Second Quarter Earnings Likely To Be A Mixed Bag For Metals And Mining Companies

Second quarter earnings for the metals and mining sector is likely to be a mixed bag, as aluminium and zinc prices rose sequentially in the quarter, and global steel demand remained soft. Aluminium and zinc prices rose 3 percent and 17 percent respectively. Spot coking coal prices rose significantly towards the end of the quarter, but that’s unlikely to reflect in this quarter’s numbers as most companies had sufficient inventories.

Steel companies like Tata Steel Ltd. and JSW Steel Ltd. are expected to report higher domestic volumes, which could be offset by seasonal price decline. Volumes for non-ferrous metal companies like Hindalco Ltd., Hindustan Zinc Ltd., and Vedanta Ltd. may also rise sequentially in the second quarter, but on a year-on-year basis, volumes are likely to decline.

The top six metals and mining sector companies are expected to see a 1 percent year-on-year decline in revenue, according to Bloomberg consensus estimates. Net profit is expected to fall 11 percent and earnings before interest, depreciation and amortisation (EBITDA) is likely to increase 23 percent.

Tata Steel

• Domestic volumes are expected to increase to around 2.5-2.7 million tonnes, aided by contribution from the Kalinganagar plant.
• European steel volumes are expected to decline on a year-on-year basis on account of the sale of the U.K. long products division and lower activity levels at U.K. steel plants.
• Standalone EBITDA/tonne is expected to decline to Rs 9,000 per tonne, while that of the European division is expected to rise marginally to $54 per tonne.
• Clarity on imports from China, global iron ore prices, restructuring of the European business, pension liability, and debt levels will be key factors to watch out for.

JSW Steel

• Standalone volumes are expected to grow to 3.6 million tonne, which could offset the decline in prices for the company, resulting into higher revenue.
• EBITDA/tonne is expected to jump 67 percent on a year-on-year basis, but decline 15 percent on a quarterly basis.
• Future capital expenditure guidance, domestic steel demand growth, and anti-dumping measures against steel imports will be crucial.

Hindalco Industries

• Hindalco is expected to report a strong quarter aided by copper volumes which may see a 50 percent rise. The aluminium segment could report weak numbers due to higher raw material prices.
• For Novelis, adjusted EBITDA and volumes are likely to be flat or marginally higher quarter-on-quarter. Overall standalone EBITDA is expected to be climb 109 percent year-on-year.
• The impact of foreign exchange rate on Novelis, and coal cost movement will be the key factors to watch.

Vedanta

• Consolidated EBITDA is expected to increase on account of higher prices and volumes in zinc and aluminium. Aluminium volumes are expected to increase due to ramp-up of new smelters.
• Standalone EBITDA may decline due to lower copper business margins and seasonally weak iron ore volumes.
• Any update on the Cairn India merger will be keenly watched. The company is in the process of commissioning a smelter with a 1.25 million tonne capacity per annum and analysts will watch for more commentary on that.

Coal India

• Fall in production and dispatch volume due to better monsoon, and lower offtake and higher inventory at power plants are expected to weigh on the government owned mining giant’s performance.
• EBITDA is expected to decline by around 36 percent due to lower volumes, lower e-auction realisations and impact of wage hike provisions.
• Employee cost movement, contractual expenses, and global coal prices would be keenly watched.

Hindustan Zinc

• Mined metal volumes are expected to increase to 1,86,000 tonnes in the previous quarter, zinc production is seen at around 1,44,000 tonnes and lead production figures are expected to be around 30,000 tonnes. Cost of production will benefit from the sequential rise in volumes.
• Profit is expected to increase 49 percent sequentially led by higher realisations in zinc, lead and silver. On a quarter-on-quarter basis zinc and silver prices rose 17 percent, while lead prices climbed 9 percent.
• Commentary on the Rampura Agucha mine will be crucial since the company had excavated more waste than ore from the mine in Rajasthan last year.

(These expectations have been compiled from reports of Emkay, HDFC Securities, ICICI Securities, Kotak Institutional Equities, Motilal Oswal, and Prabhudas Lilladher.)