PINC Results Preview – Metal Sector

Rising metal prices to underpin OPM expansion

Uptrend in metal prices (both ferrous and non-ferrous) in the seasonally strongest March qtr is expected to result in >10% revenue growth for metal companies in India. While sharper rise in RM cost would contract OPM YoY, we expect QoQ expansion on higher metal prices. We expect result of mid-cap steel companies to benefit from integration kickbacks.

Ferrous: Cost push (iron ore, coking coal spot prices rose to historical high on adverse weather conditions in Australia) led to a rise in steel prices since Dec'10. We expect this to result in a QoQ margin expansion for steel companies in Q4FY11, as impact of recent hike in RM cost is expected to come through in Q1FY12 (contract prices hiked by 20-47% QoQ).

- Tata Steel: Although realisation for TSE may not increase in line with rise in steel prices (lag effect), we expect EBITDA/t to increase to USD65 (USD25 in Q3), boosting consolidated result.

- SAIL: We expect SAIL's EBITDA/t to grow 44% QoQ on higher steel prices and lower usage of high cost coking coal.

- Usha Martin: Margin to improve on higher steel prices, resumed captive power & coal, allaying concerns of one-off events. Fire in control room to have marginal impact on Q4FY11 result.

- Bhushan Steel: Orissa phase-II project not capitalised yet; lower interest & depreciation to result in elevated EPS for FY11.

- Sesa Goa: Despite lower volume from Karnataka, Orissa and hike in export duty & freight cost, we expect volume growth & higher profitability on higher sales from Goa & strong spot prices.

Non-ferrous: In the aftermath of QE2, base metal prices remained strong in Q4FY11. While aluminium and lead gained further, copper touched all-time high before correcting marginally.

- HZL: Improved profitability on higher LME prices aided by silver. However, OPM to contract on increase in operating cost.

- Nalco: Despite rise in LME prices, we expect profitability to decline YoY on muted volume growth and rise in operating cost.

Reco: Top Buy - TATA, GPIL, USM; Top Sell - Bhushan, Nalco

Source : Equity Bulls

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