Steeling a march

Steel firms may post robust Q2 as non-ferrous players struggle

Large integrated steel players such as Tata Steel and Steel Authority of India (SAIL) are expected to report an improved performance in the September 2007 quarter, thanks to higher output and price realisations levels on a y-o-y basis, which should help them offset the surging rupee, say analysts.

In the case of SAIL, production of saleable steel was up an impressive 10 per cent to 3.25 million tonne in the September quarter.

In addition, analysts estimate 4.5 per cent y-o-y increase in realisations, which should help revenues expand by about 15 per cent y-o-y in the second quarter. SAIL is also expected to post 30 per cent growth in operating profit owing to lower coking coal costs.

In the case of Tata Steel, the standalone entity is expected improve its realisations by 10 per cent and increase its revenues by 15 per cent rise on the back of higher volumes, say analysts.

In the case of the consolidated entity, analysts are projecting a whopping 400 per cent-plus sales growth in the September quarter.

For non-ferrous players, the September quarter is, however, expected to be tough. Hindalco has been grappling with average aluminium prices that are 7 per cent lower, coupled with reduced treatment and refining charges and a surging rupee.

As a result, its standalone operating profit is expected to fall by 20 per cent, say analysts. In the case of Nalco, operating profit is expected to decline 30 per cent. Tata Steel trades at 11 times estimated FY08 earnings, while Hindalco gets a discounting of 10 times.

Banking: Gilt edge

Banks are expected to improve their profitability in the September quarter on the back of higher fee and treasury income.

Net interest margins will, however, be hit following a slowdown in credit growth at about 23 per cent compared with around 30 per cent a year ago and rising deposit rates. However, yields on loans will improve in the core banking business as banks hiked lending rates.

Treasury income should be higher as yields on gilts were down about 30 basis points compared with those in the June quarter, and stock markets are up.

A decline in low-cost deposits (current and savings accounts) is expected to put some pressure on costs. Banks with better CASA ratio such as HDFC Bank, Axis Bank, SBI and PNB stand to benefit more.

Mirroring the sentiment on the Street, the Bankex is up 53 per cent in the past year, while the Sensex gained 48 per cent. Both HDFC Bank and Axis Bank are expected to grow their net interest income at around 35 per cent y-o-y, while ICICI Bank will grow at 20 per cent.

Public sector banks such as SBI, BoB, BoI, Corporation Bank and Union Bank are expected to grow their net interest income by 15-20 per cent.

Since deposits are rising as fast as advances, banks have more funds to lend. In such an environment, high-cost deposits may impact margins going forward "" unless they reduce rates.

Lending rates are on a decline from the previous quarter on home loans and auto loans, and corporates too are borrowing at discounted rates. This should help in credit offtake in the second half, which anyway is much better than the first half for loan demand.