Q3 preview: Metal firms' sales likely to flatten, profits may plunge

Earnings may bottom out during Oct-Dec quarter, say analysts

Subdued demand as well as volatile prices will likely weigh on earnings of metal companies for the third quarter of the ongoing financial year (Q3 of FY23), Bloomberg consensus estimates for the period show.

Year-on-year (YoY) net sales growth will be flat in Q3, Bloomberg data shows, while the bottom line will decline sharply by 60.4 per cent from a year ago.

Earnings before interest tax depreciation and amortisation (Ebitda) will fall by almost 42.1 per cent versus a year ago.

The data has been compiled from a sample size of the top-10 metal firms, including Tata Steel, Hindalco, JSW Steel, Vedanta and Hindustan Zinc.

Sector experts say that while the price of coking coal, used in making steel, has fallen nearly 31 per cent to $205 per tonne in Q3, the price of iron ore, which is also a key input in steel making, has risen by 26 per cent in the quarter under review. This mixed commodity trend will keep earnings muted, analysts at Mumbai-based brokerage Centrum said in their report dated January 12.

“Primary steel producers are likely to report a sharp drop in bottom line YoY in Q3. The impact on margins would largely be driven by weaker steel prices and subdued exports. Levy of 15 per cent export duty on steel exports had led to pricing pressure, higher system inventories, and higher working capital,” analysts Rahul Jain and Shweta Dikshit at Mumbai-based brokerage Systematix Institutional Equities said in their report dated January 14.

Steel export duty has been withdrawn since the end of November and it has reduced for iron ore from 50 per cent to 30 per cent. This will aid exports and cash generation in the forthcoming quarters, Jain and Diskshit said.

Base metal prices such as aluminium, zinc, copper, nickel and lead, on the other hand, have climbed by 8-36 per cent in Q3 due to the re-opening of the Chinese market after a prolonged lockdown. But at a broader level, sentiment remains weak as concerns around a global recession continue to weigh on demand and prices of non-ferrous metals, say analysts Ravi Sodah, Saurabh Mitra and Bhavi Shah of Mumbai-based brokerage Elara Capital.

“The macro-economic story will continue to play out as far as the earnings of metal companies in Q3 are concerned. The good news is that domestic demand continues to be strong. This could aid earnings to some extent. However, global benchmark prices of base metals on the London Metal Exchange will remain volatile. It will be led by supply-side constraints, fears of a global recession and behaviour of the Chinese market,” Kunal Kothari, research analyst at Centrum Broking said about the sector's earnings in the quarter under review.
 

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For individual metal companies, the picture will remain mixed, Bloomberg consensus estimates show.

Tata Steel is likely to report a YoY decline in net sales by nearly 6 per cent, while net profit will fall nearly 80 per cent from a year ago.

Aditya Birla group flagship Hindalco, on the other hand, may see a marginal rise in net sales by 3.5 per cent, but the decline in net profit will be sharp at nearly 45 per cent, Bloomberg data shows.

Vedanta may see net sales remain flat versus a year ago in Q3. The bottom line may decline by 52.6 per cent versus last year, Bloomberg data shows.

Hindustan Zinc, which is part of the Vedanta group, may see net sales fall marginally from a year ago, though net profit drop will be sharper at nearly 23 per cent. The firm will report its Q3 numbers on Thursday.

In a conversation with Business Standard last month, Hindustan Zinc’s chief executive officer (CEO) Arun Misra said that he remained optimistic about the demand scenario for zinc.

“Domestic capital expenditure by the government remains strong, which implies that the demand for zinc will be there,” he said.