Domestic steel companies and integrated aluminum names will report sequential earnings improvement led by higher metal prices—earnings will improve for TATA, JSP, HNDL and NACL. VEDL’s earnings will decline sequentially due to closure of copper smelting, iron-ore mining operations—however, we expect VEDL’s earnings to improve from here for ramp-up of two large zinc and aluminum projects. We maintain our positive outlook on aluminum—prefer HNDL (Buy), VEDL (Buy) and NACL (Add). We maintain ADD on TATA and JSTL.
Ferrous—operating margins to improve
Domestic steel demand increased by 8.5% for April-May 2018 to 15.3 mn tons. During these two months, steel imports to India increased 15% y-o-y to 1.2 mn tons while exports declined 29% y-o-y to 1 mn tons. The steel export prices (HRC from China) increased by 1% q-o-q to $598/ton. The domestic steel prices, however, rose by 3-4% (+Rs 1,400-1,700/ton q-o-q) led by close to 4% fall in the INR/$ rate and higher demand. Overall, we expect Ebitda/ton for TATA and JSP to increase by 1-13% q-o-q but decline by 1% q-o-q for JSTL—only because JSTL’s Q4FY18 earnings included prior-period GST credits.
Non-ferrous—a mixed bag
The movements in prices of base metals were mixed for the quarter—zinc and lead prices declined by 4-5% q-o-q while all-in aluminum prices increased by 4% q-o-q. We expect Hindalco’s earnings to improve 24% q-o-q led by higher aluminum prices, premia and lower earnings drag from low-priced hedges. We estimate 45% q-o-q increase in Nalco’s Ebitda to Rs 7.1 bn largely led by higher alumina prices. We expect Hindustan Zinc’s Ebitda to decline by 13% q-o-q to Rs 31.2 bn due to lower pricing & volumes. We expect Vedanta’s Ebitda to decline by 15% q-o-q to Rs 66.8 bn.