Metals - Ferrous & Mining - Q3FY12 Results Preview - Lacklustre :: Centrum

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Q3FY12 Results Preview

Metals – Ferrous & Mining

Lacklustre performance to continue

Higher raw material costs, flat volumes due to slower domestic economic growth and muted realizations despite rupee depreciation is expected to result in further dent in margin resulting in yet another quarter of lacklustre performance. Higher interest costs are also expected to result in further slide in profits after a subdued H1FY12 leading to lower earnings on both QoQ and YoY basis in Q3FY12.  We expect Q3FY12 to be the worst for steel producers and see the situation improving slightly from Q4FY12 with a drop in raw material costs and a pick up in demand from core consumption sectors. We maintain our cautious stance on the ferrous space but see early signs of improvement in sector fundamentals going ahead.

m  Sales volume to remain mixed: We expect a mixed trend from steel players on the volume front with JSW Steel reporting growth while Tata Steel and SAIL showing flat to negative sales volumes. Domestic demand has improved in Q3FY12 and 9MFY12 domestic demand growth has stood at 4.4% up from 1.8% in H1FY12 but steel majors have found it hard to push volumes in Q3FY12.

m  Flat realizations expected on a sequential basis due to rupee depreciation: Global steel prices have remained soft with worsening economic situation in the developed world. Rupee depreciation has prevented a serious fall in realizations in the domestic market and we expect realizations to remain flat on a QoQ basis.

m  Margin slide to continue: Margins are expected to slide by 300-500 bps on a YoY basis for steel players in the standalone steel business due to high raw material costs. Miners like NMDC are expected to see YoY margin improvement on account of increase in realizations and volumes.

m  Profits to remain subdued: We expect pressure on PAT due to margin squeeze from high costs, expected forex losses on account of rupee depreciation and higher interest costs.

m  Maintain cautious view on the ferrous space: We remain cautious on the domestic ferrous space and maintain Sell on all steel large cap stocks due to continuing margin pressure amidst tough operational environment and fall in global steel prices. We expect margins to start improving from Q4FY12 when raw material price reduction becomes visible and interest rates start coming down but await clarity on the policy front. We maintain buy on mining stocks like NMDC and Sesa Goa on attractive valuations. Hindustan zinc remains our top pick in metals space with attractive risk-reward proposition and strong earnings profile backed by volume growth and low cost structure.

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