Rising prices, volumes may propel earnings recovery for steel makers

Steel volumes, that had remained soft since the onset of monsoon during Q2 FY23, recovering only slightly in the next three months, may substantially improve during Q4. The last quarter of the fiscal is a seasonally strong quarter for steel sales. As domestic volumes improve, export volumes also may see some recovery. The export ban on various steel products was lifted during November.

“For steel companies under our coverage, we expect revenues to grow sequentially on account of higher sales volumes and rise in HRC (Hot Rolled Coil) prices led by the opening of the Chinese economy," said analysts at Axis Securities.

Data collected by Mint also indicates brokerages expect revenues for steel companies to grow 7.2% sequentially during March quarter. Earnings before interest, tax, depreciation and amortization (Ebitda) is expected to grow 15% sequentially, helped by sequential price improvement and benefits of lower inputs costs starting to accrue after clearance of high-cost raw material inventory.

For steel prices, the opening of the Chinese economy is expected to remain supportive with the country being the largest global consumer of commodities. Thus, the improvement of steel price in China meant that international steel prices got some support and domestic steel prices, too, saw some recovery. Despite some volatility seen in steel prices during the quarter, average prices are likely to be higher sequentially, analysts said.

“After struggling for two quarters, domestic steel prices improved in Q4 FY23. The quarterly average HRC (hot rolled coil) price rose 6% sequentially to ₹59,189 a tonne, while the rebar price was up by 9% sequentially to ₹61,312 a tonne," said analysts at Motilal Oswal Financial Services.

Analysts at Elara Securities India Pvt. Ltd also expect blended realization of steel firms under their coverage universe to rise within the range of ₹500-2,500 per tonne, sequentially. On the volume front, JSW Steel is likely to post double-digit volume growth. On a sequential basis, Elara analysts expect steel firms to report volume growth within the range of 1-18%, sequentially.

As steel prices improve sequentially, manufacturers that had seen cost pressures eat into their margins may start seeing some respite. Raw material prices such as those of coking coal and iron ore have continued to ease from highs and benefits of lower costs may start accruing from Q4 even though coal prices had seen some spurt from lower levels during Q4.

International iron ore prices, after ranging between $120-$160 a tonne during Q4 FY22, continued to come down to around $80 a tonne during Q3. The prices, though, have risen thereafter on expectations of a pickup in demand after the opening of China in January; nevertheless, they are at much lower levels compared to peaks. The case with coal is similar. Analysts said steel manufacturers in India usually carry inventory of two to four months and hence, will benefit from low-cost raw material inventory of Q3 in Q4.

“Considering better volume as well as prices sequentially, and operating leverage benefits, we expect EBITDA/tonne for steel firms under our coverage universe to rise ₹100-2,300 sequentially," said analysts at Elara Securities. On a year-on-year basis, however, the performance may remain subdued as steel prices in Q4 FY23 are much lower than they were during the year-ago quarter. Steel prices in the year-ago quarter had seen an abnormal spike after the start of the Russia-Ukraine war and remained firm till May 2022, before the implementation of export duty bans.

Global concerns about recession have increased, pulling down steel prices. Thus, after a very strong Q4 FY22 performance by steel manufacturers, lifted by a spike in steel prices, Q4 FY23 performance may not be quite a match. Data collected by Mint suggests that revenues are likely to be 7.7% lower year-on-year during Q4 FY23. That apart, Ebitda is expected to decline by 39.35% and net profits by 26.38% on year-on-year basis.