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Metals : IIFL: Q3 FY11 Sector Preview
During the quarter, we expect topline for the complete metal universe, to increase both on a qoq and
yoy basis. Led by an increase in sales volume and marginally higher steel realizations we expect
topline of ferrous companies to jump 15% on a qoq basis. Steel companies were not able to hold on to
the hikes announced by the end of Q2 FY11. We expect average steel realizations to increase by 2-3%
qoq after a dip in the previous quarter. Volume growth would be higher for SAIL due to the liquidation
of previous quarter inventory. Sesa Goa’s volume is expected to be lower on a yoy basis due to the
loss of volumes from the Karnataka and Orrisa region.
For the non-ferrous space, topline is expected to jump 12.3% qoq led by a rise in LME prices. Base
metal prices have jumped 12-18% qoq led by copper (18.6%), lead (16.7%), zinc (14.1%) and
aluminium (12.3%). The growth in Hindalco’s topline was restricted due to a decline in copper
production.
Margin for the steel universe is expected to expand on a qoq basis as companies would be benefited
from marginally higher realizations and lower input costs. Contracts for both, iron ore and coking
contract, were agreed at lower rates on a qoq basis. We expect OPM for the ferrous companies to
expand 500bps qoq. However on a yoy basis, OPM is expected to contract 187bps as the increase in
raw material costs is higher than the increase in steel realizations. For the non-ferrous space,
operating profit is expected to increase 19.9% qoq.
After registering a dip in earnings in the previous quarter, the metal universe is expected to continue
with its earnings momentum in Q3 FY11. Only standalone Tata Steel in the ferrous space is expected
to report a decline in PAT, as previous quarter profit was aided by sales of investments. Hindalco is
expected to report the highest growth in bottomline led by higher earnings from its aluminium
division.
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