Muted steel demand to take toll on EBITDA/tonne….

The announcement of a nationwide lockdown in lieu of Covid-19 adversely impacted domestic steel demand in Q1FY20. During Q1FY20, domestic steel demand fell ~57% YoY. On account of muted demand, majority of steel companies had to operate at sub-optimal levels in April and May, 2020. Domestic steel companies increased their focus towards exports to compensate for muted domestic demand. Majority of steel companies operated at ~55-60% capacity utilisation levels in Q1FY20 while blended realisations declined by ~| 3500-4000/tonne depending on the export and product mix. The EBITDA/tonne of Tata Steel (standalone operations) is expected to come in at | 7500/tonne (| 12531/tonne in Q4FY20 and | 13158/tonne in Q1FY20). Domestic operations of JSW Steel are likely to report an EBITDA/tonne of | 5250/tonne (| 8703/tonne in Q4FY20, | 9936/tonne in Q1FY20).

Base metal prices stay muted but rupee depreciation provides partial relief

During Q1FY21, average zinc prices on the LME were at US$1970/tonne, down 28.6% YoY, 7.3% QoQ while average lead prices were at US$1679/tonne, down 10.8% YoY, 8.9% QoQ. Similarly, average aluminium prices on the LME were at US$1501/tonne, down 16.3% YoY, 11.2% QoQ while average copper prices on the LME were at US$5366/tonne, down 12.2% YoY, 4.7% QoQ. The fall in base metal prices was partially compensated by ~4.8% QoQ, ~7.7% YoY depreciation of rupee compared to the US$.

Aggregate EBITDA margins to nosedive…

On account of Covid-19 related shutdowns and muted domestic demand, we expect Q1FY21E to be a washout quarter for the metal sector. We expect the aggregate topline of coverage companies to decline 30.8% YoY and 29.0% QoQ to | 69626 crore. The aggregate EBITDA of the coverage universe is expected to decline 62.0% YoY and 57.4% QoQ to | 8194 crore. The aggregate EBITDA margin of the coverage universe is likely to come in at 11.8% (down 970 bps YoY, 780 bps QoQ). The EBITDA/tonne of Coal India is likely to come in at | 174/tonne with NMDC expected to report the same at | 1100/tonne. We expect Novelis (Hindalco’s subsidiary) to clock an EBITDA/tonne of US$325/tonne.

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