With an improvement in demand from the automotive and construction sectors, Indian steel companies are expected to register strong sales volume during the first quarter of the current financial year. Margins, on the other hand, are expected to decline significantly year-on-year due to lower realisations and higher raw materials costs, according to experts.

Motilal Oswal, in its result preview, said steel majors like Tata Steel and SAIL were expected to report a decline in their EBIDTA and net sales, whereas JSW Steel’s EBIDTA is expected to grow with net sales remaining flat.

“High-cost coking coal inventory and falling realisations will impact SAIL’s EBIDTA during the quarter. Meanwhile, Tata Steel’s standalone net sales are expected to decline 6% y-o-y due to a 20% decline in realisations, partly cushioned by a strong volume growth of 25% y-o-y,” the report said.

According to Manoj Mohta, head, Crisil Research, “In the last two quarters, the profitability of steel players was impacted. Immediate correction in steel prices led to raw materials becoming costly. Also, in the last quarter, operating margins contracted heavily, by 17%. For Q1, the operating margins are expected to further contract by 19-20%.”

Meanwhile, base metals have witnessed improvement in demand from user industries like automobile, consumer durables, construction, power and packaging, along with slides in LME prices.

“We expect base metal players like Hindalco, Nalco and Hindustan Zinc to clock de-growth in their top line owing to the sharp fall in LME prices. However, rupee depreciation of around 17% y-o-y during the quarter supported domestic realisation of these companies. Margins are also expected to decline sharply in the range of 1,000-2,500 bps, following the slump in LME prices,” said Angel Broking in its recent report.

Similarly, due to lower base metal prices on the LME, Sterlite’s net sales and EBIDTA are expected to decline 23% and 56% y-o-y, respectively, as per Motilal Oswal’s result preview.

Steel demand in India is expected to grow at 6-7% in FY10 with domestic steel prices remaining firm with an upward bias. Going ahead in the financial year, margins are likely to be maintained due to coking coal and iron ore prices being negotiated globally at lower prices. This would result in production cost of steel companies coming down significantly.

“We see about 5-7% increase in demand for steel, while last year, on a y-o-y basis, it was down marginally by 1%. This is in the backdrop of demand coming from sectors like automobile, infrastructure and so on.

Also, the incentives and roadmaps announced in the Budget on infrastructure hint towards demand picking up,” said Mohta.