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Metals: Q1FY20 Preview - Lower prices hit profitability

Q1FY20E EBITDA to decline yoy for all companies except Coal India and NMDC

Impacted by lower prices, we expect steel companies to report the lowest EBITDA margins in Q1FY20E seen over last six quarters. The ongoing trade war have kept the base metals prices under pressure leading to supressed profitability. We estimate 12%-39% yoy decline in EBITDA of ferrous and non-ferrous companies (1%-36% qoq). Only NMDC and Coal India (CIL) are expected to report EBITDA growth.

Ferrous: Lower volumes to impact EBITDA qoq - margins lowest in last 6 quarters

Seasonality, liquidity issues and lower demand from auto and construction segments has restrained qoq steel deliveries in Q1FY20. We expect JSPL to record 3.4% qoq decline in volumes (but up 17.6% yoy, due to ramp up at Angul plant). Tata Steel too is expected to report 14.5% qoq volume decline (up 3.0% yoy). However, both qoq and yoy volumes could decline for JSW Steel at 12.1% and 1.6%, respectively.

Fall in international steel prices caused domestic prices to remain subdued too. We expect average steel realisations in the domestic market to be 1% lower qoq for flat products and 1-5% lower for long products. Higher export volumes impeded average realisations of JSW and Tata Steel in Q4FY19. As a result, we estimate marginally lower average blended realisations for JSW, but marginal improvement in Tata Steel’s realisations. JSPL’s blended realisation could slide higher than those of peers.

We estimate Rs200-600/t fall in margins of steel companies in Q1FY20, given lower realisations. EBITDA/t of JSW is estimated at Rs9,501, down ~Rs618/t qoq, for JSPL at Rs9,754, down Rs177/t qoq. Tata Steel India too should see ~Rs283/t qoq decline in adj EBITDA/t (excluding forex impact) to Rs13,336 on lower volumes.

Non-Ferrous: Lower prices and volumes to reduce profits

Base metals traded weak on LME during Q1FY20. Average LME zinc prices fell ~1.2% qoq (US$2,648/t); aluminium prices too were down ~3% qoq (US$1,818/t), with lead prices falling ~8% qoq (US$1,895/t). A 1.5% qoq appreciation in rupee against the USD, further hit INR base metal prices.

We estimate Hindalco’s aluminium EBITDA to decline 21% qoq to Rs8.3bn and copper EBITDA to decline ~7.7% qoq to Rs2.9bn at its India operations, due to lower volumes (Aluminium – 302kt, down 7% qoq and Copper – 82kt, down 18% qoq) along with lower aluminum prices and TC/RC margins. We expect lower volumes (zinc – 170kt, down 4% qoq and lead – 49kt, down 6% qoq) and lower realisations to drag Hindustan Zinc’s EBITDA by 14.6% qoq to Rs23.8bn. We expect Vedanta to report qoq EBITDA de-growth in all its business segments, except Oil & Gas. As lower aluminium prices have offset the benefits of lower alumina cost at its aluminum operations, we consequently expect EBITDA/t to decline 16% qoq to US$110. Lower daily production in the Oil & Gas segment is likely to offset benefits of higher crude oil prices. Overall, we estimate ~6.2% qoq decline in Vedanta (ex-HZ) EBITDA to Rs32.5bn during Q1FY20E.

Mining: NMDC shines on volume growth, Coal on higher realisation; volume decline in GMDC continues

Even though CIL’s sales volumes were flat at 153mt in Q1FY20E, we estimate ~10% yoy increase in EBITDA/t at Rs474 on higher FSA realisations, which led to higher blended realisation. Cost/t too is expected to be lower 1% yoy. We expect NMDC’s EBITDA to increase 26% yoy to Rs17.9bn on the back of higher volumes (8.7mt, up 28% yoy). GMDC’s EBITDA is expected to fall ~31% yoy to Rs1,750m due to lower lignite volumes (2.3mt, down 26% yoy) and lower power generation (192mu, down 52% yoy).