Metals: Margin pressure in Q3, expect to improve in Q4

PINC Research has come out with its report on metal space. The research firm downgrades Sterlite Industries, Sesa Goa and Hindustan Zinc to reduce.

In Q3FY12, metal companies in PINC coverage universe witnessed 15% YoY improvement in revenue on account of rupee depreciation despite flat realisations and volumes. However, EBITDA declined 9% YoY on higher raw material and energy costs. Resultantly, OPM contracted 338bps YoY to 13.3%. PAT declined 28% YoY on higher depreciation and interest outgo.

Sectoral trends: Despite flat YoY steel realisation at USD838/t, OPM for Indian steelmakers contracted by 333bps YoY to 21% on higher RM & energy costs. Most impacted were Godawari Power (captive iron ore mining declined due to transportation issues, increasing dependence on third-party purchase) and Tata Steel (high RM cost, mainly in Tata Steel Europe). Sesa Goa's OPM declined YoY on higher export duty & coking coal cost. Although, revenue of non-ferrous companies increased due to rupee depreciation, OPM declined on higher power & fuel and coal cost. Nalco's OPM dipped due to high power & fuel and coal cost.

Result surprises: Tata Steel Europe's (TSE) results surprised negatively with losses at EBITDA level (even after adjusting for USD143mn inventory write-down) due to weak demand in Europe, further impacted by destocking. Usha Martin's results disappointed as higher coking coal cost and increased purchase of e-auction coal led margins to decline to a multi-year low. Nalco

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