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Non-ferrous to outperform Ferrous

The raw material price inflation continues to hit profitability of steel producers in Q4FY22. Though the steel producers have taken price hikes to offset rise in coking coal prices but is expected to fall short to cover entirely in Q4FY22 (margins of flat steel producers will be lower sequentially while long steel producers tend to record higher margins) as the price hikes started from March, the effect of which will be fully reflected in Q1FY23. The price hikes is more than enough to offset coking coal prices, to be reflected in Q1FY23. Despite lower margins, EBITDA of the ferrous companies is expected to remain flat/increase QoQ due to higher volumes. Zinc and aluminium prices averaged 11-18% QoQ higher in Q4FY22 which will benefits companies like Vedanta and Hindustan Zinc and Hindalco India operation. NMDC and COAL should report higher volume, leading to higher earnings for COAL on a YoY basis; While NMDC margins would be impacted due to fall in iron ore prices during the quarter.

Ferrous: Higher volume leading flat/increase in EBITDA QoQ

For Q4FY22, we expect steel producers to post flat/increase in EBITDA QoQ primarily due to higher volumes which more than offset rise in coking coal prices. Though average HRC prices (ex-Mumbai) were down ~Rs11,70/t QoQ but average Rebar prices (ex-Mumbai) were up Rs4,900/t QoQ in Q4FY22. The booking of flat steel exports in December’21 at lower prices, delay in taking price hikes will lead blended realization to be lower by Rs1,500-3,000/t QoQ for JSW and Tata while JSPL and SAIL can witness realization increase of Rs500-1,800/t QoQ due to higher share of longs. The average coking coal prices continue to rise sharply in Q4FY22 (up ~USD50/t QoQ due to old inventory) while iron ore prices were down by ~Rs300/t QoQ. We expect EBITDA/t to decrease by Rs600- Rs4,400/t QoQ for steel companies, with maximum reduction for Tata Steel followed by JSW Steel and SAIL, while JSPL is expected to report ~Rs 757/t QoQ increase in EBITDA/t as higher coking coal cost is largely offset by captive sources as well as higher steel realization.

Non-ferrous: Prices up 11-18% QoQ

Base metals traded higher during Q4FY22. Average LME aluminium price increased by 18% QoQ to USD3,250/t while zinc price rose by 11% QoQ to USD3,720/t amid supply cuts owing to higher energy prices in Europe. Average alumina prices was lower 3% QoQ at USD408/t. Hindalco’s Indian aluminum operation’s EBITDA/t is expected to increase by 6.7% QoQ to USD1,481, despite hedging ~30% of volume at ~USD2,400/t+ and higher production cost. Novelis is expected to report sharp decline in EBITDA/t at USD460, down 15.5% QoQ due to impact of lower auto volume, higher gas price in Europe and lower availability of scrap, thus need to purchase higher primary aluminium and could not reap the benefit of increased scrap spread. Higher zinc prices could result in Hindustan Zinc recording ~11% QoQ EBITDA growth. For VEDL, we estimate 40% QoQ increase in EBITDA (ex-HZ) to Rs90.8bn on higher profits across business segments due to higher prices. Overall, VEDL is expected to record 28% QoQ increase in EBITDA to Rs139bn 139bn.

Mining: COAL EBITDA to be higher, NMDC to be impacted by lower iron ore prices

Lower iron ore realization (Rs5,624/t, down 8.4% YoY) and higher royalty cost partially offset by higher volume (up 12% YoY to 12.4mt), leading to ~22% YoY decrease in NMDC’s EBITDA to Rs32.9bn (EBITDA/t of Rs2,653, down 30.6% YoY). COAL is likely to report rise in profits on a YoY basis on account of higher volumes and e-auction realisation. We expect EBITDA/t of R511, up by 5.7% YoY.

Picks on the basis of Q4FY22 results: Vedanta, JSPL, Coal India

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