Metal Sector (updated - 16 July 2009)
Metal manufacturers, especially the steelmakers, are expected to improve their performance in the June 2009 quarter on a sequential basis. The topline is, however, expected to decline by 10-15% while bottomline may be down by more than a third from the year-ago levels.
In June 2009 quarter, steelmakers witnessed higher sales volume, whereas non-ferrous companies saw rise in their products’ prices. As a result, overall, most of the metal companies are expected to report improvement in key profitability parameters in the June quarter.
Sector Specific - Metal Stocks
Compared to their steel counterparts, the non-ferrous companies are not expected to see a significant jump in sales volume during the quarter. Here, the prices of most base metals, except for zinc, are almost half of their year-ago levels. Overall, the non-ferrous companies are expected to report a 20% y-o-y drop in net sales inspite of a 10% depreciation in the rupee. The net profit might get halved during the same period.
Sequentially, the prices have increased by around 13-20%. Since most of the Indian base metal producers have their own captive mines, the operating profit is expected to jump significantly. Most of the companies, including Sterlite Industries and Nalco, reported losses in their aluminum business in the 2009 quarter. With a sharp increase in aluminum prices, these companies are expected to report operating profits from this segment. “The Q1 PAT for base metal companies is expected to decline y-o-y, but may grow q-o-q due to sequential rise in LME prices. Recurring PAT for Hindalco and Nalco is expected to rise 71% and 33%, respectively, on q-o-q basis,” said CLSA.
source - ET
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The industry has been helped by higher government spending on infra-related activities. For instance, Tata Steel’s sales volume during the June 2009 quarter is around 27% higher than the same period previous year. The steel prices are still 40-50% lower from their year-ago levels. Hence, the June 2009 result may look bad when compared to same period last year. However, there has been a slight sequential improvement in steel prices.
Even the raw material cost, mainly for non-integrated steel players, is expected to come down sequentially. The non-integrated steel producers inked long-term contracts with their raw material suppliers during the quarter. The new raw material prices will be significantly lower (30-50%). This would have a partial impact on the raw material cost of the company during the quarter, depending on the effective date of new contract.
“Most metals prices have improved on a q-o-q basis. This, coupled with aggressive cost-cutting by most companies, is expected to improve margins q-o-q,” mentions a Macquarie earnings preview report. Sequentially, the operating margin of most companies is expected to expand by 500-1,000 bps.