scorecardresearchEarnings Preview: Metal companies expected to report weak numbers in June quarter

Earnings Preview: Metal companies expected to report weak numbers in June quarter

Updated: 13 Jul 2022, 07:45 AM IST
TL;DR.
Brokerage house Kotak Institutional Equities believes these recent government measures to garner additional revenue will negatively impact the metal sector going ahead.
Brokerage house Kotak Institutional Equities believes these recent government measures to garner additional revenue will negatively impact the metal sector going ahead.

Brokerage house Kotak Institutional Equities believes these recent government measures to garner additional revenue will negatively impact the metal sector going ahead.

Metal companies are likely to post weak earnings for the quarter ended June 2022 led by the rise in commodity prices due to weak global cues. Further, many metal stocks have also been hit by earnings downgrades after the center raised export taxes and duties on steel, iron ore, and petroleum products.

Brokerage house Kotak Institutional Equities believes these recent government measures to garner additional revenue will negatively impact the metal sector going ahead.

"The bulk of the earnings reduction over the past two months for the Nifty50 index has come from the government’s decision to levy new taxes on the metals & mining and oil, gas & consumable fuel sectors. The new taxes are particularly deleterious since they are on revenues and thus, have a disproportionate impact on earnings," it said in a note.

It expects the net profit of metal firms to decline 34 percent in FY23.

Steel firms will especially deliver weak June quarter earnings. In a report, Axis Securities said that it expects revenue to decline 15 percent QoQ mainly due to lower saleable steel volumes, weak exports due to the 15 percent export duty imposed from May’22, and lower demand.

"The fall in revenue led by lower sales volume will be partially offset by higher average price realisation as Q1FY23 average HRC prices stood up 3 percent QoQ and 7 percent YoY at 69,050 per tonne. We expect EBITDA to show a steeper fall in Q1FY23, a de-growth of 32 percent QoQ and 42 percent YoY, primarily on account of a fall in the topline and higher coking coal consumption costs in the quarter," the brokerage explained.

Axis has a cautious view on the steel sector, as currently, the demand drivers are weak, and the China stimulus and actual bond issuance need to be monitored. It expects steel players' margins to take a further hit in Q2FY23 as the spot steel prices are down by 14 percent from the Q1FY23 average, partially offset by lower coking coal prices.

However, it sees steel margins bottoming out in Q2FY23 on hopes of some recovery in Chinese demand with improving the Covid situation and the possible impact of stimulus measures.

In the metal sector, the brokerage prefers APL Apollo Tubes and Coal India.

As per Axis, APL Apollo tubes is primarily a converter of Steel HRC into structural tubes and as a result, the fall in HRC prices does not have a significant impact on its margins. It added that the company is expanding through its New Raipur plant with a higher share of VAP (Value-

added products) and is expected to come online by Q3FY23. It expects that the higher volumes would partially offset the loss in margins due to the fall in HRC prices, noted the brokerage.

Meanwhile, Axis pointed out that Coal India's Q1FY23 sales volume stood robust (up 30 percent YoY) and its coal production target of 700 MT augurs well amidst the higher thermal coal prices.

Among other stocks, brokerage house Centrum noted that the lower volumes and higher input cost are expected to lower EBITDA QoQ for Hindalco and Vedanta while Hindustan Zinc is expected to report flat volumes and higher realization leading to a marginal increase in EBITDA QoQ. NMDC is expected to report lower EBITDA YoY owing to a fall in volumes and realization, it added.

It further noted that due to the lag effect in coking coal cost, EBITDA/t is likely to decrease by 900- 5,600 QoQ for steel companies, with maximum reduction for JSW Steel (major impact of coking coal increase and lower increase in realisation) followed by SAIL and JSPL. Tata Steel is expected to report the lowest fall in margins by 903/t QoQ supported by higher realization in India business and increase in EBITDA/t from European business, added Centrum.

 

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First Published: 13 Jul 2022, 07:45 AM IST