Strong commodity costs coupled with muted charges will drive record margins for metal firms in Q3FY21e. Strong steel costs (+20% q-o-q) and subdued coking coal charges will most likely raise steel margins to record higher levels in Q3FY21e. With 13% q-o-q larger aluminum/zinc costs, base metal firms, also, must see a sharp improvement in margins. Companies stay cautious on capex spends and robust earnings must accelerate deleveraging. Higher exit costs in Q3FY21 recommend margin uptrend and earnings upgrade in metals will continue.
Steel: Strong costs and muted charges to drive margins to record levels
Regional steel costs hit decadal higher in Q3FY21 led by robust sequential recovery in demand. China export HRC value enhanced 14% q-o-q to $569/ton. Domestic steel costs witnessed a sharper improvement (+20% q-o-q). Further, stronger demand resulted in reduced exports which would additional enhance realisations in Q3FY21e.
Coking coal costs corrected by 1% q-o-q in Q3FY21 but offered the inventory lag, we estimate a $5-7/ton price reduction for steel firms. Domestic iron ore costs enhanced 46% q-o-q on the back of robust demand and larger regional costs which would hit non-integrated players like JSW/JSPL.
We estimate 3% y-o-y volume decline for JSW and TATA and 12% y-o-y volume development in JSPL. We estimate Ebitda/ton to improve by 29-47% q-o-q for TATA, JSW and JSPL, factoring in sharp value increases. We estimate NMDC to witness 63% y-o-y and 152% q-o-q improve in Q3FY21e Ebitda.
Non-ferrous: Commodity value tailwinds to raise margins
Base metal costs saw sequential improvement in Q3FY21e led by robust sequential demand recovery across regions, stronger than anticipated demand in China and weaker $. Zinc and Aluminum costs enhanced by 13% qoq whereas Alumina remained stagnant (+2% q-o-q) in the course of the quarter.
(i) HNDL: We estimate India Ebitda (standalone + Utkal) at Rs 15.4 bn (+23% y-o-y, +18% q-o-q) (ii) For HZ, we estimate its Ebitda to improve by 5% q-o-q to Rs 31 bn (+35% y-o-y) (iii) We count on Vedanta Ltd’s Ebitda to improve by 18% q-o-q to Rs 76 bn (+61% y-o-y) (iv) We estimate Nalco’s Ebitda at Rs 4.3 bn (+1153% y-o-y, +56% q-o-q).
Strong FCF to accelerate deleveraging
We note that exit commodity costs in Q3FY21 are 5-23% larger than Q3FY21 typical and uptrend in earnings/upgrades must continue in Q4FY21e. Despite the current rally, metal stocks are trading beneath their historic imply valuations. With stronger balance sheets and upside danger on earnings, we see additional re-rating prospective. TATA, HNDL and JSP are our preferred stocks to play the existing buoyancy.