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Metals: Q4 preview - hit by prices; upbeat on volumes

Ferrous: Higher volumes offset by lower prices

A subdued Q3FY19, improvement in liquidity and restocking demand should help domestic steel companies record 15-25% qoq volume growth in Q4FY19. JSPL, which has effected a ramp up at its Angul plant, is expected to record 25%/23% yoy/qoq growth in sales volumes. Tata Steel too is expected to record 18% yoy volume growth due to low base (disruption at Kalinganagar plant in Q4FY18).

However, lower steel prices would offset the higher volumes during the quarter. With domestic steel prices having fallen ~10% between Nov 2018 and Jan 2019, before recovering ~3% in Feb-March 2019, we expect average steel realisation to fall 5-6% qoq (Rs2,500-3,000/t) in Q4. The fall in average flat product prices at 8-9% qoq was higher than that in longs at 2-7% qoq. As a result, companies skewed towards longs (like JSPL) should see lower impact of the fall in steel prices. The price fall of products within longs has not been uniform, with prices of wire-rods and structural steel having fallen 2-3% compared to ~7% qoq fall in rebars.

We expect non-integrated producers like JSPL and JSW Steel to witness lower fall in margins, advantaged by lower iron ore prices compared to integrated producers like Tata Steel. We estimate EBITDA/t of Rs10,270, down ~Rs1,790/t qoq for JSW Steel and Rs10,720 for JSPL, down Rs1,614/t qoq. Tata Steel India should see ~Rs1,960/t qoq decline in adj EBITDA/t (excluding forex impact) to Rs14,445, in our estimate.

Non-Ferrous: Earnings to remain mixed; zinc up while aluminium down

During Q4FY19, average LME zinc prices were up ~4% qoq whereas aluminum prices were down ~5% qoq. With rupee having appreciated 2% qoq against the USD, prices of base metals were lower in INR terms.

We estimate Hindalco’s aluminium EBITDA to decline 6% qoq to Rs12bn and copper EBITDA to decline ~13% qoq to Rs3.7bn at its India operations, due to lower aluminum and by-product prices along with lower treatment charge/refining charge (Tc/Rc) margins. Despite marginally higher zinc prices, we believe Hindustan Zinc (HZ) should report 5% qoq lower EBITDA to Rs27bn, due to lower zinc volumes (down 7% qoq to 174kt). Vedanta should report qoq EBITDA growth in all its business segments, except Oil & Gas and copper (which are non-operational). Lower alumina costs and improved linkage coal supply have helped the company reduce costs (cost of production was US$1,700/t in Mar end) in its aluminum operations. Lower crude oil prices during the quarter offset the benefits accrued by lower discounts to Brent crude prices. Overall, we estimate ~14% qoq growth in ex-HZ EBITDA to Rs32.2bn during Q4FY19.

Mining: Coal shines; NMDC and GMDC hit by lower volume and prices

During the quarter, Coal India’s sales volumes rose 2.1% yoy to 164mt. We expect EBITDA/t of Rs646, up 2% yoy due to increased realisations from E-auction, which led to higher blended realisation. Cost/t too is expected to be lower 2% yoy. We expect NMDC’s EBITDA to decline 9% yoy to Rs17.3bn on lower volumes and realisation. Non operation of the company’s Donimalai mine in Karnataka resulted in lower volumes. We expect GMDC’s EBITDA to decline ~19% yoy to Rs1,091m due to lower lignite volumes (2.7mt, down 22% yoy) and lower power generation (262mu, down 42% yoy).

Top Picks

We reiterate our Outperformer ratings on Hindalco (TP Rs305), NMDC (TP Rs160), Tata Steel (TP Rs626) and JSPL (TP Rs254).