After a strong showing in FY22, commodity companies may report lower earnings growth for the first quarter of April-June after prices declined sharply globally. The earnings hope supporting the Nifty index could wobble as well.
Prices of metals—from copper to steel—are down 20-40 percent from their highs as fears of a recession in the US heighten.
The Bloomberg commodity index fell almost 14 percent over the past three weeks, while crude oil shed 11 percent in the same period. The fallout of this is lower realisations for steel companies and oil exporters.
Ambareesh Baliga, an independent market analyst, expects a 50 percent cut in the bottom line for most metal companies due to the recent drop in prices. These companies contributed about 60 percent of the earnings per share growth last year and will be responsible for a similar cut for the rest of the year.
“Metal stocks have a high correlation to the consensus earnings trajectory and we believe the earnings cycle is inflecting down,” analysts at Jefferies India wrote in a note.
Domestic steel prices have declined 22 percent from their peak in May, while Asian hot-rolled coil steel prices have fallen 20 percent and North Europe HRC prices have tanked 36 percent.
Rating company Icra expects a 30 percent drop in the operating profit of metal companies for FY23. The government hiked duty on iron ore by up to 50 percent and some steel intermediaries to 15 percent on May 21 to step up domestic availability.
“As steel prices correct across the board following the levy of export duty, the road ahead could be bumpier, and the industry’s current year earnings are likely to be significantly lower than the all-time record achieved in FY2022,” said Ritabrata Ghosh, vice president & sector head at the rating company.
However, energy prices are still elevated compared with FY22. That means there is a double whammy for metal companies.
“Commodity prices have fallen in quick succession. Commodity producers are squeezed on margins due to the high cost of energy and low realisations,” said Deven Choksey, managing director of brokerage firm KR Choksey. “The negative impact might be played out in the first half of 2023 and it is a good possibility. Many firms that are users of commodities will have a high-cost impact on margins due to the pipeline inventory in H1 2023, though some of these companies may have a pass-over clause in their supply contracts.”
“The government imposition of hefty export duties on steel will lead to a decline in realisations for steel companies which have been resorting to exports in the last few years. Also, weak domestic demand in the near term will further lead to fall in steel prices in the domestic market,” IDBI Capital said in a recent note to investors.
Investors have already taken note of the impact. Energy and other cyclical commodity-related stocks have come off sharply in the past few weeks after revisiting all-time highs in early May.
Among the domestic indices, the Nifty commodity index dropped 22 percent mid-April, the Nifty metal index lost 30 percent and the Nifty fell 12 percent.
“Indian metal stocks have underperformed the Nifty by 12-34 percent in the Jun-Q, but we believe it’s still early to turn constructive as PB valuations remain higher than historical troughs, earnings visibility is poor and consensus downgrades should continue,” Jefferies said.Disclaimer: The views and investment tips expressed by 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.