The Street is worried as prices of key metals have been declining rapidly.
The Bombay Stock Exchange Metal index dipped 7 per cent on Friday against a 4 per cent fall in the Sensitive Index. Since July 1, the metal index has declined by about 33 per cent and the Sensex by 3 per cent.
The Street is worried as prices of key metals have been declining rapidly. Aluminium prices have fallen 16 per cent to $2,345 per tonne, while zinc and lead prices have declined by 15 and 8 per cent respectively. According to Bloomberg, international prices for hot rolled coils (steel) have also come off by about 10 per cent to $1,006 per tonne in the last one month. With the slowdown in the US and the European markets and demand from China dipping, industry watchers believe prices would remain under pressure.
The Tata Steel stock crashed 10 per cent on Friday, reaching a 52-week low in intra-day trades. The company’s stand-alone net sales are expected to be robust in the September quarter as it has significant long-term contracts. However, brokerage IIFL states that the performance of Corus is a concern as the decline in prices globally could impact revenues. Besides, Corus is not an integrated player, which means its cost of operations is quite high leading to low profitability. Corus, which increased prices by about $150 per tonne in July, is estimated to have a 10 per cent operating profit margin compared to 49 per cent for Tata Steel.
The JSW Steel stock lost nearly 10 per cent on Friday on low steel prices. The September quarter could see a decline in operating profit margins as the company imports most of its raw material – coke and coal. With the rupee depreciating close to 8 per cent in the last three months, the higher raw material bill will impact profitability.
The Hindalco stock, which saw a 52-week low this week, could reap the benefit of the rupee depreciation in the September quarter. The increase in rupee realisations in aluminium could see the company post better numbers in the September 2008 quarter. Its net sales were flat in the June quarter.
Softer aluminium prices could affect National Aluminium (Nalco) to some extent as its revenue mix is tilted towards shorter one-year contracts and spot sales. Nalco’s net sales grew by 26 per cent to Rs 1,165 crore in the June quarter because of strong aluminium and blended alumina prices. The stock fell 5.5 per cent on Friday.
At the current price of Rs 394, Tata Steel trades at 2.5 times its estimated FY09 earnings, while JSW trades at close to 4 times forward. Nalco at Rs 349 is valued at 10 times its FY09 earnings and Hindalco trades at 7.5 times.
