Experts expect ferrous and non-ferrous metals companies to deliver robust revenue growth year on year (YoY) fuelled by a surge in commodity prices and robust sales volumes. With the escalation of conflict in Eastern Europe, the market priced in the risk of supply disruption and consequently aluminium and steel prices rallied further on a sequential basis.
The Russia-Ukraine conflict resulted in several Russian banks getting barred from accessing the international payments messaging system – SWIFT. Overnight, it became difficult to settle trades in aluminium, steel, coking coal, nickel, alumina, and thermal coal, resulting in a shortage of these commodities globally and pushed certain commodity prices to record highs.
“The companies’ EBITDA margins, however, are expected to remain flattish or marginally decline YoY and quarter on quarter (QoQ) mainly due to higher coal and energy prices,” a report from Axis Securities said.
Coking coal and iron ore prices for steel companies have jumped sharply which will impact the margins in the fourth quarter (Q4FY22). Power costs for aluminium smelters, too, are expected to go up due to the jump in coal prices. The rise in input raw material inflation will partially offset the gains from strong prices and sales volumes and will keep the margins flattish.
Brokerage firm Motilal Oswal Financial Services expects revenue of metals companies to grow 39 percent on a YoY basis, but sees EBITDA growing only 2.4 percent and PAT (profit after tax) 7.5 percent, given the sharp jump in input costs, especially for steel companies.
“Sequentially, we expect a surge of 15 percent in revenue, but EBITDA/PAT is likely to remain moderately higher (two/five percent) as input cost push negates the benefit of higher steel prices,” Motilal Oswal said.
Ferrous metals/steel performance
Traditionally, fourth quarter is the strongest in terms of demand, sales volumes, prices, and profitability. However, this trend witnessed a complete breakdown as prices of steel remained sluggish in the first half of Q4FY22 as international prices continued to slide.
A COVID-induced slowdown in China impacted steel prices, which continued to correct in January 2022, before recovering in February. The exceptionally strong price push in March was driven by a massive jump in coking coal prices and resurgence in domestic demand.
That said, steel manufacturers were able to pass a majority of surge in input costs to consumers during the quarter, but the outlook for Q1FY23 does not seem good.
Kotak Institutional Equities Research said, “An average increase in steel realisation of Rs 2,000-2,500 per tonne QoQ (a sequential increase of 2-3 percent) is expected during the quarter”.
This increase in realisation is led by back-ended price hikes in the domestic and export markets; $40-50 per tonne increase in coking coal costs during the quarter; marginal moderation in domestic iron ore prices; and a sharp sequential increase in volumes led by seasonality and pick-up in exports.
Kotak expects the volume of Jindal Steel & Power Ltd to grow by 2 percent on year, JSW Steel volumes are likely to grow by 23 percent YoY, volumes of SAIL by 9 percent and Tata Steel volumes may increase by 6 percent on year.
The brokerage expects the profitability of steel players to decline on a sequential basis due to higher costs, partly offset by higher realisations.
“We estimate EBITDA per tonne for Tata Steel at Rs 24,561 (-11 percent QoQ), JSW Steel at Rs 16,240 (-8 percent), Jindal Steel & Power at Rs 16,512 (-5 percent) and SAIL at Rs 9,436 (-6 percent)”.
Motilal Oswal, on the other hand, expects EBITDA per tonne for steel players to contract between 5 and 58 percent on quarter, with Jindal Steel & Power being the least impacted due to its minimal dependence on coking coal and JSW Steel due to the implementation of biggest price hikes. “We expect EBITDA per tonne for SAIL to contract by 58 percent QoQ as it is the most leveraged to coking coal prices,” the brokerage said.
Non-ferrous metals performance
The prices of non-ferrous metals rallied sharply, led by a fundamental shortage in certain commodities like aluminum and nickel, and surging energy prices, especially in Europe which impacted the margins of energy-intensive non-ferrous commodities like aluminium. This led to a shutdown of production at several smelters in Europe and resulted in a steep hike in commodity prices. With the supplies from two of the major exporters -- Russia and Ukraine -- getting disrupted, the deficit in several commodities started reflecting in prices.
“Base metal companies in Q4FY22 would benefit from higher commodity prices and a weaker rupee, while higher volumes due to seasonality would also aid earnings,” Kotak said.
Zinc prices increased 10 percent on quarter to $3,721 per tonne, aluminum prices surged 19 percent sequentially to $3,272 per tonne while alumina prices were flat on quarter at $421 per tonne.
Hindalco—Kotak estimates Hindalco’s India EBITDA (standalone + Utkal) at Rs 3,920 crore, a growth of 112 percent on year and a sequential growth of 12 percent aided by higher commodity prices partly offset by higher costs.
Hindustan Zinc Ltd—“We expect EBITDA to increase by 8 percent QoQ to Rs 4,700 crore which is a growth of 22 percent YoY, led by higher prices partially offset by weaker volumes and cost inflation,” Kotak said.
National Aluminium Company Ltd —Kotak estimates NACL’s Q4FY22 EBITDA at Rs 1,390 crore, increasing by 113 percent on year and by 17 percent QoQ.
Vedanta Ltd—“We estimate consolidated EBITDA to increase 19 percent on quarter to Rs 12,800 crore, a growth of 42 percent YoY which is led by higher margins in the zinc, aluminium and oil and gas divisions.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
