Rising Commodity Prices May Help Metals, Mining Firms Post Strong Q3 Earnings

An across-the-board cost-led price rise and higher sales volume is likely to help mining and metal companies end 2016 on a good note. The October-December quarter is typically considered to be a better period for the sector as monsoon hampers production and demand in the second quarter. Lower import from China is also expected to aid the sector in the third quarter.

Aluminium and zinc prices were up 10 percent and six percent respectively, on a sequential basis.

The four metals and mining sector companies are expected to post an average 22 percent rise in revenue, year-on-year (YoY). Net profit is expected to rise 40 percent and earnings before interest, depreciation and amortisation (EBITDA) may increase by 40 percent during the period, according to Bloomberg consensus estimates. JSW Steel Ltd. and Tata Steel Ltd. have not been included in the calculation as both companies have already come out with their quarterly earnings.

The 40 percent rise in bottom line is largely going to be led by Hindalco Industries Ltd. and Vedanta Ltd., both of whom had a weak third quarter last year.

Hindalco Industries

• Hindalco is expected to report a strong quarter with support from higher aluminium and copper prices. Higher prices will translate to better segmental results and higher realisations.
• Adjusted EBITDA and volumes are likely to be flat or marginally higher, quarter-on-quarter, for its Novelis unit. Overall standalone EBITDA is expected to be up 102 percent, year-on-year.
• The impact of foreign exchange rate on Novelis and future outlook on coal cost will be key things to watch out for.

Vedanta

• Consolidated EBITDA is expected to increase on the back of higher prices and volume in zinc and aluminium. Aluminium volume is expected to get a boost from ramp-up of new smelters.
• EBITDA will rise due to a weak third quarter last year, which saw revenue decline by 23 percent.
• Any further update on commissioning of the 1.25 million tonnes per annum aluminium smelter and price movement of base metals will be will be interesting to look at.

Coal India Ltd.

• Coal India is expected to report subdued performance led by tepid production, muted dispatch volumes growth and higher employee cost.
• Poor demand and oversupply of coal is likely to keep realisation under check.
• Employee cost movement, e-auction volumes, realisations and global coal prices would be key things to watch out for.

Hindustan Zinc Ltd.

• Mined metal volumes are expected to increase to 2,50,000 tonnes in the third quarter, zinc production figures are expected to be around 2,01,000 tonnes and lead production figures are expected to be around 39,000 tonnes. A rise in volumes is expected to aid the operating leverage, bringing down the cost of production.
• Higher realisations aided by higher prices would lead to a 34 percent jump in net profit in the third quarter.
• Commentary on the ongoing shift to Rampura Agucha facility in Rajasthan will be crucial.

(These expectations have been compiled from reports put out by Emkay, ICICI Securities, Kotak Institutional Equities, Motilal Oswal, Jefferies and Prabhudas Lilladher.)