Base metal companies may not bring any positive surprise in the third quarter with net sales growth rate is likely to slip below 10 per cent and net profit may be down 3-5 per cent. Hindalco is expected to report stagnant sales and profit on standalone basis, and consolidated basis the growth be just about double digit. Hindustan Zinc may report flat sales and profit while the performance of National Aluminium is expected to be significantly weak. Sterlite Industries too may report sluggish performance in line with industry.
As base metal price correction was severe only towards end of Q2, earning impact would be felt primarily in third quarter results, says a base metals analyst at Kotak Securities. But dollar appreciation of over 10 per cent against rupee would protect the fall in earnings to some extent, says Kotak analyst. Overall operating margin is likely to decline by 100-200 basis points due to higher cost of production and a 13-19 per cent quarter on quarter and year on year decline in international prices of aluminium, zinc, lead and copper.
For Hindalco, margin decline could be 129 bps on standalone basis and steady on consolidated basis. National Aluminium and Sterlite expected to report a sharp drop in margins. Metal analyst at Elara Capital believe, the metal sector companies will witness continued margin pressure going ahead as well. The steeper energy costs will act as a dampener for profits in the coming years.
Metal prices have corrected 13-19 per cent in third quarter, amidst European sovereign debt crisis and China's efforts to curb inflation and maintain steady economic growth. Rupee depreciation supported Indian metal prices with average domestic prices drop by 3-8 per cent. The current spot aluminum prices are close to marginal cost of production, and further downside seems limited as high cost producers will curtail output rather than continue with loss-making production, say metal analysts.
According to CLSA analyst, in addition to the macro concerns weighing on the demand outlook for base metals, aluminium and zinc suffer from large supply overhangs with about 75 per cent of inventory stuck in contango trades. Although cost curves have risen due to higher energy prices, metal prices can fall below cost support in an acute down cycle. A weaker rupee is providing a buffer to earnings of domestic base-metal companies. But, weakening local demand could be a hurdle for full transmission of any further weakness in the rupee to domestic prices.
Quarterly price outlook
According to base metals analyst copper prices are expected to test $6800-$6700 per tonnes on LME as there may not be any rise in imports of the metal by China, as the growth outlook looks dim. Nickel prices are expected to witness a further downside as European debt problems continue to hinder demand outlook for the metal. Zinc prices are also expected to go down by 7-8 per cent in the coming quarter. At current prices, 30-40 percent of global aluminium production is either loss-making or close to breakeven so no major downside in aluminium prices.
