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Non-ferrous outperforms Ferrous; earnings still elevated

In Q3FY22, Ferrous companies (except Jindal Stainless) reported lower earnings QoQ, being hit by muted demand and higher coal cost while Non-ferrous companies offset cost inflation due to higher prices and EBITDA increased further QoQ. We observe that high working capital requirement restricted debt reduction among steel companies (JSW Steel and Jindal Stainless’ s debt increased QoQ due to increase in working capital) while we saw dip in debt of non-ferrous companies. Among ferrous companies, operating profits of Tata Steel reported above our estimates, but SAIL, JSPL and JSW Steel missed estimates by 5-14% primarily due to higher CoP and one-offs like higher provisioning of employee cost in SAIL. In non-ferrous, Hindustan Zinc and Vedanta reported in-line numbers while HNDL reported better than expected operating profits. In mining, NMDC’s earnings were hit by lower iron ore prices (in-line) while Coal India earnings increased owing to higher volume and higher e-auction prices and exceeded our estimates.

Ferrous: Higher RM cost hit earnings

In Q3FY22, all domestic steel producers posted lower margins (down 2,000-7,500/t QoQ), with maximum decrease for SAIL followed by JSW, JSPL and TATA. EBITDA was down by 3-51% QoQ primarily due to higher coking coal prices, lower volumes (except JSW Steel) and one-off higher employee cost in SAIL. Average increase in steel realization was Rs1,150-3.500/t QoQ with higher increase for long heavy producers like JSPL and SAIL. Iron ore prices were lower QoQ (cost for JSPL was down Rs1,500/t QoQ) which was more than offset by the impact of higher coking coal cost (up Rs6,000-Rs9,850/t) for all steel producers. During the quarter, all steel companies except SAIL witnessed increase in working capital due to increase in inventory and higher commodity prices. As a result, net debt movement of coverage companies was mixed with maximum reduction in Tata Steel by Rs59.9bn, followed by SAIL (down by Rs35.5bn QoQ) and JSPL (down by Rs1.8bn QoQ) while we witnessed increase of Rs109bn QoQ for JSW Steel as it merged Bhushan Power with itself wef 01October’21.

Non-ferrous: Profitability improves on higher commodity prices

During the quarter, average base metal prices rose by 4-12% QoQ, with zinc rising the most and aluminium, the least. Higher aluminium prices offset cost increase and Hindalco India delivered better than expected EBITDA of Rs35bn, up 5.9% QoQ. Novelis reported in-line EBITDA, though profitability was higher-than-estimated. Higher volume (up 23% QoQ) and higher zinc realisation (up 10% QoQ) enabled Hindustan Zinc to report in-line EBITDA of Rs43.7bn. Vedanta reported in-line EBITDA of Rs107.4bn, up 6% QoQ, driven by higher commodity prices partly offset by higher CoP in aluminum, zinc international. Ex-HZ, EBITDA was Rs63.6bn, down 10% QoQ due to higher aluminum CoP offsetting higher aluminium prices as well as lower iron ore prices.

Q4FY22: Non-ferrous outperformance continues; In ferrous, long product producers to benefit

During Q4FY22, domestic as well as global steel demand is expected to improve sequentially. Hence, sales volumes should improve QoQ. Amid significant rise of coking coal prices to ~USD445/t (all-time high), we expect further increase in coking coal cost by ~USD50/t (except for JSPL as benefits of captive mines would lower its impact). Steel realization is expected to be higher for long products and lower for flat products QoQ, leading operating profits to be flattish for SAIL & JSPL while lower QoQ for JSW Steel and Tata Steel. Vedanta’s profitability will increase higher as compared to Hindalco in Q4FY22 due to benefits of lower alumina prices for Vedanta. Aluminium price is expected to increase offsetting higher CoP for both. Zinc prices are expected to rise and Hindustan Zinc’s CoP should fall QoQ, benefiting its earnings. We expect NMDC volumes and prices to increase QoQ and COAL volumes should pick up in Q4FY22 and aid in higher earnings.

Top picks: JSPL, Hindalco, Tata Steel, SAIL

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