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Small is beautiful

Q3FY22 is expected to be a humbling quarter for ferrous while nonferrous companies are expected to fare relatively well. Key points: i) Profitability is likely to be affected by high coal cost. ii) Ferrous realisations likely to be impacted while LME prices stayed robust. iii) Domestic demand woes evident in lower volumes QoQ for ferrous players. iv) Smaller players are likely to stand out.

Going ahead, we see tepid domestic demand as the major concern for ferrous. That said, global market balance for most commodities remains favourable. Hence, we remain positive on the sector. We retain Tata Steel (TP: INR1,950), JSPL (TP: INR575) and Vedanta (TP: INR400) – all BUYs – as our key picks in the space.

The tide turns for ferrous

Q3FY22 is likely to be an ‘hour’ of reckoning for ferrous with its earnings momentum likely to come to a halt. Key points: i) Coking coal cost is likely to increase by USD80– 100/t QoQ while blended realisation is expected to be up merely INR1,500–1,800/t due to lower export prices and domestic prices remaining under pressure since the second fortnight of Nov-21. ii) Sales volume of ferrous companies are likely to decline QoQ on tepid domestic demand; iii) Non-ferrous companies are likely to see earnings growth on stable volumes and robust LME prices (particularly for LME Zinc). iv) Coal mining companies – Coal India and GMDC – are likely to see good earnings growth on volume/price uptick. v) Jindal Stainless and Shyam Metallics are likely to stand out on earnings, owing to their conversion-based business models.

Smaller companies to fare better

We see smaller companies faring better than larger ones owing to their niche products, localised markets and lower cost pressure. Key points: i) We expect EBITDA/t of Jindal Stainless to be touch a record INR27,830 on realisation uptick and focus on niche products instead of volume. ii) GMDC’s EBITDA is expected to rise 8.5x QoQ on volume uptick and five successive price hikes. iii) Shyam Metalics is expected to fare much better than larger players owing to ferrochrome in the product mix, inventory benefit from coal, and lower iron ore cost.

Outlook: Smaller players hold sway

In Q3FY22, we are likely to see red-hot ferrous earnings tempering down after five successive quarters of an uptick on the back of record-high coking coal price, reduced export realisation and subdued domestic demand. Non-ferrous companies, however, are expected to enjoy decadal-high LME prices complimented by volume growth. However, higher coal cost is likely to erode aluminium profitability.

In our view, the cynosure of Q3FY22 is likely to be smaller companies – Jindal Stainless, Shyam Metallics and GMDC – owing to their differentiated business models. That said, we expect domestic demand to improve and tight market balance to aid stock performance going ahead. We maintain Tata Steel (TP: INR1,950; 5.5x FY23E EBITDA), JSPL (TP: INR575; 5.5x FY23E EBITDA) and Vedanta (TP: INR400; 3.8x FY23E EBITDA) - all BUYs- – as key picks in the space.

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