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Cost pressure persists; margins fizzles out

In Q4FY22, Ferrous companies (except Tata Steel & JSPL) reported higher EBITDA (though EBITDA/t was lower except SAIL) QoQ, on account of higher volumes which was largely offset by increase in coal prices and flat to lower steel prices while Non-ferrous companies benefitted from increases in LME prices partially offset by higher operational cost and resulted further improvement in EBITDA QoQ. We observe that fall in inventory levels released working capital which helped in further debt reduction. Among ferrous companies, operating profits of SAIL reported above our estimates while JSW Steel and Tata Steel were in-line. JSPL missed estimates primarily due to lower than expected increase in realisation (despite higher average long product prices in Q4FY22) and higher CoP and one-offs provisions. In non-ferrous, Hindustan Zinc and Vedanta reported in-line numbers while HNDL (standalone) reported better than expected operating profits. In mining, NMDC’s earnings (below estimate) were hit by lower iron ore prices, 22.5% additional premium and certain one-offs while Coal India earnings (better than expected) increased owing to higher prices and lower than expected employee expenses.

Ferrous: Higher coking coal prices and lower realisation hit earnings

In Q4FY22, all domestic steel producers posted lower margins (down 3,500-4,900/t QoQ), with maximum decrease for Tata followed by JSPL and JSW. SAIL bucked the trend and its EBITDA/t increased by Rs322/t QoQ due to normalisation of employee cost. EBITDA was hit primarily due to higher coking coal prices and lower realisation partially offset by higher volumes. Surprisingly, JSPL (70% long products in sales mix) and SAIL (50% long steel in sales mix) reported marginal increase in realisation by Rs809/t and Rs500/t respectively despite average TMT rebar prices were up by ~Rs4,900/t QoQ. Average HRC prices fell ~Rs1,200/t QoQ and with booking of exports at lower priced earlier, Tata and JSW’s realisation fell by ~Rs1,360/t and ~Rs2,011/t respectively. Volumes increased by 14-18% QoQ with highest in JSW (up 28%) followed by SAIL (up 23%), Tata (up 17%) and JSPL (up 14%). Coking coal prices were higher QoQ which increased cost by average Rs2,250/t-Rs4250/t QoQ. During the quarter, net debt of companies was down with maximum reduction in Tata by Rs118.2bn QoQ, followed by JSW (down Rs96.6bn QoQ), SAIL (down Rs38.6bn QoQ) and JSPL (down Rs21bn QoQ).

Non-ferrous: Profitability improves on higher commodity prices

During the quarter, average base metal prices rose by 11-18% QoQ, with aluminium rising the most and Zinc, the least. Higher aluminium prices offset cost increase and Hindalco India delivered better than expected EBITDA. Novelis reported marginally lower than expected EBITDA due to supply disruption. Higher volume (up 2% QoQ) and higher zinc realisation (up 11.5% QoQ) enabled Hindustan Zinc to report in-line EBITDA. Vedanta reported in-line EBITDA driven by higher commodity prices partly offset by higher CoP in aluminium.

Margins to remain under pressure in Q1FY23

We reduce our numbers and target price for Tata Steel and Jindal Stainless after taking into account the impact of 15% export duty on steel products levied by the Government of India on 21st May 2022 (Refer Exhibit 1 &2). This move led steel prices to fall by Rs5,000-5,5500/t in last 10 days. Despite the fall, average HRC price is expected to increase by ~Rs2,700/t QoQ and long product prices by ~Rs5,000/t QoQ in Q1FY23. Added to that, prices of auto contracts are expected to increase by Rs11,000-12,000/t (Benefit to Tata and JSW, consisting ~15% of volume). Offlate, coking coal prices have fallen (from USD530/t to USD442/t) and Q1FY23 average could be flat QoQ but due to average 1.5-2 months of lag period, we expect coking coal cost to increase further by USD100-125/t in Q1FY23 which will dent margins for steel companies. For non-ferrous, while average aluminium prices are expected to be lower QoQ, zinc should buck the trend. With higher CoP, the profitability for Hindalco should be lower sequentially while Hindustan Zinc should report higher EBITDA and Vedanta’s earnings could be marginally down QoQ. We expect NMDC prices and volumes to decrease QoQ resulting in lower earnings while COAL volumes should remain nearly flat QoQ but e-auction volume should trend down.

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