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A Quarter Marred By Downgrades
The 2QFY12 results had more negative surprises than positive ones. Out of a total
of 11 companies (which represent 87% of total metal segment’s market
capitalisation) in the total metal universe, only three companies – NMDC, JSPL and
JSW Steel - were able to beat consensus earnings estimates at EBITDA level.
Besides this, only one company - NMDC - witnessed an upgrade in FY12/13 EBITDA.
Companies, which have seen major earnings downgrade include the likes of Sesa
Goa, NALCO and Sterlite Industries. We would also like to highlight that EBITDA
margin for the quarter was the lowest compared to the past six quarters. We expect
the dismal performance to continue, as the decline in metal prices is yet to reflect in
financials. We retain our negative view on the sector and Sell rating on all stocks in
our coverage universe i.e. Tata Steel, JSW Steel, SAIL, Sesa Goa and NMDC.
Raw material, power and fuel costs spoil the show: Our sample companies attained
19% YoY revenue growth for the quarter, but increase in raw material and power/fuel costs
was much steeper at 28% and 30%, respectively, YoY. This led to 201bps YoY decline in
margin and thereby EBITDA growth was confined to just 6% YoY. On sequential basis, the
situation was more grim and EBITDA margin contracted 465bps, which resulted in a 23%
drop in EBITDA. Raw material and power/fuel costs increased 9% and 13%, respectively,
QoQ, despite a 0.4% drop in revenue.
Higher interest costs, depreciation and forex loss mars PAT performance: Total
interest costs for our sample companies rose 52% YoY and 18% QoQ, while depreciation
increased 21% YoY and 4% QoQ. Besides this, the sharp rupee depreciation resulted in
MTM loss on foreign liabilities, while other income fell substantially sequentially because of
extraordinary gains of Tata Steel during 1QFY12. This resulted in 11% YoY and 41% QoQ
drop in PAT for the quarter.
A quarter marred by downgrades: The quarter’s performance, which was impacted by
global slowdown, saw a sizeable cut in FY12/13E earnings. Sesa Goa witnessed the
maximum downgrade followed by NALCO, Sterlite Industries, Hindustan Zinc and Steel
Authority of India. We would like to mention that the earnings cut was also driven by a drop
in global commodity prices. NMDC is the only company which witnessed 1% and 0.5%
upgrade in EBITDA for FY12 and FY13, respectively.
Further downgrade likely: We believe this may not be the last quarter in terms of
downgrade and prospects of a further downgrade are likely. Consensus metal price
assumption for FY12 and FY13 appears to be higher than current prices as market
participants expect recovery in the coming quarters. However, we are not as sanguine as
the street and expect a prolonged slowdown in developed countries, which will also slow
down the growth in India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A Quarter Marred By Downgrades
The 2QFY12 results had more negative surprises than positive ones. Out of a total
of 11 companies (which represent 87% of total metal segment’s market
capitalisation) in the total metal universe, only three companies – NMDC, JSPL and
JSW Steel - were able to beat consensus earnings estimates at EBITDA level.
Besides this, only one company - NMDC - witnessed an upgrade in FY12/13 EBITDA.
Companies, which have seen major earnings downgrade include the likes of Sesa
Goa, NALCO and Sterlite Industries. We would also like to highlight that EBITDA
margin for the quarter was the lowest compared to the past six quarters. We expect
the dismal performance to continue, as the decline in metal prices is yet to reflect in
financials. We retain our negative view on the sector and Sell rating on all stocks in
our coverage universe i.e. Tata Steel, JSW Steel, SAIL, Sesa Goa and NMDC.
Raw material, power and fuel costs spoil the show: Our sample companies attained
19% YoY revenue growth for the quarter, but increase in raw material and power/fuel costs
was much steeper at 28% and 30%, respectively, YoY. This led to 201bps YoY decline in
margin and thereby EBITDA growth was confined to just 6% YoY. On sequential basis, the
situation was more grim and EBITDA margin contracted 465bps, which resulted in a 23%
drop in EBITDA. Raw material and power/fuel costs increased 9% and 13%, respectively,
QoQ, despite a 0.4% drop in revenue.
Higher interest costs, depreciation and forex loss mars PAT performance: Total
interest costs for our sample companies rose 52% YoY and 18% QoQ, while depreciation
increased 21% YoY and 4% QoQ. Besides this, the sharp rupee depreciation resulted in
MTM loss on foreign liabilities, while other income fell substantially sequentially because of
extraordinary gains of Tata Steel during 1QFY12. This resulted in 11% YoY and 41% QoQ
drop in PAT for the quarter.
A quarter marred by downgrades: The quarter’s performance, which was impacted by
global slowdown, saw a sizeable cut in FY12/13E earnings. Sesa Goa witnessed the
maximum downgrade followed by NALCO, Sterlite Industries, Hindustan Zinc and Steel
Authority of India. We would like to mention that the earnings cut was also driven by a drop
in global commodity prices. NMDC is the only company which witnessed 1% and 0.5%
upgrade in EBITDA for FY12 and FY13, respectively.
Further downgrade likely: We believe this may not be the last quarter in terms of
downgrade and prospects of a further downgrade are likely. Consensus metal price
assumption for FY12 and FY13 appears to be higher than current prices as market
participants expect recovery in the coming quarters. However, we are not as sanguine as
the street and expect a prolonged slowdown in developed countries, which will also slow
down the growth in India.
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