The domestic metals and mining sector may face flat-to-marginal decline in realisations in the first quarterly results because of weaker product mix and sequential decline in coking coal costs. An analysis by equity research firms note that while the sector could get some reprieve due to growth in exports and lower raw material costs in this quarter but the full impact of this would only translate into profits next fiscal.
In a report on the metals and mining sectors,equity research firm Anand Rathi points out that companies like Hindalco and Sterlite continue to suffer from rising costs in the aluminium smelting (leading to plant closures and loss in production,etc),although both companies will benefit from currency depreciation. During the current quarter,non ferrous companies are expected to perform better than expected,while ferrous companies would be hit by costs,the firm said. Anand Rathis top picks in the sector are Tata Steel and JSW Steel for their improved operations and volumes.
Q1FY14 saw weak demand… However,we see sequential improvement for Indian steel companies,led by export volume growth,albeit aided by the weaker currency. With benefit of lower raw material costs and stable realisations,we expect margins to stabilize during FY14, the firm observed in the report.
IDFC Securities too agrees that among the metal firms Tata Steel is the best placed. But in a comparison of the 30 Sensex stocks it will rank Tata Steel along with Sterlite Industries as among the bottom five contributors to earnings.
Muted end-use demand,declining international prices offset by depreciating currency led to a flattish sequential realisation growth,its note argues. Among all leading sectors from automobiles to telecom,IDFC Securities expects metals to earn better than oil and gas,power and even IT services (EBITDA).
Anand Rathi writes that Steel Authority of India Limiteds (SAIL) volumes are expected to be up 8 per cent y-o-y (against lower base in Q1 FY13),but realisations will dip by 7.5 per cent resulting in flat revenue of Rs 107 billion. The PSU may have to sustain increased inventory levels driven by the subdued demand in select products like plates,structurals,etc. Project delays have reduced internal rate of returns despite vast raw material assets,better infrastructure and the best marketing network. Volume is likely to rise from FY15,but profitability expected over the next three years is unlikely to provide any respite from leverage concerns, the firm reasoned in its report.
Steel sales volume at Jindal Steel and Power will improve by 34 per cent year-on-year,to 0.74 million tonne in the first quarter of FY14,but decline in pellet prices could hit profitability of the standalone business. The equity research projected that a drop of $10 per tonne in pellet realisation in FY14,in line with reduction of state-run miner NMDCs lump prices and flat steel realisations on account of subdued plate demand.