Operating margins may decline by 100-200 basis points on account of higher cost of production and fall in international prices.
With the rate of net sales growth likely to slip below 10 per cent and net profit likely to decline 3-5 per cent, base metal companies may not spring any positive surprise in the third quarter.
As a standalone basis, Hindalco is expected to report stagnant sales and profit; while on a consolidated basis, the growth could be in low double digits. Hindustan Zinc’s growth in sales and profit may be flat, while the performance of National Aluminium is expected to be significantly weak. Sterlite Industries, too, may report sluggish a performance, in line with industry.
| BASE METALS SLUGGISH PERFORMANCE Stiff price correction towards the end of Q2 could show impact on earnings in Q3 results | ||||
| Q3 growth rate | Operating margins | |||
| Sales | Profit | Q3 FY11 | Q3 FY 12 | |
| Hindalco | 2.64 | -0.74 | 12.41 | 11.12 |
| Hindalco (con) | 10.02 | 11.60 | 10.57 | 10.62 |
| Hindustan Zinc | 1.67 | 0.70 | 57.33 | 53.92 |
| National Alumin | 12.25 | -38.40 | 26.96 | 12.05 |
| Sterlite Ind | 13.59 | -7.07 | 23.67 | 24.34 |
| AGGR (STANDALONE) | |||
| Q3 growth rate | Operating margins | ||
|
Sales | |||
| AGGR (CONSOLIDATED) | |||
| Q3 growth rate | Operating margins | ||
| Sales | Profit | Q3 FY11 | Q3 FY 12 |
| 10.39 | -3.07 | 19.11 | 18.12 |
As base metals saw a stiff price correction only towards the end of Q2, impact on earnings would be felt primarily in the third quarter results, says the base metals analyst at Kotak Securities. But the dollar’s appreciation of more than 10 per cent against the rupee would protect the fall in earnings to an extent, says the analyst. Overall, operating margins are likely to decline by 100-200 basis points, on account of 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 sqeeze could be 129 bps on a standalone basis and steady on a consolidated basis. National Aluminium and Sterlite are expected to report sharp drop in their margins. Metal analysts at Elara Capital believe that the metal sector companies would witness a continued margin pressure going ahead too. Steeper energy costs will act as a dampener for profits in the coming years.
Metal prices have corrected 13-19 per cent in the third quarter, amid European sovereign debt crisis and China’s efforts to curb inflation and maintain steady economic growth. The depreciation in the rupee has supported Indian metal prices with an average drop of 3-8 per cent in domestic prices. The current spot aluminum prices are close to the marginal cost of production, and further downside seems limited, as high-cost producers would curtail output rather than continuing with loss-making production, say metal analysts.
According to a CLSA analyst, in addition to 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 the cost support in an acute down cycle. A weaker rupee is providing a buffer to earnings of domestic base-metal companies. But, a weakening local demand could be a hurdle for the full transmission of any further weakness in the rupee to domestic prices.
Quarterly price outlook
According to base metal analysts, copper prices are expected to test $6,800-6,700 per tonne on the London Metal Exchange, as there may not be any rise in imports of the metal by China, since 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 per cent of global aluminium production is either loss-making or close to the break-even, so there may not be any major downside for aluminium prices.
