Metals & Mining Q1 FY16 Preview: Average blended steel realisations could dip 4-5% qoqq

India Infoline News Service | Mumbai | July 09, 2015 16:37 IST

Q1 FY16 would be worst quarter for the metals sector post the financial crisis as all the steel companies in our coverage universe are expected to report loss and most of the non-ferrous companies would report a decline in earnings on a qoq basis.

Q1 FY16 would be worst quarter for the metals sector post the financial crisis as all the steel companies in our coverage universe are expected to report loss and most of the non-ferrous companies would report a decline in earnings on a qoq basis. Earnings for the metal companies would be impacted by the sharp decline in global metal prices and premiums over the last six months. Steel prices have extended their fall in Q1 FY16, declining by +30% on a yoy basis. On a qoq basis, Chinese HRC export prices has declined by 10.1% qoq as demand in the region declined and supplies continued to remain high. Prices of iron ore and coking coal too have been declining due to excess supply and subdued demand growth in China.
 
Even though the decline in non-ferrous metals has been lower compared to ferrous prices, product premiums have plunged on a qoq basis. Exports from China have continued to flood the global markets and product premiums have declined sharply since the start of CY15. Average LME aluminium prices declined by 1.4% qoq; however, all-in aluminium prices have declined more than 10% as premiums have declined by 72% in the last one quarter. Except aluminium, other base metals managed to report an increase in average prices, but product premiums too declined on a qoq basis.
 
The domestic steel market has been reeling under pressure from cheaper imports. However, the decline in domestic steel prices was lower compared to international rates due to depreciation of the rupee. The Government of India has also increased the import duty on steel by 2.5% which would reduce the premium of domestic prices over landed import prices. Imports during April-May 2015 have rose 55% yoy and exports have declined 36% yoy leading to an increase in domestic steel supply. Steel demand improved by 7% during the same period which was a positive sign for the sector.
 
We expect average blended steel realisations for companies to decline 4-5% on a qoq basis, lower compared to overall price decline. Companies in Q4 FY15 had registered a sharp fall in realisations, which was higher than our estimate and average decline in market prices. Volume growth too would remain muted as increase in demand was met by a jump in imports and prices remained unfavorable. The impact of lower realisations on margins would be marginally impacted by the decline in iron ore and coking coal prices. Tata Steel’s domestic business would see a marginal decrease in raw material costs as the impact of lower consumption of bough out iron ore would be offset by an increase in provision for DMF. JSW would be the biggest beneficiary amongst the domestic steel manufacturers due to the sharp decline in iron ore and coking coal prices. NMDC’s volumes and realisations would be sharply lower on a yoy basis. Demand remained weak as NMDC’s iron ore prices were at a premium to domestic ore prices. Coal India is expected to report strong volume growth during the quarter. However, blended realisations would be impacted due to lower e-auction prices and increase in sales to power sector.
 
For the non-ferrous space, volumes for most of the players would be higher on a yoy basis. Hindalco’s aluminium volumes would be strong on the back of higher output from new capacities. Vedanta’s aluminium volumes too would be higher on the back of higher output from BALCO’s new projects. HZL is expected to report strong volume growth on a yoy basis; however, on a qoq basis volumes would decline due to lower mined metal output. NALCO’s external alumina sales volume would be lower due to maintenance shutdown of its refinery. Margins for most of the players would be impacted due to lower realisations. The impact of lower product premiums would be somewhat offset by a decline in coal prices.
 
All the steel manufacturing companies in our coverage universe are expected to report loss during the quarter. Provisions related to DMF would impact earnings with captive mining resources during the quarter.
 
Coal India and JSW Steel are our top picks in the sector.
 
Q1 FY16 estimates
Company Sales (Rs cr) OPM (%) PAT (Rs cr)
Q1 FY16 yoy (%) qoq (%) Q1 FY16 yoy (bps) qoq (bps) Q1 FY16 yoy (%) qoq (%)
Coal India 19,506 9.6 (8.6) 19.8 (424) (814) 3,495 (12.7) (17.5)
Hindalco* 8,760 9.6 (6.5) 7.4 (191) (160) 119 (63.7) (25.5)
HZL 3,631 20.8 (12.0) 52.2 427 725 1,891 16.9 (5.3)
JSPL 4,654 (6.5) 2.8 20.5 (1,218) 310 (311) (40.1)
JSW 12,055 (9.1) (4.3) 11.9 (776) (141) (254)
MOIL 174 (13.1) 8.0 25.3 (2,380) (2,148) 47 (55.7) (54.1)
NALCO 1,616 (3.8) (10.3) 18.3 183 (548) 235 (13.4) (33.8)
NMDC 1,917 (44.9) (32.2) 46.2 (2,285) (401) 921 (51.9) (31.6)
SAIL 10,519 (7.3) (9.2) 5.4 (455) (261) (31) - -
Sesa Sterlite 17,634 2.6 (1.0) 24.0 (902) 145 971 158.4 -
Tata Steel 30,603 (16.0) (9.1) 7.9 (387) 328 (357) - (93.7)
Source: Company, IIFL Research, *Standalone
 

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