Strong pricing trends to boost metal sector earnings in Q3FY21
Business and economic activities around the globe have rebounded with demand for metals improving significantly during the third quarter of FY20-21. This, coupled with shortage in raw material have pushed metal prices higher.
During the October-December quarter of 2020, average aluminum/zinc prices rose around 13 percent QoQ each, whereas Indian steel prices rose around 19 percent QoQ. Analysts expect domestic steel consumption to rise around 7 percent YoY in Q3FY21.
According to domestic brokerage Motilal Oswal, revenue for major steel companies such as Tata Steel, Jindal Steel & Power, SAIL and JSW Steel is expected to improve 8 percent QoQ and 12 percent YoY to Rs 88,500 crore due to higher realisations.
On the cost front, while coking coal prices remain subdued, iron ore prices increased sharply. NMDC raised prices for iron ore fines by Rs 1,700/t (cumulative) to Rs 4,600/t. The same averaged around Rs 1,100/t higher QoQ. Coking coal prices averaged 5 percent lower QoQ at $119/t.
The brokerage expects margins for SAIL and Tata Steel to increase by a higher amount given their integrated operations.
Further, EBITDA/t for Tata Steel, SAIL, JSPL and Jindal Steel is likely to increase by Rs 4,976, Rs 5,536, Rs 3,805 and Rs 2,987, respectively. Similarly, EBITDA for steel companies may increase 41 percent QoQ to Rs 21,200 crore, the brokerage house said in a report.
For NMDC, it expects EBITDA to rise 180 percent QoQ to Rs 2,900 crore on the back of higher realization (Rs 4,949/t, +47% QoQ) and higher volumes (9.4 mt, +43% QoQ).
Meanwhile, a strong recovery in LME base metals prices which was seen in Q2FY21 continued in the third quarter. This may improve profitability in the Non-Ferrous segment.
On average, aluminum prices were higher by 13 percent QoQ to USD 1,920/t, zinc by 13 percent QoQ to USD 2,633/t, lead by 1 percent QoQ to USD 1,903/t, and copper by 9 percent QoQ to USD 7,108/t.
Silver prices increased by 1 percent QoQ to Rs 62,400/kg. INR appreciated ~1% against the USD, which should marginally offset the rise in LME prices.
Motilal Oswal expects EBITDA for Hindalco India operations to increase 19 percent QoQ to Rs 1,520 crore on the back of higher LME prices and adjusted EBITDA from Novelis’ operations (including Aleris) to remain strong at USD 442 million (down 3 percent QoQ) due to seasonally lower volumes (902 kt, down 2 percent QOQ).
EBITDA for Hindustan Zinc is likely to increase by 4 percent QoQ to Rs 3,070 crore (34% YoY) due to improved LME prices, higher metal volumes, and silver prices. However, the same should get be partially offset by an expected decline in silver volumes. Vedanta’s EBITDA (ex-Hindustan Zinc) is expected to improve by 19 percent, QoQ, the brokerage said.
Among stocks, the brokerage house continues to prefer structurally efficient companies like Hindalco given its low capital and operating costs, 75 percent margin accrues from non-LME linked operations, and its strong balance sheet. Its top pick is Hindalo. In the Ferrous space, Jindal Steel & Power remains the brokerage’s top pick on strong volume growth, margins and deleveraging.
Source: CNBC TV18