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FY21 ends on a high note

Our top picks: SAIL, JSP, and HNDL

Pricing at fresh highs leads to record high EBITDA Strong demand surge for metals globally further boosted prices during the quarter gone by. In 4QFY21, average aluminum/zinc prices rose 9%/4% QoQ, whereas India rebar/HRC prices rose by 17%/19%. Steel volumes for our coverage universe are expected to rise by 14% YoY (1% QoQ) on strong demand and low base in 4QFY20.

Higher regional steel prices and robust domestic demand helped local mills to raise HRC prices during Jan’21 by INR5,000/t to INR56,000/t. Primary rebar prices too increased by a similar quantum to INR55,000/t in early Jan’21. However, improved supply from the secondary rebar market put pressure on primary rebar prices, thereby leading to some roll back in prices. On an average, HRC/rebar prices (exMumbai) rose by 19%/17% QoQ at INR55,250/INR51,700 per tonne. With improved domestic prices and product mix, we expect blended realization for steel companies to improve by INR5,500-8,200/t QoQ in 4QFY21E.

Revenue for steel companies under our coverage (TATA, JSTL, SAIL, and JSP) is expected to improve 20% QoQ (44% YoY) to INR1,102b due to higher realization and volumes. On the cost front, coking coal prices rose by 21% QoQ to USD143/t CNF India. However, the full impact in cost would not be realized during 4QFY21 due to a lag effect. NMDC average iron ore fines/lumps rose by 23-34% QoQ to INR4,430- 5,330/t. As a result, spot steel spreads were higher by 16-18% QoQ to INR35,100- 38,700/t for rebar HRC. We expect margin for TATA to rise by a higher amount given their integrated operations. SAIL’s margin would be affected due to retrospective revision in salaries, which could impact EBITDA/t by ~INR2,900. We expect EBITDA/t for TATA/SAIL/JSP/JSTL to rise by INR6,281/INR3,672/INR4,909/INR4,389. We expect EBITDA for steel companies to increase 38% QoQ (194% YoY) to a record high of INR347b. We expect record high consolidated EBITDA for TATA/SAIL/JSP/JSTL at INR146.6/68.0/79.8/52.5, up 215%/248%/168%/136% YoY. For NMDC, we expect EBITDA to rise 45% QoQ to INR40.1b on the back of higher realization (INR6,060/t, +29% QoQ) and higher volumes (10.6mt, +14% QoQ).

Higher LME prices to improve profitability in the Non-Ferrous segment

Strong rebound seen in LME base in earlier quarters continued in 4QFY21 as well. LME Aluminum averaged 9% higher QoQ (+24% YoY) at USD2,093/t. LME zinc/lead prices averaged 4-6% higher QoQ (+29%/9% YoY) at USD2,749/USD2,016 per tonne. Silver prices too averaged 7% higher QoQ to INR67,020/kg. Brent Crude rose 36% QoQ to USD61/bbl.

We expect EBITDA for HNDL’s India operations to increase 4% QoQ to INR17.2b on the back of higher LME prices. However, the full benefit of higher LME prices would not be realized due to hedging of 58% of LME volumes at USD1,716/t. We expect adjusted EBITDA from Novelis’ operations to remain strong at USD472m (down 1% QoQ) due to normalization in margin (USD493/t, -3% QoQ) on softening of spreads during 4QFY21, offset by 3% higher volumes QoQ at 958kt. We expect EBITDA for HZ to increase by 6% QoQ to INR34.5b (+76% YoY) due to improved volumes and prices. VEDL’s EBITDA (excluding HZ) is expected to improve by 13% QoQ to INR53.1b on the back of higher EBITDA from aluminum (INR23.6b, +15% QoQ), iron ore (INR7.3b, +28% QoQ), and oil and gas (INR10.5b, +23% QoQ) business segments.

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