Steel companies to report modest top-line: Angel

Angel Broking has come with its quarterly earning estimates on metal sector for March 2012. The research firm expects, non-ferrous companies to register a dip in their top line on a yoy basis, owing to the decline in LME prices.

In our view, profitability of steel companies is expected to improve during 4QFY2012 compared to 3QFY2012 on the back of decreasing prices of key inputs coupled with stable domestic prices. During 4QFY2012, steel demand improved sequentially, with steelmakers increasing prices by `1,000-2,000/tonne. Globally, steel prices have risen during the quarter, including increases in the CIS and China by 10% and 4%, respectively. For 1QFY2013, coking coal prices have settled at lower levels of US$206/tonne (down 12.3% qoq). Iron ore contract prices for 1QFY2013 are expected to remain flat due to stable iron ore prices during 4QFY2012.

Steel consumption in India grew by only 1.8% yoy in 1HFY2012 on account of subdued demand. Nevertheless, steel demand improved in 3QFY2012 and grew by 7.7% yoy. Looking ahead, although we expect steel consumption to pick up, there are some concerns owing to slowdown in the capex cycle, high interest rates and slowdown in construction and auto demand.

4QFY2012 expectations

For 4QFY2012, on a yoy basis, we expect steel companies under our coverage to report modest top-line performance on account of flat realization. Further, due to relatively higher raw-material costs, margins of steel companies are likely to contract by 295-708bp yoy. For Sesa Goa, net sales are expected to decline by 17.0% yoy on account of no production from Karnataka mines and a decline in iron ore prices. Further, higher iron ore royalty and increased export tax are expected to result in net profit declining by 15.0% yoy. For Coal India, we expect a 5.9% yoy decrease in net profit on account of increased provisions for staff costs. For NMDC, we expect its top line and bottom line to decrease by 33.1% and 27.2% yoy, respectively, on account of a decline in its sales volumes and realization. Nevertheless, we remain positive on NMDC at current price levels.

Outlook

Although base metal prices are likely to remain under pressure in the near term due to growth concerns, high cost of production should lend support to prices. While the copper market is struggling with supply constraints, the downside for aluminium prices is capped due to high energy cost. Zinc and lead prices are unlikely to see any major upside as the market remains in surplus.

For 4QFY2012, we expect non-ferrous companies to register a dip in their top line on a yoy basis, owing to the decline in LME prices. Further, we expect a margin decline of 165-1,558bp yoy on account of lower LME prices and higher coal cost. We remain positive on Sterlite Industries and Hindustan Zinc.

Company	Net Sales		Net Profit
	4QFY12E Rs (Cr)	% Chg	4QFY12E Rs (Cr)	% Chg
Coal India	17,672	17.1	3,958	-5.9
Hindalco	6,680	-1.2	516	-27.1
Hind Zinc	2,919	-8.7	1,335	-24.6
JSW Steel	8,406	19.5	432	-48.1
MOIL	240	-4.5	97	-26.9
Nalco	1,588	-11.2	115	-62.5
NMDC	2,524	-33.1	1,528	-27.2
SAIL	12,183	2	1,263	-16.2
Sesa Goa	3,006	-17	1,247	-15
Sterlite Inds	10,912	9.1	1,311	-32.8
Tata Steel	33,437	-1.1	2,743	44.7

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