Home >Markets >Mark To Market >Robust sales, price hikes to drive earnings of steel companies

Steel stocks have been in demand in the wake of domestic firms reporting strong sales volume growth during the fourth quarter, indicating continuing steel demand momentum.

The recent price hikes by steel manufacturers have also come on the back of the firm demand. Thus, with rising volumes and improving realizations, Indian manufacturers are set to report improved earnings.

Share prices of Tata Steel Ltd, JSW Steel Ltd, Jindal Steel and Power Ltd (JSPL) and Steel Authority of India Ltd (SAIL) have each risen more than 100% in the past six months and the shares are trading near the new highs seen recently. The provisional sales volume reported by Tata Steel not only indicates good India prospects, but also that European sales are seeing traction. Tata Steel Europe is set to see a strong 18% sequential growth in sales volumes ( 4.2% growth year-on-year).

Strong realizations
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Strong realizations

On a y-o-y basis, JSPL is leading the pack with sales volumes growth of around 35.5% at the standalone level. This, however, is being helped by expanded capacities and a low base of last year. Tata Steel India, JSW Steel and SAIL are to report robust growth of 6.4% to 15.8% y-o-y. Steel demand in the June quarter is expected to continue being supported by an increase in construction activity before the onset of monsoon. The strong recovery in automobile sales remains supportive for demand for flat products and prices as well.

Of course, one needs to watch out for the impact of a fresh wave of the covid-19 pandemic. Capacity expansions are expected to further aid volume growth in FY22. JSW Steel is set to see capacity expansion of 5 million tonnes per annum (mtpa) at Dolvi in Maharashtra coming on stream and SAIL is to achieve the much-awaited 20 mtpa capacities in FY22, say analysts. Meanwhile, higher realizations in the export market are also aiding overall realizations.

During the third quarter, hot rolled coil prices had gained 19% sequentially on average to 55,250 per tonne. Steel companies are expected to see improvement in blended realization by 5,500-8,200 per tonne sequentially because of improved domestic prices and product mix, according to analysts at Motilal Oswal Financial Services Ltd. Steel companies could see revenues grow 19-25 % sequentially and 31-47% y-o-y, helped by the higher realization and volume growth, analysts said.

The recent price hike of up to 5,000 a tonne is expected to drive improvement in profitability. However, coking coal prices rose by 21% sequentially to $143 per tonne on a landed cost basis.

The full impact in cost would be realized in Q1 by manufacturers, depending on external supplies of coal. Meanwhile, the improved cash flows can lead to meaningful deleveraging, thus providing a further trigger to stocks, according to some analysts.

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