Metal firms to witness mixed fortunes in Q2

Written by Corporate Bureau | Mumbai, Sep 29 | Updated: Sep 30 2008, 07:22am hrs
Unprecedented raw-material price hikes have increased the cost of steel making for a completely non-integrated steel producer, which has brought the Q2 margins for these players under pressure, say experts.

The QoQ realisation and margins is likely to remain flat for the steel players, whereas YoY margins will be under pressure by about 400 to 500 basis points (bps) in Q2 FY09, said Pawan Burde, an analyst with Angel Broking.

Steel players have also not increased steel prices since August 7, after the voluntary industry moratorium of three months, to hold steel prices ended on August 7, 2008. On the other hand players like JSW Steel, Ispat, Essar Steel have reduced their steel prices by Rs 2,000 per tonne effective Sepetmber 1, 2008 on account of fall in the global steel prices.

Says Tarang Bhanushali, an analyst with India Infoline, The impact of price reduction by the steel manufacturers will be seen in Q3 FY09 and in Q2 of the current year. The bottom line of some players, especially the non-integrated players, is likely to take a hit due to increasing raw-material prices which were not passed on to the consumers.

Meanwhile, Motilal Oswal Financial Services in its report said, Rising coal prices and softening aluminium prices post substantial challenges to the margins of Indian aluminium companies. However, correction in the Indian aluminium prices has been much less due to sharp depreciation of the Indian currency against the US dollar.

The report further said, Hindalco is presently highly leveraged and its return ratios are worst in the metals space. Sterlites exposure to growth in the aluminium business has been reduced due to restructuring of the company.

According to the report, JSW Steels margins are expected to decline 650 bps YoY due to coking coal cost pressures worsened by rupee depreciation and PAT is likely to decline 5.9%.

Net sales of Nalco is expected to increase 17.6% YoY on the back of a 20% YoY increase in alumina and a 12%YoY increase in aluminum prices on the LME.

Sterlite Industries net sales to decline 1.4% YoY due to fall in zinc prices on the LME and falling TcRc margins in the copper business. EBITDA is expected to decline 8.3% YoY and the margin would contract 200 bps.

EBITDA margin of SAIL is expected to decline 410 bps YoY to 25.5% due to higher coking coal import costs worsened further by the depreciating rupee. The increase in raw material costs will be partially offset by softening freight rates.

Tata Steels Indian operations will deliver strong volume growth of 30% in 2HFY09 and further 20% growth in FY10. Captive iron ore and coking coal mines, strong volume growth, and lower operating costs due to performance improvement will ensure strong cash flows even if steel cycle were to go for a toss.