Muted Sept quarter for metal players

Last Updated: Mon, Oct 08, 2012 19:32 hrs

The metal companies are likely to see a poor September quarter on the back of lower volume growth due to subdued demand as well as lower realisations. While most analysts expect the metals sector to report single-digit revenue growth, analysts at Citi estimate earnings to contract in the quarter, thereby ranking it at the bottom among various sectors.

This is because while companies in the non-ferrous space may see their realisations get affected due to lower base metal prices on the London Metal Exchange (LME), steel companies are expected to fell the heat of muted end-user demand, seasonal factors and declining global steel prices affecting their realisations.

Comparatively though, steel players are in a more vulnerable position, whereby Tata Steel is expected to report a net loss of Rs 558 crore compared to profit of Rs 212 crore in the year ago quarter. Although SAIL is estimated to report an 86 per cent rise in profit, the same is consequent to a low base. In the year ago quarter (September 2011), the company’s profits had fallen sharply (more than halved), partly due to extraordinary expenses.

In Rs crore Tata Steel JSW Steel SAIL Sterlite Hindalco
Net sales 31,568 8,695 10,964 11,211 6,027
% change y-o-y -4.0 14.0 1.0 11.0 -3.0
Ebitda 2,300 1,436 1,416 2,295 481
% change y-o-y -16.0 3.0 20.0 -5.0 -22.0
Ebitda (%) 7.3 16.5 12.9 20.5 8.0
Net profit -558 382 922 2,155 474
% change y-o-y NA -34.0 86.0 21.0 -6.0
September quarter analysts’ estimates
Source: Morgan Stanley Research

While international prices have fallen, in the backdrop an increase in imports into India as well as lower domestic demand, there has been a sharp decline in prices of flat and long products. Analysts at IDFC Securities estimate the overall realisation to have decreased Rs 1,500-2,000 a tonne sequentially. Sanjay Jain at Motilal Oswal too observes that the domestic steel prices have corrected 9-10 per cent sequentially. With this, the impact on profitability may be profound as raw material prices such as that of iron-ore have been flattish on sequential basis and coal prices though lower will alone not be able to provide a cushion, say an analyst. However, the gains from lower coal prices will be seen with a lag in the December quarter. In volume terms, too, while steel volumes have been weaker in the first two months (July and August) attributable to higher imports (led by a sudden decline in global steel prices), late monsoon have dampened end-use demand in September. Analysts at Morgan Stanley observe that weak steel prices will weigh down on profitability of steel makers while volume growth is expected to be muted on sequential basis.

On the other hand, the average LME prices for non-ferrous metals like copper, aluminium, zinc, lead and alumina have fallen 15-20 per cent year-on-year during the September quarter, though sequentially they are down just 1-three per cent. This may limit the downside for the stocks in the non-ferrous universe. On the positive side, the third round of quantitative easing has led to recovery in the base metal prices during September. In fact, analysts at Motilal Oswal Securities observe that the aluminum spot premium has shot up to all-time high levels in the month of September. This will provide further relief to aluminium players like Hindalco and Nalco as rupee depreciation provides a respite and cushions the fall in revenues.

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