 "March quarter earnings: Mixed picture for metals sector")
A sliding rupee is the only common thread helping both ferrous and non-ferrous metal companies to derive foreign exchange gains in the quarter, they said.
“The 3.4 per cent depreciation of rupee against dollar will lead to a good translation benefit for metal companies,” said Giriraj Daga, analyst with Nirmal Bang Securities.
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In the period under review, steel companies might see realisations improving on account of price increases; non-ferrous companies might see weak performance because of subdued trends on the London Metal Exchange, they said.
“We expect Sesa Sterlite’s and Hindalco Industries’ consolidated debt to decline by Rs 1,000 crore and Rs 1,100 crore, respectively, due to the rupee translation benefit,” said Kotak Institutional Equities in its report. It also expected Tata Steel’s consolidated debt to come down by Rs 1,400 crore due to the translation benefits on borrowings by subsidiaries abroad.
Most metal companies have huge debt on their books, either due to earlier acquisitions or large capital expenditure plans.
Ferrous segment
Steel companies’ realisations might improve due to rupee depreciation against the dollar, even as volumes remain flat on a year-on-year basis. Their operational performance is seen higher, due to the significant drop in raw material prices.
“Contracted coking coal prices have declined gradually over the past one year and this is expected to benefit Indian steelmakers,” said Angel Broking in its report.
Coking coal and iron ore are the key raw materials used in the making of steel.
The price of the former has come down due to weak demand in the international market.
Among the leading steel producers, net profit of state-owned Steel Authority of India is expected to increase by 28.5 per cent due to higher prices, said Angel Broking. Tata Steel’s might rise 24.3 per cent over a year, due to improvement in profitability from its European operations, it said.
And, JSW Steel’s revenues and profits are expected to go up significantly, mainly due to the effect of the merger with JSW Ispat, said Angel.
Tata Steel Europe’s operating earnings (earnings before interest, taxes, depreciation and amortisation, or Ebitda)are seen as improving in the period under review, with higher volumes because of a seasonally strong quarter, said Kotak Institutional Equities.
Sequentially, volumes for Tata Steel and SAIL have seen a pick up of 10-11 per cent, despite weak domestic demand, said Centrum Research. In the case of SAIL, marginal improvement in realisation, combined with savings in cost due to lower coking coal prices, is expected to lead to a sharp sequential jump of 54 per cent in Ebitda per tonne in the period under review, Edelweiss Securities said in its report.
It expects JSW Steel’s volumes and realisations to remain broadly flat on a quarter-on-quarter basis.
A hedging cost of Rs 20 crore incurred by JSW Steel in the December quarter is expected in the March quarter, too. “As a consequence, we expect broadly flat Ebitda on a sequential basis for JSW,” said the report.
Non-ferrous
In the non-ferrous segment, brokerages remained bearish, mainly citing subdued trends on the LME over a year. Though the rupee was weak in the period under review, its cushioning for lower LME prices started to taper towards the end of the quarter, they said.
“We expect margins of non-ferrous companies to contract on a year-on-year basis on account of low LME prices and sticky costs,” Angel Broking said. “We expect Hindalco Industries’ net profit to be down (over a year) due to higher depreciation and interest costs because of capitalisation of expansion projects,” said Centrum Broking. “Lower zinc volumes are likely to drag Hindustan Zinc’s revenue (down) nine per cent year-on-year, while its Ebitda is expected to fall by 15 per cent.”
Sequentially, Hindalco Industries is expected to post strong volumes in the aluminium business as its Mahan smelter in Madhya Pradesh ramps up.
However, Ebitda per tonne could drop due to soft LME prices, said Edelweiss. And, strong copper volumes and higher treatment charges and refining charges (Tc/Rc) are expected to drive Ebitda growth in its copper business, it said.
In the case of Sesa Sterlite, Cairn India and Hindustan Zinc are expected to contribute 80 per cent of the total Ebitda. Strong Ebitda growth is expected from the copper business, as Tc/Rc rates have risen. However, the power and aluminium business is expected to show a sequential drop.
- Companies across the domestic metals sector are set to reap the benefit of a rupee depreciating against the dollar, brokerages said
- Most metal companies have huge debt on their books, either due to earlier acquisitions or large capital expenditure plans
- Steel companies’ operational performance is seen higher, due to the significant drop in raw material prices