Metal sector Q1FY24 preview: Margins likely to fall on price weakness, says Kotak Equities; Jindal Steel top buy
Domestic brokerage Kotak Institutional Equities predicts that ferrous producers will offer a stronger risk-reward ratio in Q1FY24 compared to non-ferrous ones. The brokerage's top pick is Jindal Steel & Power Ltd.
In a recent analysis, domestic brokerage Kotak Institutional Equities indicated that, for Q1FY24 (April to June), ferrous producers offered a stronger risk-reward ratio than non-ferrous ones. The brokerage's top pick is Jindal Steel & Power Ltd, while its'sell' recommendations are for National Aluminium Company Ltd (NALCO), Vedanta Ltd, Hindustan Zinc Ltd, Steel Authority of India Ltd, and Vedanta Ltd.
The brokerage firm expects Indian metal shares to continue to suffer from the conflict between the downturn in the West and expectations for a Chinese resurgence.
"Steel margins in 1QFY24 should remain under pressure but recover in 2QFY23E on cost deflation. We see attractive risk-reward at current valuations in select stocks, given the strong growth prospects. We expect aluminum prices and margins to remain under pressure due to fading global energy cost support and find risk-reward unfavourable in base metals," said the brokerage in its report.
Ferrous
Price reductions and the utilisation of high-cost coking coal inventory, according to the brokerage, will cause margins to fall by around ₹2,000/ton (quarter-on-quarter) qoq in 1QFY24E.
Additionally, the brokerage anticipates an average decline in steel realisation of approximately ₹1,250/ton qoq, driven by price cuts, partially offset by contract resets and better product mix during the quarter; an increase in coking coal costs of approximately US$10/ton and an increase in iron ore prices of approximately ₹500–600/ton for non-integrated producers, assuming a lag in consumption; and an estimate of approximately 19% volume growth year over year (yoy) during the quarter.
“For Tata Steel’s Europe division, we estimate an Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) loss of US$81/ton (US$92/ton loss in 4QFY23), led by weak demand, shutdowns and higher costs. While for NMDC, we estimate EBITDA/ton to decrease sequentially to ₹1,709/ton (down 30% yoy and 1.7% qoq), mainly due to back-ended price cuts in 1QFY24E,” said the brokerage in its report.
Non-ferrous
For base metal companies in 1QFY24E, the brokerage predicts dismal sequential results. In contrast to zinc producers, whose margins should be substantially decreased as a result of the steep decrease in zinc prices, aluminium companies should have sequentially lower pricing, helped in part by lower coal costs. In terms of US dollars, the prices of zinc, aluminium, and alumina dropped by 18%, 5.3%, and 4% qoq in 1QFY24.
Hindalco: While Novelis EBITDA should recover (US$450/ton, down 23% yoy, up 4.5% qoq), the brokerage predicts India EBITDA at ₹21.6 bn (down 40% yoy and 10% qoq).
NALCO: Due mostly to weaker commodity prices during the quarter, the brokerage expects EBITDA of ₹6.8 bn (down 21% yoy and 11% qoq).
Hindustan Zinc: According to the brokerage estimates EBITDA to decrease by 24% qoq (down 37% yoy), mainly due to lower zinc prices, which sharply underperformed other base metals.
Vedanta: The brokerage forecast a 24% qoq decrease in EBITDA (down 30% yoy) due to weaker commodity prices across key segments (zinc, aluminum and oil/gas).
Below is the valuation summary given by the brokerage:
| Company | CMP (Rs) | FV (Rs) | Rating | Upside/Downside |
| Hindustan Zinc Ltd | 311 | 260 | Sell | -16% |
| Jindal Steel & Power Ltd | 609 | 740 | Buy | 21% |
| JSW Steel Ltd | 797 | 715 | Reduce | -10% |
| Vedanta Ltd | 278 | 235 | Sell | -15% |
| Tata Steel Ltd | 112 | 130 | Buy | 16% |
| Hindalco Ltd | 426 | 455 | Add | 7% |
| Steel Authority of India Ltd | 87 | 50 | Sell | -43% |
| National Aluminium Company Ltd | 84 | 70 | Sell | -16% |
| NMDC Ltd | 107 | 140 | Buy | 31% |
| Source: Bloomberg, Company data, Kotak Institutional Equities estimates | ||||
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