Brokerages estimate good growth in volumes and revenues for steel producers in the January-March 2011 quarter; warn surge in coking coal prices may hurt margins
Improved realisation and volumes, and increased prices are likely to drive steel companies' earnings in the fourth quarter, according to brokerage.
"Driven by strong improvement in realisation as well as healthy volumes, we expect steel companies to report top line growth of 15% q-o-q," Prasad Baji and Faisal Memon, analysts at Edelweiss Securities, said in a recent report.
Echoing this view, Ambit Capital Research said that significant sequential increase in metal prices would lead to improved margins in the fourth quarter of the financial year 2010-11. "Higher steel prices, which have not been accompanied by a significant increase in costs, have led us to increase our revenue and profit estimates for all the steel companies for Q4 and FY11," Ambit Capital said in a report.
During the fourth quarter, Indian steel companies increased steel product prices on an average between Rs5,000 and Rs6,000 a tonne, citing inventory re-stocking, strong demand from the auto sector, and a spurt in coking coal prices, following a shortage of supplies in the international market.
Major floods in Queensland, which contributes around 70% of the coking coal exports from Australia, wiped out many productive mines and disrupted transportation of the commodity from the region. Coking coal contract prices increased from $207 a tonne in the third quarter to $225 per tonne in the fourth quarter. However, the prices of the commodity in the spot market breached the $300 level during the quarter.
The Edelweiss analysts said they expect price hikes to exceed the cost push and EBIDTA to expand by Rs700 to Rs3,000 a tonne.
Motilal Oswal estimated that standalone net sales of the Sajjan Jindal-owned JSW Steel should grow by 28% y-o-y to Rs6,680 crore on higher steel prices and better volumes. Volume growth is likely to improve 12% to 1.7 million tonnes and average steel prices realisation is expected to grow by 15% to Rs39,280 a tonne from the corresponding period a year ago.
The company's EBITDA for the fourth quarter is likely to be Rs1,350 crore, an increase of 35% from the previous quarter, on the back of higher steel realisation and improved product mix, Motilal Oswal said. JSW's capacity expansion plan to 11 million tonnes is on track and is expected to be completed this month. The company's foreign investment in Chilean iron ore mines and US coal mines are likely to generate cash flows in FY12.
Steel Authority of India (SAIL) is also expected to see a growth in top line due to higher volumes and realisation. The state-owned company may report net sales of Rs13,060 crore, an increase of 15% q-o-q and 7% y-o-y due to higher steel prices and better sales volumes. Volumes are expected to increase 8% q-o-q to 3.5 million tonnes (up 3% y-o-y) and realisation per ton is expected to improve by 7% q-o-q to Rs37,309 (up 4% y-o-y), Motilal Oswal said. Despite higher costs, SAIL's EBIDTA per tonne will likely increase by 41% q-o-q to $174 on the account of higher realisation.
Tata Steel, the world's seventh largest steel producer, is estimated to earn a net revenue of Rs8,330 crore, an increase of 13% q-o-q, while sales volume would increase by 7% q-o-q to 1.75 million tonnes, Motilal Oswal said. Average steel price realisation is expected to improve 8% q-o-q to Rs44, 404 a tonne. "We expect EBIDTA per tonne to increase 24% q-o-q to $447."
EBITDA of the company's European subsidiary-Tata Steel Europe (TSE)-and other foreign subsidiaries is expected to increase from $37 a tonne in the third quarter to $80 in the fourth quarter as steel prices began to improve across the world since early December and average prices in Europe moved up 18% q-o-q from early this year.
"We expect consolidated EBITDA to increase 59% q-o-q to Rs5,440 crore and EBITDA per tonne to improve to $181," Motilal Oswal said.
However, the surge in April-June contract coking coal prices will hit margins of steel companies in the first quarter of the financial year 2011-12. April-June coking coal contract prices have been sealed at $330 a tonne, compared to $225 a tonne in the fourth quarter of 2010. Steel companies would not be able to pass on the entire raw material price hike to consumers as it will break the demand, so they will have to compromise with their margins, say analysts.
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