Metals & Mining: Q1FY22 preview – Another blockbuster quarter in the offing

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July 13, 2021 12:45 AM

Ferrous firms likely to fare better; but lower volumes & higher costs to be a drag; Tata Steel is placed the best

Emissions rise from a chimney at a Tata Steel Ltd. plant in Jamshedpur, Jharkhand, India, on Monday, Feb. 11, 2019. Tata Steel is shifting its focus to India, where a government-led thrust on infrastructure is supporting demand. Plans are underway to double capacity in five years through expansions at existing mills and acquiring indebted domestic mills. Photographer: Anindito Mukherjee/Bloomberg

Despite Covid-19 related disruptions, Q1FY22 is likely to be a record quarter for most companies in our coverage. Key points: (i) A q-o-q volume dip likely for most companies; (ii) ferrous companies (flats oriented) are likely to fare better; (iii) debt reduction likely; (iv) higher iron ore and crude derivatives’ cost to weigh on performance.

For almost all firms we expect margins to sustain at or breach the record-Q4FY21 levels. We maintain Tata Steel (TP: Rs 1,300), Hindalco (TP: Rs 475) and Jindal Stainless (TP: Rs 140) as our preferred picks.

Another glorious quarter…: Key points: (i) Flats-oriented ferrous companies such as Tata Steel and JSW Steel to deliver record margins on the back of realisation uptick in both exports and domestic volumes; (ii) overseas subsidiaries of Tata Steel and JSW Steel to deliver massive outperformance due to higher realisation; (iii) The Al division’s Ebitda in non-ferrous companies would show a good improvement mainly due to higher LME price; (iv) volumes of non-ferrous companies to be subdued as well owing to Covid-19 related disruptions. We see scope for substantial deleveraging at steel companies, particularly Tata Steel and SAIL.

…but lower volumes and higher cost to weigh: Q2FY21 would have been much better, but for higher costs and lower volumes. Production/sales volume for ferrous companies are likely to be impacted by diversion of industrial oxygen for medical purposes and sporadic lockdowns owing to Covid-19. As a result, we expect sales volumes of ferrous companies to decline 10% q-o-q on average. For non-ferrous companies as well, volume is expected to be down ~14% q-o-q on average.

Outlook: We expect Q1FY22 to mark a successive quarter of blockbuster performance. Benefits of higher realisation are likely to offset the adverse impact of higher cost at most companies.

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