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Metals: Q2FY20 Preview - Lower prices and sluggish demand hit profitability

Q2FY20E EBITDA to decline qoq/yoy for all companies except Hindalco (qoq)

We expect steel companies to report lowest EBITDA margins in Q2FY20E seen over last 8 quarters, due to weak steel prices during the quarter. Base metals prices too declined during the quarter, with aluminium and zinc prices tumbling ~2% and 14%, respectively. However, a depreciating rupee against USD (~1.3% qoq) offset the decline in aluminium prices. We estimate ferrous companies and non-ferrous companies to report 8%-31% qoq (8%-48% yoy) decline in EBITDA except Hindalco (3.1% qoq growth), and mining companies to report 6%-32% yoy (38%-54% qoq) decline in EBITDA.

Ferrous: Lower prices and flattish/lower volumes to drag qoq EBITDA; lowest margins in 8 quarters

Persisting liquidity issues, seasonal monsoons and lower demand from auto, infra and construction segments have rendered steel deliveries subdued in Q2FY20. We expect JSPL to record 7% qoq decline in steel volumes (but up ~4% yoy, due to ramp up at its Angul plant). Higher export volumes at JSW and Tata Steel could result in flat qoq volumes at 3.75mt (down 5.3% yoy) and 3.01mt (down 5.3% yoy), respectively.

Weak steel demand (due to economic slowdown) caused domestic prices to decline during the quarter. We estimate 6-8% lower average steel realisations in the domestic market qoq. Higher exports aided to lower realisations. As a result, we estimate average blended realisations could be marginally lower at JSW versus JSPL and Tata Steel.

We estimate steel companies margins to fall by Rs1,533-3,243/t in Q2FY20, given lower realisations, partly offset by lower RM cost. We estimate JSW’s EBITDA/t at Rs6,693, down ~Rs3,243/t qoq, for Tata Steel at Rs11,373, down Rs2,836/t qoq. However, for JSPL we expect lower decline in EBITDA/t at Rs9,762/t, down Rs1,483, as we have factored in cost efficiencies and benefits of lower iron ore & coal prices.

Non-Ferrous: Lower prices to reduce profits for HZ and VEDL; Hindalco to see EBITDA growth qoq

Base metals traded weak on LME during Q2FY20. Average LME zinc prices fell ~14% qoq (US$2,348/t); aluminium prices too were down ~2% qoq (US$1,790/t), however, lead prices bucked trend with a gain of ~7% qoq (US$2,032/t). A 1.3% qoq depreciation in rupee against the USD offset the decline in base metals price in INR base.

We estimate Hindalco’s aluminium EBITDA to improve 8.7% qoq to Rs9.2bn due to higher volumes (326kt, 2% qoq) and lower costs; copper EBITDA to decline ~15.5% qoq to Rs2.1bn at its India operations due to lower TC/RC margins, alongwith lower DAP volumes. We expect lower zinc realisations and flattish volumes (zinc – 168kt, and lead – 47kt) to drag Hindustan Zinc’s EBITDA by 16% qoq to Rs20.8bn. We expect lower EBITDA from Zinc, Oil & Gas and Steel businesses would cause Vedanta to report qoq EBITDA de-growth, partly offset by higher EBITDA from aluminium business. Overall, we estimate ~2.3% qoq decline in Vedanta’s (ex-HZ) EBITDA to Rs27.1bn during Q2FY20E.

Mining: Lower volumes to hit NMDC, COAL and GMDC’s EBITDA

COAL is estimated to report ~32% yoy decline in (ex OBR) adjusted EBITDA to Rs34.8bn owing to ~11% yoy decline in sales volumes (123mt), lower e-auction volume and prices. Similarly, ~12.5% yoy decline in NMDC’s volumes (5.9mt), led by absence of operations at Donimalai mine could cause EBITDA to decline 16.2% yoy to Rs10.6bn. GMDC’s EBITDA is expected to fall ~6% yoy to Rs708m, due to lower lignite volumes (1.1mt, down 13.9% yoy) and lower power generation (173mu, down 34% yoy), partly offset by 18% yoy increase in lignite realisation.

Top Picks: Hindalco, JSPL