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Volume disappoints amid best pricing conditions

We expect our metals coverage universe to report mixed performance in Q1FY26, with revenue/EBITDA/PAT growth of 0%/9%/22% YoY (-9%/-3%/-6% QoQ). Benefits of higher domestic steel prices (aided by safeguard duty) and lower coking coal prices are getting negated by weaker set of volume numbers in H1FY26. Although domestic demand remains strong aided by GoI spending, Q1FY26 volume growth seems to have affected by early monsoon, heatwaves and maintenance shutdowns. Average NSR for steel companies is expected to improve by ~4% QoQ in Q1FY26, supported by increases in both HRC and rebar prices, which improved by 7% and 4% QoQ, respectively. Companies are expected to benefit from a USD10-15/t decline in coking coal costs, which have fallen to USD184/t levels. As a result, EBITDA/t for our coverage companies is expected to improve on an average ~Rs2,400/t QoQ. However, with weakened steel prices on monsoon led weakness, FY26 EBIDTA growth would depend upon demand recovery in H2FY26.

Uncertainties amid ongoing tariff wars and geopolitical tensions have kept export markets under pressure while base metal prices have corrected. With limited scope to increase estimates in ferrous space, we expect non-ferrous companies to outperform in the near term as valuations remain favorable. However, GoI’s focus on building infrastructure, protected steel prices and ramp up of recently commissioned capacities would aid steel companies once demand improves post monsoon. Key monitorables to watch out for: 1) extent of slowdown in the global economy, 2) stability in domestic demand & GoI spending, 3) volume improvement post monsoon.

Steel to benefit from lower coking coal and improved NSR: Steel companies are expected to benefit from the uptick in prices post Mar’25 in the anticipation of safeguard duties. HRC prices improved by 7% QoQ, while long product prices increased by 4% QoQ, supported by better domestic demand, protection from cheap imports, and continued government infrastructure spending in the first 2 months of the quarter. Coking coal prices have been on a declining trend, and companies expect savings of USD10-15/t in Q1. This is expected to drive an increase of ~Rs2,400/t in EBITDA/t for our coverage steel companies on a sequential basis. However, volumes are expected to take a hit due to weak global demand and maintenance shutdowns undertaken by the companies.

Iron ore prices remained elevated as NMDC implemented a price hike of Rs440/t in May, followed by a price cut of Rs150/t in June for both lumps and fines. Overall, NMDC’s realisations are expected to increase by 4% in Q1FY26. We expect NMDC’s EBITDA/t to improve by Rs267/t to Rs1,886/t, aided by the price hike; however, expect weak Q2 as NMDC has taken price cuts of ~9% w.e.f. Jul’25.

JDSL is expected to report 32% QoQ increase in standalone EBITDA/t to ~Rs18,324/t, led by increase in stainless steel prices by ~2.9% QoQ and relatively better volume growth. We expect JDSL realisation to increase by 2% QoQ, further volume growth of ~9% would also aid operating performance.

Sharp fall in LME prices: The performance of non-ferrous companies under our coverage universe is expected to decline in Q1FY26 due to a sharp fall in both alumina and metal prices. Alumina prices declined by 20% QoQ, while metal prices fell by ~7% QoQ. Novelis volumes are expected to remain steady (~2% YoY), though impact of tariffs would drive lower operating performance. We factor in ~USD450/t EBITDA for Novelis for Q1FY26. NACL is expected to post strong YoY volume growth on a low base; however, realisations are likely to be adversely affected due to the sharp decline in alumina and metal prices, which will weigh on Q1FY26 earnings.

Key changes in estimates/ratings:

Ferrous companies: We incorporate weak H1FY26 and cut FY26 EBITDA as monsoon led weakness seems impacting the near-term volume growth. We cut our FY26E/27E EBITDA for Tata Steel (TATA) by 5.6%/1% on weaker than expected H1FY26 margin performance and downgrade the stock to ‘Accumulate’ from ‘Buy’ earlier with TP of Rs171 (Rs176 earlier).

Despite the ongoing delays in commissioning of blast furnace, we expect JSP to ramp up volumes in FY27E from 9/11.4mt earlier to 8.8/11.5mt. We maintain ‘Accumulate’ with a revised TP of Rs1,008 from Rs984 earlier based on 6.5x EV of Mar’27 EBITDA.

We expect JSTL to ramp up Vijayanagar capacities and garner market share amongst peers. However, with CMP of Rs1,043 there is limited scope to revise EBITDA. We maintain our estimates and downgrade the stock to ‘Hold’ from ‘Accumulate’ earlier with TP of Rs1,068 based on 7.5x EV of Mar’27 EBITDA.

For SAIL, we raise our FY26E/27E EBITDA by 1% each on higher steel price assumptions. As SAIL remains a price play on domestic steel prices in the medium term, maintain ‘Hold’ with revised TP of Rs136 based on 5.5x EV of Mar’27 EBITDA (earlier Rs133).

JDSL has seen sharp 30%+ run up in the past few months on improving export market outlook and stability in stainless steel prices. We believe JDSL has better pricing power over carbon steel players while its usage is also improving in India. However, with CMP, we expect better entry point and downgrade the stock to ‘Hold’ from ‘Buy’ earlier with TP of Rs 678 based on 9x EV of FY27 EBITDA.

Non-ferrous companies: For every USD100/t increase in LME price assumption, NACL’s EPS gets upgraded by ~10.4%, while HNDL’s EPS gets upgraded by ~5.6%. NACL would experience a weaker set of earnings due to sharp fall in alumina prices while LME average aluminum prices have also declined by 6.7% QoQ to USD2,450/t. We have raised FY27E EBITDA by 2% on revised LME assumptions of USD2,487/2,537 from USD2,418/2,442 earlier. The stock trades at an EV of 5.7x/4.3x FY26/27E EBITDA, maintain ‘Buy’ with revised TP of Rs218 (earlier Rs Rs212). For Hindalco, we raise our FY26/27E EBITDA by 1%/2% respectively incorporating better LME. Improvement in Novelis remains the key trigger for the stock however with current uncertainties amid higher tariffs, we maintain ‘Accumulate’ with revised TP of Rs738 (earlier Rs724).

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