Domestic steelmakers will report strong growth in volumes from the ramp-up of expanded capacities even though operating margins will decline sequentially due to lower steel prices in a seasonally weak period. Among non-ferrous names, strong increase in zinc prices (+17% q-o-q) and mined metal volumes (+51% q-o-q) will aid sharp q-o-q earnings improvement for HZ, VEDL. We maintain ADD on Tata Steel, JSW Steel whose earnings are supported by anti-dumping duties in India & Europe and Vedanta on strong zinc pricing outlook.
Steel companies—strong growth in volumes from expanded capacities
After strong improvement in Q1FY17 earnings of steel companies aided by MIP, we expect moderate sequential decline due to 2-6% decline in domestic steel prices in a seasonally weak period, and sharp increase in spot coking coal prices towards August-September 2016. We expect blended realisation for large cap. steel names to decline by R1,200-1,500/ton depending upon their product mix. The impact of coking coal cost increase will be limited due to carry-over of low-priced inventories and purchases on quarterly contracts.
Domestic steel demand growth has remained weak at less than 2% for April-August 2016, though volumes of domestic steelmakers have increased by 8% y-o-y owing to decline in imports (-35%). Tata Steel, JSW Steel will report 12-16% y-o-y volume growth from expanded capacities.
Non-ferrous—higher volumes & increase in zinc prices positive for VEDL, HZ
Zinc prices increased by 17% q-o-q to $2,253/ton (+22% y-o-y) due to weak global supplies while aluminum prices increased by 3% q-o-q to $1,620/ton (+2% y-o-y) in Q2FY17. Higher prices combined with increase in mined metal volumes (+51% q-o-q) will aid strong sequential improvement in earnings for Hindustan Zinc (+53% q-o-q, -20% y-o-y) and Vedanta (+17% q-o-q, +3% y-o-y). We expect 15% q-o-q increase in Hindalco’s standalone Ebitda led by higher aluminum prices (+3% q-o-q) and volumes. We estimate Nalco’s Ebitda to increase 23% q-o-q due to higher alumina shipments even as lower alumina realisations (-9% q-o-q) will partially offset the gains.
We expect Ebitda to increase by 67-75% y-o-y (-1 to -12% q-o-q) for steel names aided by higher steel prices courtesy MIP, anti-dumping duty.
Tata Steel: We expect consolidated Ebitda to increase by 75% y-o-y to R32 bn (-1% q-o-q) and net income of R3.6 bn (R4.1 bn adjusted net loss in Q2FY16). On operating margins, we expect India steel Ebitda/ton to decline sequentially by 12% q-o-q to R9,140 (+15% y-o-y). We expect Ebitda of $40/ton ($51/ton in Q1FY17) in European operations.
JSW Steel: We expect consolidated Ebitda to increase 67% y-o-y to R28.9 bn (-12% q-o-q). Weaker domestic steel prices (-R1,250/ton q-o-q) and increase in coking coal costs will result in lower sequential Ebitda/ton of R7,400/ton
(-20% q-o-q, +51% y-o-y).
Jindal Steel & Power: We expect JSP’s consolidated Ebitda of R9.7 bn (flat y-o-y, -2% q-o-q). We expect standalone Ebitda to increase 2% y-o-y to R6.5 bn (-3% q-o-q).
NMDC: We estimate Ebitda of R8.6 bn (-5% y-o-y, +5% q-o-q)—the sequential improvement is led by higher volumes. We estimate Ebitda/ton to decline 25% y-o-y to R1,050 (-2% y-o-y).
Vedanta: We expect Ebitda to increase by 3% y-o-y to R41 bn (+17% q-o-q). The sequential Ebitda increase is led by (i) HZ (R17.4 bn, +53 % q-o-q) from higher ore mining and strong commodity prices, (ii) aluminum (R3.9 bn, +48 % q-o-q) from the ramp-up of new smelters.
Hindustan Zinc: We expect HZ’s Ebitda at R17.4 bn (-20% y-o-y, +53% q-o-q). The sharp increase in Ebitda sequentially is led by higher mined metal volumes and increase in zinc prices.
Hindalco: We expect standalone Ebitda at R13.1 bn (+117% y-o-y, +15% q-o-q). We expect
aluminum Ebitda of R8.8 bn
(R2.7 bn in Q2FY16, +4% q-o-q) and copper Ebitda of R4.2 bn (+4% y-o-y). At Novelis, we expect adjusted Ebitda before metal price lag at $275 million (+17% y-o-y, +3% q-o-q).