Q3 result preview: Steel cos’ margins may contract on higher input costs, says Axis Securities; picks Tata Steel

Q3FY24 Preview: In its Metals & Mining Q3FY24 results preview report, brokerage house Axis Securities stated that it anticipates base metal stocks to perform significantly better this quarter and that steel companies will report a slight QoQ margin contraction. A mixed quarter is what the brokerage anticipate for structural steel tube companies.

APL Apollo tubes, Hindalco, JTL Industries, Tata Steel, and Coal India are the brokerage's top picks. JTL Industries, Hindalco, Coal India, and Nalco are their top performers in terms of earnings.

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Steel Q3FY24 Preview

The brokerage house anticipates a slight sequential contraction in the earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins for the steel companies under its coverage, Tata Steel and Steel Authority of India Limited (SAIL), as higher coking coal consumption costs may offset the benefit of higher steel realisation.

The brokerage expects Tata Steel's EBITDA/t at its Indian operations to decrease by 2% QoQ to ₹14,705/t due to increased costs associated with the consumption of coking coal, which will be partially offset by higher sales volumes and realisations.

The brokerage model in Europe witnessed an expanded EBITDA/t loss of $180/t as opposed to a loss of $137/t in Q2FY24 due to decreased sales volume and sales realisation, which could only be partially offset by lower costs due to the consumption of coking coal.

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"For SAIL, we assume sales volumes of 4.6MT, down 4.1% QoQ, (up 11% YoY) on a high base of the last quarter. We expect revenue to decline slightly by 3% QoQ led by a decline in sales volume which more than offsets higher sales realisation.

We expect EBITDA to drop QoQ by 18% on account of higher coking coal consumption costs. On a YoY basis, we expect EBITDA to increase by 53% YoY, led by higher topline. We expect EBITDA/t to drop QoQ by 18% to ₹6,663/t, led by higher coking coal consumption costs," the brokerage said.

Aluminium Q3FY24 Preview

The brokerage expects aggregate EBITDA to increase by 59%/7% YoY and QoQ for the aluminium companies it covers, Hindalco and National Aluminium Company Ltd (NALCO).

"Although LME Aluminium prices declined by 6% YoY to $2,198/t, (up 1.8% QoQ), the EBITDA is expected to increase on account of a drop in thermal coal prices. Average thermal coal prices at Newcastle coal (6,000 Kcal) are down by 56%/14% YoY/QoQ in Q3FY24," the brokerage said.

The brokerage believes Hindalco will sell flat aluminium on a quarterly basis at 338 kt in Q3FY24. Due to maintenance shutdowns in North America (Oswego Hot Mill) and other regions, novelis volumes will be impacted in Q3FY24 as opposed to Q2FY24.

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In terms of coal offtake for Coal India, it increased by 24%/10% YoY/QoQ to 190MT, and at 552MT for the YTD, it was up 9% YoY. E-auction premium FYTD to Nov'23 was approximately 90%. Premium was at an all-time high of 241% in Q3FY23. However, the increase in overall offtake volumes and higher YoY FSA prices more than offset the premium decrease.

Sales volume for APL Apollo Tubes fell to 604kt, a YoY/QoQ decrease of 0.2%/11%. The decrease in general and light product sales as a result of channel de-stocking in anticipation of a steel price correction was the main driver of this.

"We expect EBITDA to decline by 8.7% QoQ, led by the drop in topline and EBITDA/t to slightly improve by 2% QoQ. EBITDA and EBITDA/t are expected to increase by 9% YoY each, led by a higher share of the VAP and the contribution from Super Heavy Sections,"the brokerage said.

JTL Industries' sales volume reached a record-high of one lac tonnes, growing by 24% QoQ. However, from 35% in Q2FY24 and 26% in Q3FY23, its VAP share fell to 20% in the quarter.

“Galvanization pot but the company expects it to recover in the upcoming quarter. We expect revenue to grow by 58%/8% YoY/QoQ, mainly led by higher sales volume (though it will be partially offset by lower realisation due to lower VAP share). The company’s EBITDA is expected to grow by 48%/15% YoY/QoQ, led by higher topline and operating leverage. However, its EBITDA/t is expected to drop YoY/QoQ by 16%/7% to ₹4,261/t due to lower VAP share,” the brokerage said.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.