2QFY18 preview—good for all. Domestic metal companies will report strong sequential improvement in earnings led by higher prices and volume. We expect earnings of large cap. steel companies to increase by 5-19% qoq led by improved realizations and higher steel volumes from project ramp-ups. The earnings of nonferrous names will improve on the back of higher base metal prices, especially zinc (+14% qoq); besides stabilization of production will aid volumes after 1QFY18, which was affected by numerous shutdowns, outages. We prefer VEDL (BUY), HNDL (BUY) and TATA (ADD).
Steel—muted long product demand & prices; flat segment improves sequentially
Domestic steel demand increased 4% yoy to 42.9 mn tons for April - September 2017—the subdued demand is largely due to weak off-take of long products. The demand for bars & rods declined 3% yoy due to weak construction activity in the country while the demand for flat products remained strong. Despite weak demand, the volumes of domestic steel companies increased 7% yoy aided by export sales increasing 60% to 4.9 mn tons in 1HFY18. Indian steel producers were able to boost exports due to (1) lower steel exports from China due to trade protection measures in many countries, and (2) higher global steel prices.
The long product prices declined in 2QFY18 (due to weak construction demand, especially in the monsoon season) while flat steel product prices increased by 2-6% qoq in-line with the increase in global prices (and import offers to India). We also highlight that while China’s HRC prices increased 25% qoq to US$550/ton during the quarter, domestic prices trailed due to increased supplies from new capacities; domestic prices are at a discount to import offers.
Non-ferrous—price increases, improved volumes to aid a strong quarter
Base-metal prices increased by 5-14% qoq with zinc leading the pack. Zinc and lead prices increased by 14% and 8% qoq, respectively, and will aid strong growth in earnings for Hindustan Zinc and Vedanta. In addition, higher lead (38,000 tons, +9% qoq) and silver production (140 tons, +22% qoq) will aid Hindustan Zinc’s earnings as well. Vedanta’s earnings will be aided by higher aluminum production (401,000 tons, +14% qoq), improved availability of its Talwandi Sabo plant (87% versus 20% in 1QFY18), and higher copper volumes (106,000 tons, +18% qoq).
All-in aluminum prices increased 5% qoq though we expect higher input costs to offset some of the pricing gains. We estimate Hindalco's EBITDA to increase 14% qoq to `13.1 bn; Hindalco's earnings may also be marginally impacted by the aluminum hedges carried over from FY2017 at lower LME prices. We estimate Nalco's EBITDA to increase 49% qoq to `3.4 bn aided by higher alumina and aluminum realizations.
2QFY18—an improvement across names
We expect 5-19% qoq increase (+5% to +76% qoq) in consolidated EBITDA for large cap. steel names aided by higher volumes, realizations and lower costs (including operating leverage gains).
* Tata Steel. We expect consolidated EBITDA to increase 5% qoq to `52.2 bn (+76% yoy) and adjusted net income of `16.4 bn (+7% qoq). We expect Tata Steel to report a one-off exceptional charge of GBP 550 mn for payment made to the British Steel Pension Scheme. Tata Steel's India steel deliveries increased 19% yoy to 3.13 mn tons in 2QFY18 from rampup of KPO. We estimate India EBITDA/ton to increase 9% qoq to `11,750 (+61% yoy) led by higher flat steel prices and export realizations. We expect costs to remain largely flat. We expect Europe EBITDA/ton at US$78 (US$81/ton EBITDA in 1QFY18).
* JSW Steel. We expect consolidated EBITDA to increase 19% qoq to `31 bn (+5% yoy). We expect EBITDA/ton to increase 24% qoq to `7,800 (+10% yoy) led by higher realizations. We model steel deliveries of 3.7 mn tons (+5% qoq, -3% yoy). We estimate net income of `9.3 bn (+27% yoy, +48% qoq).
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