 "Royalty rise near-term dampener for metal stocks")
The rise in royalty rates for minerals, approved by the Cabinet Committee on Economic Affairs, is good news for states, whose revenues will rise about Rs 4,000 crore on an annual basis. However, this will raise costs for the mining sector and users of minerals. The rise will be effective after its notification.
Minerals and coal are major raw materials for both ferrous and non-ferrous entities. While royalty on coal hasn’t been raised (as such, energy costs will not rise), producers and users of minerals will be impacted.
Iron ore, which will see the highest royalty rise of 50 per cent (from 10 per cent to 15 per cent of ex-mine price), will impact steel producers more than those mining and selling the ore in the local market. While Tata Steel, Steel Authority of India Ltd (SAIL) and Jindal Steel and Power (JSPL) are integrated players and should see a lower impact, profitability will play a key role. Tata Steel generates high earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne of about Rs 15,000. Therefore, it might see an impact of half a per cent on its Ebitda due to higher ore costs, compared to SAIL (Ebitda of about Rs 4,000 a tonne).
Kotak Institutional Equities analysts estimate Tata Steel and JSPL to record declines of four per cent and six per cent, respectively, in FY16 earnings. Giriraj Daga at Nirmal Bang Institutional Equities feels SAIL might a decline of up to eight per cent in earnings. Analysts say JSW Steel, which sources ore from the market, might record an eight per cent fall in FY16 earnings, assuming it will have to absorb the full royalty rise. But since JSW Steel has started using imported iron ore and has the leeway to negotiate with domestic ore sellers, the impact might be lower (some analysts peg it at one-two per cent. Not surprisingly, while SAIL fell 3.2 per cent on Thursday, Tata Steel and JSPL slipped 1.6-1.8 per cent and JSW Steel was down about one per cent, compared with a marginal 0.17 per cent rise in the Sensex.
Currently, Sesa Sterlite does not produce much iron ore, but it will have to absorb most of the royalty rise, as it is a net exporter. For zinc, the royalty was raised from 8.4 per cent to 10 per cent, lead 12.7 per cent to 14.5 per cent and bauxite 0.5 per cent to 0.6 per cent. This will impact Sesa and its subsidiary, Hindustan Zinc Ltd (HZL). Sesa’s FY16 earnings could see an impact of two-three per cent and HZL three per cent.
The Sesa Sterlite stock lost 1.7 per cent on Thursday, while HZL fell 1.4 per cent. For Hindalco and Nalco, the impact is likely to be negligible.
Though these stocks have corrected, the increases (typically carried out once in three years) were expected after the Budget and, therefore, aren’t expected to lead to a prolonged period of correction. Also, in the long term, many companies may use operational levers to offset the higher costs.
Minerals and coal are major raw materials for both ferrous and non-ferrous entities. While royalty on coal hasn’t been raised (as such, energy costs will not rise), producers and users of minerals will be impacted.
Iron ore, which will see the highest royalty rise of 50 per cent (from 10 per cent to 15 per cent of ex-mine price), will impact steel producers more than those mining and selling the ore in the local market. While Tata Steel, Steel Authority of India Ltd (SAIL) and Jindal Steel and Power (JSPL) are integrated players and should see a lower impact, profitability will play a key role. Tata Steel generates high earnings before interest, tax, depreciation and amortisation (Ebitda) per tonne of about Rs 15,000. Therefore, it might see an impact of half a per cent on its Ebitda due to higher ore costs, compared to SAIL (Ebitda of about Rs 4,000 a tonne).
Kotak Institutional Equities analysts estimate Tata Steel and JSPL to record declines of four per cent and six per cent, respectively, in FY16 earnings. Giriraj Daga at Nirmal Bang Institutional Equities feels SAIL might a decline of up to eight per cent in earnings. Analysts say JSW Steel, which sources ore from the market, might record an eight per cent fall in FY16 earnings, assuming it will have to absorb the full royalty rise. But since JSW Steel has started using imported iron ore and has the leeway to negotiate with domestic ore sellers, the impact might be lower (some analysts peg it at one-two per cent. Not surprisingly, while SAIL fell 3.2 per cent on Thursday, Tata Steel and JSPL slipped 1.6-1.8 per cent and JSW Steel was down about one per cent, compared with a marginal 0.17 per cent rise in the Sensex.
Currently, Sesa Sterlite does not produce much iron ore, but it will have to absorb most of the royalty rise, as it is a net exporter. For zinc, the royalty was raised from 8.4 per cent to 10 per cent, lead 12.7 per cent to 14.5 per cent and bauxite 0.5 per cent to 0.6 per cent. This will impact Sesa and its subsidiary, Hindustan Zinc Ltd (HZL). Sesa’s FY16 earnings could see an impact of two-three per cent and HZL three per cent.
The Sesa Sterlite stock lost 1.7 per cent on Thursday, while HZL fell 1.4 per cent. For Hindalco and Nalco, the impact is likely to be negligible.
Though these stocks have corrected, the increases (typically carried out once in three years) were expected after the Budget and, therefore, aren’t expected to lead to a prolonged period of correction. Also, in the long term, many companies may use operational levers to offset the higher costs.