2QFY18 preview-good for all. Domestic metal companies will report strong sequential improvement in earnings led by higher prices and volume. We expect earnings of large cap. steel companies to increase by 5-19% qoq led by improved realizations and higher steel volumes from project ramp-ups. The earnings of non-ferrous names will improve on the back of higher base metal prices, especially zinc (+14% qoq); besides stabilization of production will aid volumes after 1QFY18, which was affected by numerous shutdowns, outages. We prefer VEDL (BUY), HNDL (BUY) and TATA (ADD).
Steel-muted long product demand & prices; flat segment improves sequentially
Domestic steel demand increased 4% yoy to 42.9 mn tons for April - September 2017-the subdued demand is largely due to weak off-take of long products. The demand for bars & rods declined 3% yoy due to weak construction activity in the country while the demand for flat products remained strong. Despite weak demand, the volumes of domestic steel companies increased 7% yoy aided by export sales increasing 60% to 4.9 mn tons in 1HFY18. Indian steel producers were able to boost exports due to (1) lower steel exports from China due to trade protection measures in many countries, and (2) higher global steel prices.
The long product prices declined in 2QFY18 (due to weak construction demand, especially in the monsoon season) while flat steel product prices increased by 2-6% qoq in-line with the increase in global prices (and import offers to India). We also highlight that while China's HRC prices increased 25% qoq to US$550/ton during the quarter, domestic prices trailed due to increased supplies from new capacities; domestic prices are at a discount to import offers.
Non-ferrous-price increases, improved volumes to aid a strong quarter
Base-metal prices increased by 5-14% qoq with zinc leading the pack. Zinc and lead prices increased by 14% and 8% qoq, respectively, and will aid strong growth in earnings for Hindustan Zinc and Vedanta. In addition, higher lead (38,000 tons, +9% qoq) and silver production (140 tons, +22% qoq) will aid Hindustan Zinc's earnings as well. Vedanta's earnings will be aided by higher aluminum production (401,000 tons, +14% qoq), improved availability of its Talwandi Sabo plant (87% versus 20% in 1QFY18), and higher copper volumes (106,000 tons, +18% qoq).
All-in aluminum prices increased 5% qoq though we expect higher input costs to offset some of the pricing gains. We estimate Hindalco's EBITDA to increase 14% qoq to Rs13.1 bn; Hindalco's earnings may also be marginally impacted by the aluminum hedges carried over from FY2017 at lower LME prices. We estimate Nalco's EBITDA to increase 49% qoq to Rs3.4 bn aided by higher alumina and aluminum realizations.
2QFY18-an improvement across names
We expect 5-19% qoq increase (+5% to +76% qoq) in consolidated EBITDA for large cap. steel names aided by higher volumes, realizations and lower costs (including operating leverage gains).
- Tata Steel. We expect consolidated EBITDA to increase 5% qoq to Rs52.2 bn (+76% yoy) and adjusted net income of Rs16.4 bn (+7% qoq). We expect Tata Steel to report a one-off exceptional charge of GBP 550 mn for payment made to the British Steel Pension Scheme. Tata Steel's India steel deliveries increased 19% yoy to 3.13 mn tons in 2QFY18 from ramp-up of KPO. We estimate India EBITDA/ton to increase 9% qoq to Rs11,750 (+61% yoy) led by higher flat steel prices and export realizations. We expect costs to remain largely flat. We expect Europe EBITDA/ton at US$78 (US$81/ton EBITDA in 1QFY18).
- JSW Steel. We expect consolidated EBITDA to increase 19% qoq to Rs31 bn (+5% yoy). We expect EBITDA/ton to increase 24% qoq to Rs7,800 (+10% yoy) led by higher realizations. We model steel deliveries of 3.7 mn tons (+5% qoq, -3% yoy). We estimate net income of Rs9.3 bn (+27% yoy, +48% qoq).
- Jindal Steel & Power. We expect JSP's consolidated EBITDA at Rs13.5 bn (+57% yoy, flat qoq). We model steel deliveries of 940,000 tons (+16% yoy), assuming ramp-up of its Angul steel plant (Blast furnace) post commissioning in August 2017. We expect steel EBITDA/ton to decline 4% qoq to Rs8,900 due to a decline in long product prices.
We estimate Jindal Power's EBITDA at Rs3.3 bn (-30% qoq, +81% qoq). The sequential decline is due to lower generation in the quarter. We expect EBITDA for other international subsidiaries to increase to Rs1.8 bn (Rs1.4 bn in 1QFY18) from improved earnings at its Oman steel plant and lower losses in coal mining. We estimate a net loss of Rs4.4 bn for the quarter (Rs3.9 bn net loss in 1QFY18).
- NMDC. We estimate EBITDA to decline 13% qoq to Rs13 bn (+57% yoy). We model iron ore sales of 9.4 mn tons (-4% qoq, +21% yoy) led by higher sales from Chhattisgarh mines. NMDC's iron ore sales increased 5% yoy to 8.4 mn tons (-8% qoq). We expect a marginal sequential decline in blended realization to Rs3,050/ton (-1% qoq). We expect EBITDA/ton to decline sequentially to Rs1,550 (-5% qoq). We estimate net income of Rs8.5 bn (+10% yoy, -12% qoq).
Non-ferrous companies-higher prices, volumes to aid earnings improvement
- Vedanta. We expect EBITDA to increase by 27% qoq to Rs61.7 bn (+32% yoy). The sequential improvement in EBITDA is led by production recovery after 1QFY18 volumes were affected due to pot outages/shutdown in aluminum, power and copper.
We expect EBITDA to increase for (a) Hindustan Zinc (Rs30.8 bn, +29% qoq) led by higher zinc prices, (b) aluminum (Rs6.2 bn, +17% qoq) as 1QFY18 was affected by pot outages, (c) copper (Rs3.9 bn, +84% qoq) as 1QFY18 earnings were again affected due to smelter shutdown, and (d) power (Rs3.3 bn versus Rs1.1 bn in 1QFY18) from ramp-up of Talwandi Sabo after the fire incident. We estimate net income of Rs23.1 bn (+85% yoy, +52% qoq).
- Hindustan Zinc. We expect HZ's EBITDA to increase by 29% qoq to Rs30.8 bn (+48% yoy). Hindustan Zinc's mined metal volumes increased 14% yoy to 219,000 tons (-6% qoq). The refined zinc metal volume increased to 192,000 tons (+28% yoy, -1% qoq), lead production increased to 38,000 tons (+23% yoy, +9% qoq) and silver production increased to 140 tons (+31% yoy, +22% qoq). We estimate net income to increase by 29% qoq to Rs24.2 bn (+27% yoy).
- Hindalco. We expect standalone EBITDA to increase by 14% qoq to Rs13.1 bn (+13% yoy). We model aluminum deliveries of 320,000 tons (+7% qoq, flat yoy) and aluminum EBITDA of Rs10.1 bn (+16% qoq, +26% yoy). The gains from higher aluminum prices are partially offset by higher input costs and hedging losses. We estimate copper EBITDA of Rs3.5 bn (+7% qoq, -6% yoy).
We expect adjusted EBITDA before metal price lag at US$285 mn (+5% yoy, -2% qoq). We expect volumes to increase by 4% yoy to 803,000 tons and EBITDA/ton to increase by 1% yoy to US$354/ton led by higher automotive shipments. We expect higher EBITDA in North America (US$ 110 mn, +18% yoy) and Europe (US$ 56 mn, +15% yoy) aided by higher automotive shipments. We expect South America EBITDA to decline to US$75 mn (-8% yoy) due to lower Fx benefit.