PL Sector Report: Metals & Mining - Jul-Sep’23 Earnings Preview – Strong quarter due to lower RM & weak base

Metals & Mining - Tushar Chaudhari - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Jul-Sep’23 Earnings Preview – Strong quarter due to lower RM & weak base

We expect our metals coverage universe to report healthy performance in 2QFY24, owing to lower raw material and energy prices, continued strong demand momentum despite seasonally weak monsoon quarter and weak base of 2QFY23. We expect overall EBITDA/ PAT growth of ~48%/ 179% YoY (2%/ -5% QoQ) for our coverage universe (ex-JDSL). Key monitorables would be rising coking coal prices, progress on capex, outlook on demand from China & developed countries. Our top picks are Hindalco, Jindal Steel & Power, and Tata Steel.

Sharp fall in steel prices to negate benefit of lower coking coal prices: Steel companies under our universe are expected to witness sequential improvement in EBITDA (~Rs 700-1,700/t QoQ) in Q2FY24E as most of the benefit of lower coking coal prices will be seen in this quarter due to prior period inventory; while steel realization is expected to be down 3-5% QoQ. Long product prices declined sharply post March 2023 (-8% QoQ) which would have affected realization while flat product prices were also on a decline (-3% QoQ). Iron ore cost is likely to be soft sequentially (down 4% QoQ) however sharp jump in coking coal prices in September can lead to significant margin erosion in 2HFY24. JDSL is expected to deliver stable shipments QoQ and EBITDA/t sustaining in the range of Rs19k-20k/t. NMDC has delivered 9.68mt volumes while taking price hikes from mid-August which is leading to upward revision of FY24/25E EBITDA by 2/8% respectively.

LME prices remains weak but lower energy costs to drive EBITDA: Revenue of non-ferrous companies under our universe are expected to be impacted by weakness in LME prices during the quarter. However, prior period inventory of thermal coal may benefit Hindalco, while NALCO is likely to benefit from the commencement of Utkal D operations. Hindalco’s standalone operations are going to witness strong volume growth and better TcRc margins in copper business while cost of production is expected to see decline of 3-5% QoQ.

Top Picks:

Hindalco: We believe HNDL is well placed amongst the space as a) Novelis is expected to witness gradual improvement in per ton EBITDA over next few quarters, led by resilient developed economies and gradual improvement in consumer demand from China; b) fall in thermal coal prices and opening of captive coal mines to benefit India business; and c) rising focus on high margin Value added products. Maintain Buy with TP of Rs557.

Jindal Steel & power: We remain positive on JSP given 1) strong 16% CAGR in steel volumes over FY23-26E led by ongoing Angul capacity expansion, 2) commissioning of 5.5mtpa Hot Strip Mill to improve product mix, and 3) its margin improvement projects such as 12mtpa pellet plant, 18mtpa slurry pipeline and four coal blocks to drive margins. Maintain Buy with TP of 812.

Tata Steel: TATA’s 2QFY24E performance is expected to be weakest among peers due to further drag on TSE EBITDA losses led by lower NSR, poor volumes and TSUK operating losses. We remain positive given 1) strong double digit volume growth potential for TSI post commissioning of 5mtpa KPO II by 1QFY25, 2) better clarity on TSUK with GBP 500mn grant from the UK govt. for 3mtpa EAF and reduction of losses from TSUK, and 3) focused deleveraging to keep balance sheet healthy. Maintain Buy with TP of Rs144.

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