Metals Sector Q2 Earnings Preview: Mixed bag performance likely, says Nuvama; prefers JSPL, Coal India
- Q2 Earnings Preview: Lower costs for coking coal offset lower steel prices, leading to increase in Q2FY24 earnings for ferrous firms. Reduced base metal prices pressure nonferrous companies' EBITDA, but offset by higher volume and lower CoP.
For Q2FY24 (July–September), brokerage Nuvama Institutional Equities forecasts "mixed bag performance" for the mining and metals sector.
In the most recent Q2FY24 preview report, the brokerage forecast that lower costs for coking coal would offset lower steel prices, leading to an increase in Q2FY24 earnings before interest, taxes, depreciation, and amortisation (EBITDA).
Conversely, the brokerage stated that reduced base metal prices are pressureing nonferrous companies' EBITDA, with higher volume and a lower coefficient of performance (CoP) providing a slight counterbalance.
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"Meanwhile, we expect a further increase in steel prices, which should offset rising coal cost, thereby keeping margins steady for ferrous firms in Q3FY24. Jindal Steel & Power Ltd (JSPL) and Coal India are our preferred picks," said the brokerage in its report.
Ferrous Companies
Although lower steel prices (down ₹2,600–3,400/t) are expected to be offset by lower coking coal costs (down USD45–60/t QoQ), the brokerage expects ferrous companies to post stable to higher EBITDA/t (up ₹14–2,000/t QoQ).
Jindal Steel & Power Ltd and other such companies stand to lose the most from the brokerage's observation that long product prices decline more during monsoon seasons.
According to brokerage estimates, Steel Authority of India Ltd (SAIL) outperforms with an EBITDA/t of around ₹6,262, up ₹2,000/t QoQ due to a boost in volume and reduced coking coal prices that are somewhat offset by lower steel pricing.
“We expect the volume growth in the range of 6-23% QoQ with SAIL reporting the highest volume (up 23% QoQ to 4.78mt), while Tata Steel’s sales volume is likely to see a decline of 1.6% QoQ. We expect Jindal Steel & Power Ltd's EBITDA/t to decline by ₹1,661 QoQ due to a steeper fall in long prices and less availability of iron ore from its captive iron ore mine. Tata Steel Europe’s losses continued and are estimated to report EBITDA loss at USD131/t versus USD96/t in Q1FY24,” the brokerage said in its report.
Non ferrous companies
According to the brokerage non-ferrous players are likely to witness a dent in margins due to lower London Metal Exchange (LME) prices.
Reduced pricing for zinc and aluminium are expected to cause Vedanta (apart from Hindustan Zinc) to experience a 3% QoQ fall in EBITDA. Improved coal connectivity is expected to result in a ~5% QoQ cost drop for Hindalco, offsetting lower aluminium prices.
“We forecast non-ferrous producers’ EBITDA to dip due to lower metal prices and volumes partially offset by lower CoP. Novelis is also expected to register an improvement of 5% QoQ in EBITDA to USD442mn with EBITDA/t of USD480. Hindustan Zinc's EBITDA is likely to decline 5% QoQ due to lower zinc prices (LME down USD96/t QoQ) partially offset by lower CoP,” the brokerage said.
Mining companies
Brokerage claims that NMDC continued to be an outlier with EBITDA growth (up 69% YoY) due to increased volume and realisation, which were up 15% and 13% YoY, respectively.
GMDC is projected to decline 20%/43% YoY due to decreased volume and realisation. Because of reduced e-auction prices (down 52% YoY) and higher labour costs, Coal India's EBITDA is expected to be down 6% YoY. These factors would be largely mitigated by improved volume and FSA realisation.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Business NewsIndustryMetals Sector Q2 Earnings Preview: Mixed bag performance likely, says Nuvama; prefers JSPL, Coal India
First Published:11 Oct 2023, 02:09 PM IST
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