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Metal stocks set to bounce as higher prices hint at good Q1

Realisation for exporters will be higher due to the depreciation of the rupee.

, ET Bureau|
Updated: Jul 12, 2018, 08.49 AM IST
Aluminium makers Hindalco and Nalco are also expected to deliver better numbers, given 5 per cent higher sequential prices of the metal.
ET Intelligence Group: Steel and aluminium companies will likely post better sequential performance in the June quarter, led primarily by metal prices. This could lead to a technical bounceback in the stocks of Tata Steel, Jindal Steel & Power, Hindalco and Nalco, which have seen sharp corrections over the past few months due to global concerns over punitive tariffs.

Domestic steel prices in the quarter were up 3-4 per cent, helped by a weak rupee and higher demand. Local demand for steel in April and May climbed 8.5 per cent on-year. Realisation for exporters will also be higher due to the depreciation of the rupee, which has been among the biggest losers against the dollar this year.

Cost pressures, meanwhile, moderated. After the sharp increase in March, coking coal costs fell 15 per cent sequentially, while iron ore prices declined 2 per cent. However, the total benefit of lower raw material costs will not be visible in the June-quarter performance due to the inventory lag effect, with plants using materials on the first-in-first-out (FIFO) basis. The September quarter will show the full effects of lower input costs.

Against this backdrop, analysts expect Tata Steel’s operating profit or EBIDTA to jump 10 per cent over the March quarter and 45 per cent over the year-ago period. Jindal Steel should deliver 8 per cent EBIDTA growth on a sequential basis and 70 per cent y-o-y. In case of JSW Steel, analysts expect a 3 per cent sequential growth and 80 per cent y-o-y growth in EBIDTA, driven by higher realisations, which should help offset the seasonality impact of tapering demand.

Metal snip 2

Aluminium makers Hindalco and Nalco are also expected to deliver better numbers, given 5 per cent higher sequential prices of the metal. Furthermore, the 25 per cent rise in alumina prices in the quarter that faced supply bottlenecks should help both producers, which have the benefit of backward integration.

Hindalco’s Indian operations, which include aluminium and alumina production, should deliver 20 per cent sequential EBIDTA growth, driven by higher realisations and lower hedging costs. State-run Nalco, which sells two-thirds of the alumina it produces (the remaining used for internal aluminium production), will be the biggest beneficiary of the sharp rise in alumina prices. Analysts expect the company to deliver a 40 per cent sequential increase in EBIDTA.

Stocks of these companies have seen a correction over the past few months: They now trade at the lower range of their three-year average EV by EBIDTA multiples, the metric used in the valuation of metal companies. EV, or enterprise value, includes market capitalization and net debt.

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