Another Healthy Quarter on Higher Base Metal Prices
1QFY18E is expected to be strong for the non-ferrous companies, while the ferrous ones are set to report a relatively dull show due to higher raw material prices as well as sequentially lower volumes. The non-ferrous players are likely to deliver superb YoY performance, while their QoQ performance is expected to be lower due to seasonality and INR appreciation. Ferrous prices sequentially declined by Rs1,700-Rs2,350/tonne, while volumes are expected to be lower too on a sequential basis due to seasonality. However, volumes are expected to be higher on YoY comparison. Steel companies are expected to show a decline in EBITDA/tonne as high cost raw material especially coking coal would have been mostly got consumed during the quarter. Non-ferrous LME prices rose by ~20-35% YoY, but declined by ~3-6% on QoQ basis. The INR averaged at Rs64.4/US$ during the quarter.
Higher LME Prices to Aid Earnings
LME Zinc prices rose by 35.2% YoY in 1QFY18 due to tight global concentrate supply, while aluminium prices rose by 21.4% during the same period. Higher zinc prices coupled with higher volume (as per the mine plan due to higher waste mining in 1HFY17) will result in strong YoY growth in EBITDA and PAT for Hindustan Zinc (HZL). We expect HZL’s EBITDA to rise by 126.5% YoY, but decline 31.7% on QoQ basis due to sequential fall in LME zinc prices, INR appreciation and lower volume. We expect just 5% YoY rise in Hindalco’s standalone EBITDA due to higher LME due to alumina transfer price from Utkal. Going forward, we expect LME prices to remain benign on the back of steady plant closures in China, thereby increasing the global aluminium deficit. On Zinc front, the outlook on prices is dominated by structural issues of whether mine supply growth will be able to keep pace with consumption growth. LME aluminium prices have rose by 3.1% QoQ and 21.4% YoY to average at US$1,909/tonne, while Zinc prices rose by 35.2% YoY, but declined by 6.4% QoQ. Further, while Aluminium prices are currently trading at ~US$1,877/tonne, Zinc is trading at US$2,843/tonne.
Ferrous Players Expected to Deliver Weak Performance
After strong growth in FY17, the earnings of steel companies were aided by MIP and other safeguard measures. We expect their EBITDA/tonne to be lower both on YoY and QoQ basis due to the steep rise in input cost especially coking coal. Also, we expect blended realization for JSW Steel and SAIL to decrease by Rs1,727-2,335/tonne depending upon their respective product-mix. It must be noted that while the impact of rise in coking coal was felt in 4QFY17, input cost is also expected to remain elevated in 1QFY18 due to carry-over of this high-priced inventories and purchases on quarterly contracts. We expect EBITDA/tonne for JSW Steel (standalone) to decline by 11% QoQ, while SAIL’s loss is expected to widen.
Outlook & Valuation
Maintaining our long-term positive outlook on metals sector, we believe that at the current prices, most ferrous and non-ferrous companies have managed to break-even since a couple of quarters. On base metals front, while the prices have increased, we remain optimistic on demand front (ex- China) in the long-run. The domestic steel industry is expected to witness sustained demand with considerable investments in construction, infrastructure and manufacturing sectors. As far as steel prices are concerned, we do not rule out higher realization and lower imports in the coming quarters due to continued protectionist measures.
1QFY18E Result Pick
JSW Steel: JSW Steel has a strong balance sheet, excellent execution track record and is also one of the lowest-cost convertors of steel globally. We expect India’s steel demand to start outpacing supply from FY21 onwards. As JSW Steel is of the few companies in India with the ability to expand, lowcapex expansion at Dolvi from 5mnT to 10mnT would drive value, going forward. The Company is also investing in optimization projects like blast furnace replacement, slurry pipeline and digitization, which would drive margin in the medium term.
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