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4Q FY11 preview – Higher realization to raise profit
Realization on a qoq basis is likely to be higher since all steel majors increased prices
by close to Rs4,000/tonne in Jan ’11.
Costs likely to be flat compared with the previous quarter because coking coal contracts
were signed at US$225/tonne this quarter. Hence, the cost will be a blend of
US$208/tonne (signed last quarter) and US$225/tonne.
Volume growth is likely to be muted this quarter since apparent consumption increased
by only 4.5% yoy.
Higher realization and flat costs are likely to improve profitability significantly compared
to the previous quarter.
We prefer Tata Steel based on quarterly results, however, Sail remains our long-term
pick.
Realization likely to be better than in the previous quarter
Given strengthening steel prices globally, Indian steel majors increased prices by close to
Rs3,000-4,000/tonne in Jan ’11. In Mar ’11, however, prices softened somewhat because
Chinese spot HRC prices corrected by around US$20 from the peak of US$635/tonne. During the
quarter, India’s steel market was also suffering from:
Weak long demand
Correcting steel prices with dealers sitting on high cost inventory
Cheaper imports from China and elsewhere
Due to the factors mentioned above, prices were slightly weak in March compared to January
and February. However, we expect the realization of steel majors to improve by Rs2,500-3,000
per tonne during 4Q FY11 compared with 3Q FY11.
No significant change in costs
Since Tata Steel and Sail are fully integrated in terms of iron ore, their raw material cost is
affected primarily by change in coking coal prices. In 4Q FY11, coking coal contracts were signed
at US$225/tonne whereas for 3Q it was approximately US$207-208/tonne. Considering that the
companies keep an inventory of close to 45 days, the coking coal cost for the quarter will be a
blend of 3Q FY11 and 4Q FY11 coking coal prices. Since 2Q FY11 coking coal contracts were
signed at US$225/tonne, the blended cost for 3Q FY11 and 4Q FY11 are likely to be close to
each other. Thus, we don’t expect raw material cost per tonne to show a significant deviation
from the previous quarter for Tata Steel and Sail.
On the other hand, NMDC hiked iron ore prices by ~5% in 4Q FY11, translating to close to
Rs200/tonne. Since JSW Steel procures 80% of its iron ore requirement from the external market
(NMDC and other vendors), this increase could hurt EBITDA by approximately Rs300/tonne.
Moreover, NMDC has also announced a further provisional price hike of 10% for iron ore lumps
but has not increased prices of fines. Once the contract with Japanese and Australian firms are
finalised, it will announce the final prices. Considering the softness in steel prices, this move is
likely to hurt non integrated players like JSW Steel.
Volume growth likely to be muted this quarter
After a strong start this year, volume growth on a yoy basis is likely to have dropped significantly
during 4Q FY11. Although apparent consumption is likely to have increased by 7.7% yoy in FY11,
growth was just 4.5% yoy in 4Q FY11. This can partly be explained by the comparatively higher
base towards 4Q FY10. However, a slowdown in construction activity was primarily responsible
for such weak growth.
Our economics team forecast approximately 8% growth in industrial production for FY12. Taking
that as a proxy for steel demand, we expect consumption growth also to be close to 8% during
FY12.
Companies’ profitability likely better than in 3Q FY11
Given the increase in realization and flat cost structure, we expect steel companies to report
better profitability than in 3Q FY11. Even though volume growth is likely to be muted, we believe
it would be more than made up for by the increase in realization. For Tata Steel and Sail, the
increase in realization will flow directly to EBITDA, whereas for JSW Steel, given the increase in
iron ore prices, EBITDA is not likely to increase as much.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4Q FY11 preview – Higher realization to raise profit
Realization on a qoq basis is likely to be higher since all steel majors increased prices
by close to Rs4,000/tonne in Jan ’11.
Costs likely to be flat compared with the previous quarter because coking coal contracts
were signed at US$225/tonne this quarter. Hence, the cost will be a blend of
US$208/tonne (signed last quarter) and US$225/tonne.
Volume growth is likely to be muted this quarter since apparent consumption increased
by only 4.5% yoy.
Higher realization and flat costs are likely to improve profitability significantly compared
to the previous quarter.
We prefer Tata Steel based on quarterly results, however, Sail remains our long-term
pick.
Realization likely to be better than in the previous quarter
Given strengthening steel prices globally, Indian steel majors increased prices by close to
Rs3,000-4,000/tonne in Jan ’11. In Mar ’11, however, prices softened somewhat because
Chinese spot HRC prices corrected by around US$20 from the peak of US$635/tonne. During the
quarter, India’s steel market was also suffering from:
Weak long demand
Correcting steel prices with dealers sitting on high cost inventory
Cheaper imports from China and elsewhere
Due to the factors mentioned above, prices were slightly weak in March compared to January
and February. However, we expect the realization of steel majors to improve by Rs2,500-3,000
per tonne during 4Q FY11 compared with 3Q FY11.
No significant change in costs
Since Tata Steel and Sail are fully integrated in terms of iron ore, their raw material cost is
affected primarily by change in coking coal prices. In 4Q FY11, coking coal contracts were signed
at US$225/tonne whereas for 3Q it was approximately US$207-208/tonne. Considering that the
companies keep an inventory of close to 45 days, the coking coal cost for the quarter will be a
blend of 3Q FY11 and 4Q FY11 coking coal prices. Since 2Q FY11 coking coal contracts were
signed at US$225/tonne, the blended cost for 3Q FY11 and 4Q FY11 are likely to be close to
each other. Thus, we don’t expect raw material cost per tonne to show a significant deviation
from the previous quarter for Tata Steel and Sail.
On the other hand, NMDC hiked iron ore prices by ~5% in 4Q FY11, translating to close to
Rs200/tonne. Since JSW Steel procures 80% of its iron ore requirement from the external market
(NMDC and other vendors), this increase could hurt EBITDA by approximately Rs300/tonne.
Moreover, NMDC has also announced a further provisional price hike of 10% for iron ore lumps
but has not increased prices of fines. Once the contract with Japanese and Australian firms are
finalised, it will announce the final prices. Considering the softness in steel prices, this move is
likely to hurt non integrated players like JSW Steel.
Volume growth likely to be muted this quarter
After a strong start this year, volume growth on a yoy basis is likely to have dropped significantly
during 4Q FY11. Although apparent consumption is likely to have increased by 7.7% yoy in FY11,
growth was just 4.5% yoy in 4Q FY11. This can partly be explained by the comparatively higher
base towards 4Q FY10. However, a slowdown in construction activity was primarily responsible
for such weak growth.
Our economics team forecast approximately 8% growth in industrial production for FY12. Taking
that as a proxy for steel demand, we expect consumption growth also to be close to 8% during
FY12.
Companies’ profitability likely better than in 3Q FY11
Given the increase in realization and flat cost structure, we expect steel companies to report
better profitability than in 3Q FY11. Even though volume growth is likely to be muted, we believe
it would be more than made up for by the increase in realization. For Tata Steel and Sail, the
increase in realization will flow directly to EBITDA, whereas for JSW Steel, given the increase in
iron ore prices, EBITDA is not likely to increase as much.
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