On the other hand, raw material prices have been adding to the woes of steel manufacturers. Where coking coal saw average spot prices at $220/tonne in Q1FY11, the contract prices at $200/tonne during the first quarter were already 55 percent higher as compared to $129 per tonne in the previous corresponding period. These are likely to see further upside during the second quarter. In the beginning of the first quarter of the current financial year, analysts expected $60-70/mt rise in prices of steel given the rise in coking coal prices. However, the glut due to inventory pile up forced steel manufacturers to opt for price cuts.
Iron ore also stood no exception. The contract prices at $110-120/tonne during first quarter of the current fiscal had seen rise of 80 percent as compared to $61/tonne during FY10. Australian iron ore miners such as BHP Billiton and Rio Tinto have already indicated that contract prices may rise from around $120 a tonne in the April - June 2010 quarter to around $158 a metric ton in Q2FY11.
Despite a steep rise in raw material prices, spot prices for steel at $685/tonne on 30 June, 2010 have been marginally 3 percent higher than $665 on 31 March, 2010; although these were 41.8% higher y-o-y thanks to rock bottom prices of steel a year ago.
For the near-term there are little hopes for early recovery in prices with robust production in China and subdued demand in Europe squeezing the margins for steel manufacturers. This will be reflected in the first quarter results for Indian manufacturers, feel analysts.
SAIL will be hit the hardest on the revenues as well as margins front. With around 1.35 million tonnes (MT) sales volumes in April-May 2010, selling 2.7 MT in Q1FY11 looks difficult. Analysts at Motilal oswal have cut volume estimates to around 2.4 MT for the April-June 2010 quarter, with realizations at Rs 3610 per tonne, down one percent y-o-y. While coke prices were higher, the iron ore supplier - NMDC – has increased contract prices of iron-ore to Rs 270 per tonne during the recently concluded quarter (6-15% higher on various grades).The net sales are pegged at Rs 8664.2 crore, down 5.3% with EBIDTA margins losing 401 bps. Hence, PAT is expected to clock in at Rs 944.4 crore, 29.4% lower than a year ago.
JSW Steel, on the other hand, is expected to be best performer in the first quarter among the lot. Sales volumes are pegged at 1.45 MT up 9.8% y-o-y. Realizations are likely to be at Rs 3510.8 per tonne due to good sales volumes in April-May 2010 before June price cuts. Net sales at Rs 5077.6 crore will thus grow 29.6 % y-o-y with operating margins improving 304 bps to 22.5 and adjusted PAT at Rs 480.6 crore, growing robust 396% on a y-o-y basis, analysts say.
Tata Steels’ sales at 9,12,000 tonnes in Apr-May 2010 were flat, and after price cuts in June, analysts expect the company to report sales volumes at 1.42 MT. With net sales pegged at Rs 5985.3 crore in Q1FY11, realizations are expected to improve by 6.9 percent to Rs 3925.3/tonne. Tata Steel had old inventories and contracts, and hence, iron ore and coal price increases will not affect first quarter's results. However, in the second quarter it should feel the heat in line with other manufacturers. EBIDTA margins in first quarter are likely to gain 610 bps. Their European subsidiary, Corus, is seeing an improvement in realizations, which are pegged at $ 160/ tone and will add to EBIDTA growth sequentially. The consolidated sales for Tata steel are estimated as Rs 29,089.1 crore, growing 24.8 percent y-o-y. Profits are estimated at Rs 2952.9 crore, as against last years’ losses.
The road ahead for the steel manufacturers seems bumpy, with realizations and margins feeling heat of price cuts in June and raw material costs rising further. The uptick in raw material prices will at some point force steel players to go for price hikes, and analysts expect that raw material prices will start adjusting too. The recovery will come in second half of financial year. Till then, the outlook for this sector remains bleak.
For more investment ideas / Portfolio Management advise get in touch with us
Bought to you by
Ingenious Investor
Equity Research Division
Ravina Consulting
No.429 Mahavir Tuscan
Near Hoodi, Whitefield
Mahadevapura Post
BANGALORE 560048
For Free Stock Advise + Ideas
sowmya@ravinaconsulting.com
Talk / SMS 08105737966
Read - www.ingeniousinvestor.blogspot.com
Follow us - www.twitter.com/smartinvestor
No comments:
Post a Comment