Margins set to expand despite flat volume growth in a seasonally weak quarter
Steel companies' earnings in second quarter will benefit from lower raw material costs, leading to margin expansion despite flat volume growth in a seasonally weak quarter, analysts said.
"Volumes for ferrous names like Tata Steel and Steel Authority of India Ltd are expected to be flat year on year due to subdued domestic demand and import pressure from China, but Ebitda pick-up year on year (yoy) is seen on account of lower coking coal costs," Centrum Broking said in a report.
Prices of key raw materials like iron ore and coking coal have remained soft in the September quarter. Iron ore prices fell to $91 per tonne, down 32% from a year ago and 12% from quarter ago. Coking coal price in Q2 was $119 per tonne as against $145/tonne in the year-ago quarter and $120/ tonne in June quarter.
"Steel prices globally have been weak over the last two quarters led by softening raw material prices. Iron ore and coking coal prices have plunged globally due to lower demand from China and increased supply from Australian miners. However, the decline in steel prices has been lowered as compared with the decline in raw material prices, leading to higher margin spreads for non-integrated steel producers," IIFL said.
While raw material prices contracted globally, in domestic market iron ore price remained firm due to supply shortage. Steel companies including Tata Steel and SAIL had to shut operations of their captive mines in Odisha and Jharkhand following Supreme Court, impacting their cost of production.
On account of the tight iron ore supply and the sharp decline in international iron ore prices, iron ore imports for the period April?August 2014 stood at 2.6 million tonne. Iron ore costs for the steel companies are expected to increase on a qoq basis due to the above reasons, IIFL noted in earnings preview note.
Margins for the domestic steel players are expected to be lower sequentially due to increase in iron ore costs and lower realisations. Demand for steel products remained subdued in September quarter as construction activities slow down during monsoon.
"For the quarter, while flat (HRC) prices corrected marginally, there was a steep Rs 1,800/tonne fall in longs (rebar) prices quarter on quarter. Combined with higher domestic iron ore cost, our steel coverage universe is expected to report 4% fall in Ebitda/t qoq, though on yoy basis, we still expect margin expansion of 17% on lower coking coal prices," Edelweiss Securities said in a report.
Nirmal Bang Securities expects steel companies to report a 24% yoy jump in Ebitda, driven by better realisation and lower costs, while on qoq basis, we expect an 8% improvement on the back of higher volume and lower costs.
Tata Steel's sales volume in September jumped 3.5% from year ago to 2.1 million tonne but was flat sequentially. "While realisations, are expected to be flat qoq, we expect higher cost of iron ore due to shut down of mining operations leading to Ebitda/t of Rs 13.4/t, down estimated 7% yoy, 13% qoq. International business is expected to see flat volumes and better margins on the back of soft raw material prices partially offset by soft European steel prices," Edelweiss said.
SAIL's volumes are likely to be flat to marginally higher around 3 mt. "Marginal improvement in realisation on yoy basis combined with savings in cost due to lower coking coal prices is expected to lead to a sharp jump of estimated 63% in Ebitda/t in second quarter of fiscal 2015," the brokerage said.
Tata steel's consolidated net profit in second quarter is seen at Rs 800 crore, down 16% from year ago and up 127% from quarter ago, as per Bloomberg average estimate of 38 brokerages. Antique Stock Broking noted that higher effective tax rate at the consolidated level would cause drop in net profit. Consolidated revenue are seen at Rs 36,185 crore flat sequentially as well as from year ago.
SAIL's standalone net profit in September quarter is seen at Rs 625 crore, down 47% from year ago and up 18% from quarter ago. Brokerage estimates, however, varied widely due to foreign exchange gain or loss calculations. Revenue were seen at Rs 12,185 crore, up 6.8% from year ago and 8.8% from quarter ago.
Source: DNA India
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