Base metal and steel companies are expected to report decline in operating margins and net profit in the first quarter of the current financial year, on account of a 5-10 per cent drop in metal prices in the international markets.
While growth in net sales is expected to be in single digit, realisations are expected to be stable quarter-on-quarter (q-o-q), protected by the rupee depreciation and some relief in the form of decline in carbon prices.
Losses on forex loans not corresponding to fixed asset creation will dent bottom lines in JSW Steel, SAIL, Sesa Goa, Sterlite and Tata Steel.
According to revised accounting guidelines, part of the forex losses will be accounted for by way of interest costs. Analysts estimate this to be as high as 50 per cent.
Steel makers Tata Steel, JSW Steel and Jindal Saw and base metal producers Sterlite Industries, Hindalco and National Aluminium are expected to underperform. SAIL, Bhushan Steel and Jindal Steel might do better than their peers.
Analysts expect operating margins from the Indian operations of Tata Steel to remain stable. Higher realisations and flat costs at its European operations are expected to expand the operating margin at its European operations.
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Volumes for JSW Steel, Jindal Steel and Power and Bhushan Steel will be up strongly. Tata Steel is expected to post a flat to marginal increase in net sales on the back of weak demand and shutdown of two old furnaces during the quarter.
Sterlite Industries is expected to report a marginal increase in net sales due to lower London Metal Exchange (LME) prices and volumes. Refined zinc and lead production would decline around seven per cent during the quarter. Aluminum and copper cathode production may decrease by around one per cent. Forex losses are expected to sharply impact at the net profit level.
“Like any other zinc producer globally, Hindustan Zinc’s operating margins are impacted by zinc prices. However the company’s focus on cost efficiency and increase in production volumes will help in managing the cost performance effectively,” Akhilesh Joshi, chief executive officer, Hindustan Zinc, told Business Standard.
| LOSING SHEEN | |||||
| Q1 preview | Y-o-Y % change* | Ebitda margin | |||
| STEEL | Sales | Ebitda | Net profit | Q1FY12 | Q1FY13-E |
| Tata Steel | 0.47 | -30.41 | -79.01 | 13.40 | 9.28 |
| SAIL | 8.96 | 23.75 | 10.51 | 11.43 | 12.98 |
| JSW Steel | 25.17 | 10.95 | -30.36 | 19.52 | 17.30 |
| Jindal Steel & Power | 27.18 | 13.34 | 10.64 | 41.20 | 36.72 |
| Bhushan Steel | 22.24 | 23.60 | 29.52 | 29.62 | 29.95 |
| Jindal Saw | 19.87 | -2.47 | -24.22 | 15.64 | 12.72 |
| BASE METALS | |||||
| Sterlite Industries | 3.51 | -11.51 | -29.22 | 27.97 | 23.91 |
| Hindalco (S) | 17.99 | -13.10 | -23.13 | 14.40 | 10.61 |
| Hindustan Zinc | 2.86 | -5.24 | -8.24 | 55.92 | 51.51 |
| National Aluminium | -5.41 | -42.64 | -40.58 | 30.19 | 18.31 |
| Steel | 8.13 | -5.50 | -37.74 | 16.33 | 14.27 |
| Base Metals | 6.92 | -12.90 | -21.74 | 28.03 | 22.84 |
| Aggregate metals | 7.82 | -8.27 | -30.57 | 19.36 | 16.47 |
| *Average estimates; Source: Analysts’ reports | |||||
Hindalco (standalone) is expected to post an 18 per cent increase in net sales on a year-on-year basis. However, net profit might fall due to decline in price realisations, driven by lower LME prices.
LME prices of base metals have corrected a little more than 10 per cent q-o-q in the first quarter after recovering in the fourth quarter of FY12. According to analysts, rupee depreciation is supporting domestic steel prices. Globally, prices of hot rolled coil (HRC) declined across major regions in the first quarter and are now close to yearly lows.
The growth in global crude steel production is moderating on heightened concerns of slowdown in China. Most countries registered moderate to low production growth in the last few months. So, HRC prices have declined five per cent in China and 10 per cent in Europe and America. The full effect of declining prices will be seen in Q2 FY13.
Angel Broking analysts expect base metal prices to remain under pressure in the near term on concerns over growth and high cost of production. While the copper market is struggling with supply constraints, downside for aluminum prices is expected to end soon.