Another strong quarter ahead for steel firms: Tata, JSW to perform better

The country’s steel companies, which have benefited during the past two years from improving realisations, are expected to deliver another strong quarter for the January-March 2018 (Q4) period.

Thereafter, too, their prospects appear strong, analysts said.

Measures announced by the government, including those to curb cheap imports, which in turn improved domestic realisations, have boosted their operating performance. Capacity closures in China and improving fundamentals of the global steel industry are adding to their gains. 

While companies such as Tata Steel and JSW Steel continued with their impressive performance in Q3, Jindal Steel and Power (JSPL) and Steel Authority of India (SAIL) saw a spectacular turnaround. Their outlook remains firm and earnings growth is expected to improve further. Mining players such as NMDC, too, are doing well.

Strong global support

India Ratings and Research recently revised its outlook on the domestic steel sector to ‘stable’ for FY19 from ‘negative’ in FY18, on account of healthy global and domestic demand growth, along with the ongoing capacity rationalisation in China. 

The rating agency expects industry participants to exhibit an improvement in operational and financial performance, backed by steady sales realisations and margins, supported by an improved demand-supply balance.

The curbs by China, the world’s largest producer of the ferrous metal, on capacities to control pollution have shown results. These are likely to continue, in turn lending support to domestic and international steel prices.

Chinese steel companies’ high leverage is also a factor that will support steel prices, said analysts at Phillip Capital. These companies need strong margins to reduce leverage, but capacity closures and output restrictions will limit their ability to significantly increase volumes. Thus, Chinese steel prices are also seen to be supportive for the global industry.

On the other hand, the growth in demand, led by the infrastructure and housing sectors as well as automobiles and white goods, among others, is likely to continue in India. Besides, an improving outlook in the US and Europe will further lend support.

How the companies performed

A seasonally strong demand in European markets will improve the performance of Tata Steel Europe. Tata Steel has reported a high operating profit per tonne of Rs 14,025 (highest since Q2 FY15) in Q3FY18 compared with Rs 11,285 in Q3 FY17, and Rs 10,959 in Q2 FY18 for its India operations.

The European business had seen its per tonne profit at Rs 2,589 against Rs 2,896 in the previous quarter.

The outlook for JSW Steel is also firm. Fitch Ratings on Thursday revised its outlook on the company to ‘stable’ from ‘negative’, as the rating agency feels that a robust profitability from improved industry fundamentals and a measured approach to capacity expansion will enable the company to deleverage steadily.

JSPL and SAIL’s expanded capacities are stabilising, thereby pushing up volumes, while rising realisations will further boost their operational performance.

Soumen Chatterjee, head of research at Guiness Securities, said macros were in place for metals and mining players and would help drive the performance of NMDC and Coal India.

Edelweiss Securities said they expected the buoyancy in the metals and mining space to continue in March 2018 quarter as well, with a further 13-22 per cent rise in steel prices. It expects the quarter to mark a turning point in the earnings of JSPL and NMDC.

The brokerage expects JSPL to report its highest volume growth, driven by a ramp-up of steel volumes at its Angul plant. Coal India and NMDC are also expected to benefit from the price hikes implemented in January 2018. For NMDC, Edelweiss estimates the company’s operating profit per tonne to revert to Rs 1,800-1,900 from past 12 quarters’ run-rate of sub-Rs 1,600.