Analyst corner: Metals & mining companies may report strong Q1 results

By: | Published: July 18, 2018 2:27 AM

Indian metal companies should report strong 1Q results. Steel cos should benefit from the full impact of 4Q price hikes, though volume may be lower QoQ.

We expect EBITDA at Tata and JSW to grow 8-11% QoQ. (Representational image: Reuters)

Indian metal companies should report strong 1Q results. Steel cos should benefit from the full impact of 4Q price hikes, though volume may be lower QoQ. We expect EBITDA at Tata and JSW to grow 8-11% QoQ. We expect strong EBITDA growth at HNDL led by higher AL LME, weaker rupee and lower hedge drag. Coal India should benefit from recent price hikes and report strong earnings growth.

We expect EBITDA to rise 7% QoQ for our covered metal names. We expect steel companies to report higher EBITDA/tonne due to better realizations as the full impact of the March Q price hikes flows through. Average domestic HRC was up Rs 2400/tonne QoQ, while average long product prices were up Rs 500-800/tonne QoQ.

Average coking coal prices fell $15/tonne QoQ, but inventory lag would lead to mixed cost impact.

We expect 14% QoQ growth in EBITDA at HNDL led by higher Al LME, weaker rupee. At CIL, we expect impact of recent coal price hike, buoyant e-auction prices to drive strong profit growth.

Strong 1Q results are well understood. Focus would remain on outlook. Domestic steel prices are down 3-10% from the recent peak partly led by seasonal demand weakness (monsoon) esp. in longs. Regional prices/ spreads could moderate as Chinese output remains high and demand may moderate post seasonally strong period. This could weigh on domestic steel prices. Recent news flow around possible output cuts at Tangshaan could be a positive. Al LME is down 9% over last month, partly on trade war concerns. We believe cost push factors and low margins at Chinese smelters should underpin Al prices.

We forecast group EBITDA of Rs 7,200 crore incl. Bhushan. 1Q volumes were down 8% QoQ, but we expect Tata India EBITDA to rise 8% QoQ led by Rs 1,500/tonne QoQ rise in EBITDA/ton. Note, 4Q costs included costs related to KPO outage, which should fade in 1Q. At TSE, we expect EBITDA/tonne to rise $18/tonne QoQ owing to better spreads, receding Fx headwind due to weaker GBP and EUR vs. dollar and better fixed cost absorption due to higher output (6.8% QoQ). We expect TSE volumes to be down 5% QoQ.

We assume Rs 330 crore of EBITDA from Bhushan in 1Q.

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