Steel sector set to mine best ever earnings growth in Q4FY21
Soaring steel prices coupled with low coking coal prices are set to lift the March quarter earnings of the metals and mining sector, especially steel companies which are likely to report best-ever profits.
The earnings’ dream run for the sector is expected to continue driven by rising steel prices, which are up around Rs 5,000-6,500 per tonne QoQ, supported by low coking coal prices and partly offset by higher iron ore prices.
Coking coal prices continue to trend down due to no offtake of Australian coking coal by China. The mid-month hike in HRC is expected to continue, while the export prices may continue to offset any weakness in domestic demand, experts said.
In Q4FY21, prices of non-ferrous metals such as copper, aluminium, nickel and zinc also moved up driven by continued fiscal stimulus in China, COVID induced mining deficit, which has resulted in a reduction in metal surpluses and demand resurgence in the rest of the world, according to brokerage firm Emkay Global.
Meanwhile, the projects that have been postponed last year due to COVID-induced lockdowns have resumed, and economic revival have resulted in higher consumption of metals. Further, demand for automobiles, white goods, construction metals have all led to strong growth in demand, the brokerage said in a report.
However, the resumption of supplies, especially mines, has been slow, resulting in a temporary mismatch of demand-supply, pushing up prices. With the economic revival, end-user demand is likely to remain robust further boosting demand for commodities.
Among the mining sector, while NMDC and MOIL are expected to report a strong quarter, driven by higher prices and lower base, Emkay Global expects Coal India to report mid-single digit growth QoQ due to weaker-than-anticipated e-auction premium.
Several steel companies are expected to announce large capex plans as the current upcycle has brought down their overall debt numbers substantially, leaving enough headroom for substantial borrowing, the report said.
“In our view, the companies will slow down the pace of deleveraging that we have seen in Q4 and instead will focus on capex and building capacities. Net debt-to-EBITDA, which stood at more than 6x for many companies 9-12 months ago, have reduced to less than 3x on annualised Q4 EBITDA.
Going ahead, any action by China reflecting the tightening of monetary policy will likely spoil the commodities rally. In the domestic market, the possibility of regulation of price control could impact stocks, the brokerage said.
Emkay Global prefers the ferrous over the non-ferrous sector in the current rally. Its top picks are JSW Steel, SAIL and Tata Steel. In the non-ferrous space, it prefers Hindalco, while NMDC and Coal India are its top picks in mining.
It believes Jindal Stainless is a structural growth story due to increasing consumption of stainless steel in India as urbanization improves.
Source: CNBC TV18