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Q1FY24E is likely to be one of the atypical quarters with prior period inventory, product mix and contract prices resulting in differentiated performance of the companies under our coverage. Key points: 1) Shipments of all major ferrous players are likely to be up YoY, tracking steel consumption growth; 2) coking coal cost is likely to be higher by US$6-20/te; 3) realisation for ferrous companies may be lower by Rs1,500-2,000/te QoQ, except Tata Steel; 4) prior period inventory of thermal coal may impact Hindalco, while NALCO is likely to benefit from the commencement of Utkal D operations; and 5) Jindal Stainless may stand out with stable shipments QoQ and EBITDA/te sustaining above Rs20,000/te.

Going ahead, we expect profitability to improve for ferrous players owing to lower coking coal cost, offsetting the impact of lower realisation. Additionally, in case of non-ferrous players, we expect global surplus in key commodities- copper (Cu), zinc (Zn) and aluminium (Al) and hence, expect prices to stay rangebound. Over and above, we continue to monitor demand pick up in China, which is key for stock performance. Our top picks in the space are: JSPL (TP: Rs750; BUY), Jindal Stainless (TP: Rs390; BUY) and Tata Steel (TP: Rs125; ADD).

* Margins are likely to buckle on lower underlying prices: We expect EBITDA/te to decline for all major ferrous companies under our coverage owing to lower realisation- both YoY and QoQ. Key points: 1) EBITDA/te is likely to decline by Rs3,000/te on average for all major ferrous companies under our coverage. In case of JSPL, however, the benefit from lower thermal coal cost and non-recurrence of inventory write-off of Rs2.5bn (in prior quarter) may result in only a slight blip of Rs55/te QoQ; 2) coking coal cost: Likely to be higher by US$6-20/te depending on prior-period (high cost) inventory being carried; 3) iron ore cost: Likely to be lower for JSPL, but higher for JSW Steel due to difference in sourcing; 4) shipments may be lower QoQ owing to seasonality, but higher YoY with SAIL and JSW Steel recording higher growth owing to capacity ramp up; 5) in case of Hindalco, cost of production of Al division is likely t o remain unchanged QoQ, though the adverse impact of lower LME Al price is expected to be mitigated by higher premium and export sales; and 6) in case of mining companies (NMDC and Coal India), robust volumes are likely to be offset by lower realisation.

* Four stocks in focus: We are focusing on four stocks in Q1FY24: 1) Jindal Stainless is likely to report EBITDA/te in excess of Rs20,000 with sales volume remaining broadly stable QoQ; 2) NALCO is expected to report better performance compared to Hindalco mainly due to captive mining at Utkal D block; 3) Tata Steel: Insurance buy in pertaining to BSPS scheme is expected to complete in Q1FY24E resulting in non- cash tax impact of Rs16bn. Loss at TSE (at EBITDA level) is likely to be US$95/te- third successive quarter of loss; and 4) JSPL: Performance may be the best among major steel players with reported EBITDA/te likely to remain flat QoQ compared to decline for others.

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