Metals: A mixed bag

A greater value-added content should help Tata Steel and SAIL post decent numbers.

With spot prices of key inputs such as coking coal having more than doubled to over $300 per tonne over the last few months, several steel companies are expected to face margin pressures in the March 2008 quarter.

That apart, the government too has asked companies to cut prices of finished products. However, integrated players such as Tata Steel and SAIL have been focussing on higher value products and that could fetch them better realisations.

SAIL, for instance, is expected to post a growth in revenues of 28-29 per cent in the March 2008 quarter thanks to a better mix of products that include rails.

SAIL produced 3.44 million tonnes during the quarter and its operating profit should rise 60 per cent .

The firm's operating margin in the December quarter at 31.3 per cent the highest in 8 quarters and SAIL is expected to close FY08 with revenues of around Rs 38,000 crore and a net profit of around Rs 8150 crore.

Sales are expected to go up to about Rs 44,000 crore in FY09, while profits should be cross Rs 10,000 crore with the company improving its product mix.

The stock has been hit as investors fear the government will force a cut in steel prices""it has crashed 42 per cent since the start of 2008 as compared to a 22 per cent fall in the Sensex.

At Rs 162, trades at 8.25 times estimated FY 09 earnings and is reasonably valued.

Tata Steel should post a growth in stand-alone net sales of between 8-10 per cent in the March 2008 quarter: in the first nine months of FY08, Tata Steel 's sales rose 11 per cent to Rs 13, 956 crore.

Again, the company's focus on high value products like auto-grade steel are expected to help realisations improve by 6 - 7 per cent and that should boost operating profits by about 26 - 28 per cent.

Tata Steel's operating profit margin in the first nine months of FY 08 was up 160 basis points at 37.2 per cent. The stock has declined about 26 per cent since the beginning of 2008 and at Rs 692 trades at five times estimated FY 09 earnings.

With aluminum prices staying flat on a y-o-y basis at $2779 per tonne in the March 2008 quarter, at a time when the rupee has appreciated nearly 10 per cent, stand-alone sales for Hindalco should grow by about seven per cent.

Moreover, it could report a 14 - 15 per cent fall in operating profits and a lower operating margin""-in first nine months of FY 08, the operating profit margin fell 30 basis points to 18.4 per cent.

Hindalco is expected to end FY 08 with net sales of Rs 19,265 crore, a rise of merely 5 per cent while the expected operating profit is Rs 3,559 crore, a fall of about 13 per cent.

Thus, the net profit could be lower by about 10 per cent at around Rs 2,410 crore. In FY 09, the company is estimated to report net sales of Rs 20500 crore and a net profit Rs 2,875.