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Metals: Q3FY20 preview - Last quarter of sluggishness

Q3FY20E – Metals: A mixed bag; Mining: EBITDA still a laggard on volume de-growth

We expect margins of steel companies to shrink further on average 4-6% decline in steel prices over Q2FY20. However, while volumes were higher qoq, raw material prices fell, which caused JSW Steel and Jindal Steel to post EBITDA growth of 7% and 9%, respectively. However, we expect Tata Steel’s EBITDA to decline 13% qoq, given the weakness in its Europe business. Base metals traded mixed during the quarter, with aluminium tumbling ~2% and zinc rising 1% qoq. However, a depreciating rupee against USD (~1.1% qoq) offset the decline in aluminium prices. We estimate non-ferrous companies to report 1%-8% qoq increase in EBITDA and mining companies to report 23%-28% yoy decline in EBITDA (but up 45%-64% qoq).

Ferrous: Margins to shrink further; Higher volumes to improve qoq EBITDA

Restocking demand from Nov onwards caused steel deliveries to rise during Q3FY20. We expect JSPL’s steel volumes to rise ~19% qoq (~32% yoy, due to ramp up at its Angul plant). Similarly, JSW Steel and Tata Steel’s standalone businesses are estimated to record ~7% and 11% qoq growth in steel volumes to 4.01mt and 3.18mt, respectively, during Q3FY20E.

Weak steel demand (due to economic slowdown and liquidity crisis), inventory de-stocking at dealers’ end caused a turmoil in steel prices till Oct, resulting in 4%-6% decline in average steel prices during the quarter. We estimate 6-7% qoq lower average blended steel realisations for companies under our coverage, depending on product and geographical mix.

We expect benefits of lower coking coal prices to accrue to steel companies in Q3FY20 and partially offset the decline in realisations. We estimate margins of steel companies to fall by Rs140-Rs967/t in Q3FY20. We estimate EBITDA/t of Rs8,530, down by ~Rs907/t qoq for JSPL and Rs10,211, down by Rs967/t qoq for Tata Steel. However, in the case of JSW Steel, we believe the decline in EBITDA/t would be lower at Rs6,332/t, down Rs140/t, due to lesser fall in realisations.

Non-Ferrous: Higher zinc volumes to drive EBITDA growth in HZ and VEDL; Hindalco to see marginal EBITDA growth

Base metals traded mixed during Q3FY20. Average LME zinc prices increased ~1% qoq to US$2,358/t whereas aluminium prices fell ~2% qoq to US$1,757/t. Lead prices grew marginally during the quarter and averaged US$2,042/t. A 1.1% qoq depreciation in rupee against the USD offset the decline in base metals price in INR base. Alumina prices declined ~7% qoq to US$281/t.

We estimate Hindalco’s EBITDA to increase 1.4% qoq to Rs10.8bn. We expect marginally higher zinc realisations and 8% qoq higher mined metal volumes to drive 6% qoq increase in EBITDA to Rs22.5bn in HZ. For Vedanta, we expect ex-HZ EBITDA to register 7% qoq growth to Rs26.2bn, primarily due to higher profitability from the aluminium business (on lower alumina and power costs) offset by lower profitability from Oil & Gas (due to higher discounts to Brent). As a result, we expect ~8.2% qoq growth in EBITDA to Rs47.8bn for Vedanta.

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

COAL is estimated to report ~23% yoy decline in (ex-OBR) adjusted EBITDA to Rs61.5bn, owing to ~8% yoy decline in sales volumes (142mt), lower e-auction volumes and prices. Similarly, ~3.1% yoy decline in NMDC’s volumes (8.4mt), led by absence of operations at Donimalai mine and ~14.6% yoy decline in realisations to Rs3,550/t could cause EBITDA to decline 28% yoy to Rs15.5bn. GMDC’s EBITDA is estimated to slide ~26% yoy to Rs452m on lower lignite volumes (1.6mt, down 24.6% yoy) and lower power generation (187mu, down 26% yoy), partly offset by 3.4% yoy increase in lignite realisation.