Metal Stocks Outlook: Global steel oversupply, weak demand to weigh

12 Aug 2022

Base metal stocks may come under pressure next week due to concerns of global oversupply in steel from surge in the metal's exports from China amid weak global demand.

Metal stock investors will also weigh the commentary made by the managements of Hindalco Industries and Steel Authority of India Ltd this week after they declared their results for the June quarter.

Aluminium and copper producer Hindalco said that it the cost of production will rise in the high teens in Jul-Sep due to the flow-through effect of high coal costs in the June quarter. It said that the current Jul-Sep quarter will likely be the company's worst quarter from the cost of production point of view because the majority of the coal problems and the high cost coal that it had to buy during May-Jun was getting consumed in the current quarter.

On the other hand, steel maker SAIL said that its imported coking coal costs were down in July to 38,000 rupees per tn from 39,500 rupees per tn in Apr-Jun. It expected the cost to come down further by 4,000-5,000 rupees per tn in the current month and further from September onwards.

But SAIL also specified that the high-priced coal inventory at the end of the June quarter is getting consumed in the current quarter and the full benefit of the coal price fall will be realised only in the December quarter.

The Nifty Metal index ended this week 4.6% higher.

Axis Capital said in a report this week that with steel demand currently being weak globally the surge in exports from China had fueled concerns on oversupply. It said hopes of a stimulus-driven demand recovery in China was fading away.

Grasim Ind Apr-Jun net profit, sales up sharply but margin contracts

12 Aug 2022

The profitability of Grasim Industries Ltd fell in the June quarter on higher operating costs, while the operating profit, sales and net profit rose sharply.

The Aditya Birla Group company reported a net profit of 8.1 bln rupees for the quarter ended June, up 68% on year. It was above analyst estimates of 5.2-6.1 bln rupees.

The sales jumped 93% to 72.5 bln rupees, and were above analyst estimates of 63.8-70.2 bln rupees

Grasim's operating profit, defined as earnings before interest, tax, depreciation and amortisation, also rose sharply by 69% on year to 13.6 bln rupees.

But a substantial rise in operating costs in Apr-Jun led to the operating margin contracting to 18.6% from 20% a year ago.

The cost of materials consumed jumped 83% on year to 33.4 bln rupees while power and fuel costs rose sharply by 92% on year to 12.3 bln rupees.

Grasim's revenue growth was aided by a doubling of revenue in its viscose segment to 43 bln rupees driven by a sales volume increase of 76% in viscose staple fibre to 197,000 tn and improved realisations in the segment. The viscose filament yarn volume was up 34% on year to 10,300 tn during the June quarter.

The company said that the viscose staple fibre growth in the June quarter was aided by around 51,000 tn contribution from its brownfield expansion at the Vilayat site.

In the company's chemicals segment, the volume performance was not great. The caustic soda sales were up only 17% on year to 278,000 tn while the chlorine and HCL consumption in value added products was up 34% on year to 86.7 mln tn.

The company said that average global caustic soda prices peaked at $769 per tn on the back of higher energy prices and supply chain disruption. A weak demand environment prevailed in the chlorine user industry in segments like dyes and pigments, and as a result the chlorine sales realisation continued to stay negative, the company said.

However higher sales realisation in the chemicals segment led to a 90% jump in revenue to 27.3 bln rupees.

The bottomline was mainly aided by the sharp rise in operating profit.

Tax expenses were 2.2 times higher at 2.1 bln rupees.

Pidilite Ind expects Jul-Sep input costs to be "highest", impact operating margin

12 Aug 2022

Pidilite Industries Ltd expects the operating margin in the September quarter to be flattish due to consumption of unutilised key raw materials from the June quarter when the prices were at their peak, the company told analysts in a conference call with analysts and investors on Thursday.
 
The adhesive-to-construction-chemicals company's managing director, Bharat Puri, also told Informist that the consumption of key raw material vinyl acetate monomer would likely be in the $2,300-2,500 per tn range in the September quarter as compared to $2,200-2,400 range recorded in the June quarter.
 
This represents a $100 per tn, or around 5%, increase in the vinyl acetate monomer cost in the September quarter and would restrict any expansion of the operating margin.
 
In the June quarter, Pidilite's operating margin, defined as the earnings before interest, tax, depreciation and amortisation margin, contracted to 17.1% from 17.8% a year ago. In Jan-Mar, the margin was 16%.
 
The profitability of the company during the quarter was hit due to a jump in raw material expenses. They rose 72% on year to 15.7 bln rupees, accounting for nearly 60% of the total expenses. But calibrated price hikes and 44% volume growth led to the consolidated EBITDA rising sharply by 52% on year to 5.3 bln rupees.
 
Puri told analysts in the call that he saw the near term as challenging because of two reasons.
 
The company saw the highest level of input costs in the June quarter and "a large part of those input costs will be consumed in the current quarter (Jul-Sep)," he said. Therefore, from an operating margin point of view the near term will be very challenging.

Puri said the raw material costs as a percentage of sales will likely be the highest in the September quarter. The operating margin will be impacted by this and on how the product mix works out, he said.

The second reason, according to Puri, was that the company was seeing a slowdown in growth in the rural and semi-urban areas due to a significant rise in the cost of building materials in the last one year.

“Until the effect of a good monsoon and money going into the hands of the rural and semi-urban consumers, which will happen in the second half of the current financial year, the near term will remain challenging,” he said.

In the June quarter Pidilite’s consolidated net sales were up 60% on year to 31 bln rupees while the net profit jumped 61% on year to 3.5 bln rupees.

Cost of production in Jul-Sep may rise 17-19% on qtr, says Hindalco

 11 Aug 2022

Hindalco Industries Ltd expects the cost of production to rise in the high teens in the Jul-Sep quarter due to the flow-through effect of high coal costs in the June quarter, the management told analysts in a conference call with investors and analysts on Wednesday.

Coal costs is reflected in the power and fuel expenses of the aluminium and copper producer.

The cost of production in the June quarter was 17% higher than that in the previous quarter, the company said.

"Probably Q2 (September quarter) will be in some way our worst quarter from the cost of production point of view because the majority of the coal problems and the high cost coal that we had to buy during May-Jun will be consumed in Jul-Sep quarter," a senior official said.

The company expects the production costs to rise sequentially in the high teens which could mean that the rise would be in the 16-19% range.

The company said the coal has been the biggest factor in the rise in the cost of production since the company had to source 31% of their coal from the auction market after the government restricted the linkage coal supply to non-power producers.

The premiums in the auction market had risen substantially to 500%, the company said.

The company expects the share of shrinkage coal from 50% to 65% in the December quarter with coal supply woes easing gradually.

On a standalone basis, Hindalco's power and fuel expenses rose 32% sequentially to 25.1 bln rupees and it made up for 15.1% of operating expenses. Raw material expenses, which made up for 59% of expenses, recorded a decline of 17% sequentially.

The standalone operating margin of Hindalco contracted to 15% in Apr-Jun from 17.2% in the previous quarter. The operating profit, defined as earnings before interest, tax, depreciation and amortisation, declined by 10.3% sequentially to 29.3 bln rupees.

Jul sales volume over 1.4 mln tn, SAIL expects further recovery ahead

11 Aug 2022

Steel Authority of India Ltd sold over 1.4 mln tn of steel in July and expects the current month to record the highest sales volume for August of any year, its management told analysts and investors in a conference call today.

The steel public sector unit reported a weak set of earnings numbers for the June quarter on the back of 5.4% decline in sales volume to 3.2 mln tn from the year ago period.

It was in this context that the company addressed concerns on volume growth front. The company said it was confident of volume recovering in the remainder of the current financial year on the back of a bounce back in domestic steel consumption.

The company's net profit for the June quarter fell 80% on year to 7.8 bln rupees. But its sales went up by 16% to 249.3 bln rupees on the back of improved sales realisation.

The company disclosed in today's analyst call that the net sales realisation in the June quarter was 66,829 rupees per tn as compared to 59,495 rupees in the March quarter.

Since coal costs went on a decline for the company in the current quarter till date the sales realisations in July had fallen.

The company said its imported coking coal costs were down in July to 38,000 rupees per tn from 39,500 rupees per tn in Apr-Jun. It expected the cost to come down further by 4,000-5,000 rupees per tn in the current month and further from September onwards.

The imported coal consumption in the June quarter was around 85% of total coal consumption. Indigenous coal made up for the rest and its costs were much lower at 13,000 rupees per tn in the June quarter.

SAIL's cost of materials consumed jumped 2.8 times to 176.8 bln rupees in Apr-Jun. This affected its operating performance.

The operating profit, defined as earnings before interest, tax, depreciation and amortisation, dived 61% on year to 26.1 bln rupees in the June quarter and its operating margin contracted substantially to 10.9% from 32.3% in the year ago period.

Hindalco Apr-Jun PAT and sales rise strongly, but margin contracts

10 Aug 2022

Hindalco Industries Ltd reported a strong increase in its net profit and sales for the June quarter but high operating costs weighed on its operating margin.

The metal company's consolidated net profit in Apr-Jun rose 48% on year to 41.2 bln rupees, its highest ever, topping analyst estimates of 30-32.3 bln rupees. Its consolidated net sales were up sharply by 40% on year to 580.2 bln rupees which too topped analyst estimates of 524.4-534 bln rupees.

A substantial rise in energy costs and raw material expenses dashed any hope of operating margin expansion. But higher price realisations ensured that the consolidated operating profit, defined as earnings before interest, tax, depreciation and amortisation, was up 37% on year to 84.3 bln rupees.

The company's consolidated operating margin contracted to 14.5% in Apr-Jun from 14.9% a year ago.

The weak operating performance of Novelis Inc, a wholly-owned overseas subsidiary of Hindalco, weighed on the metal company's operating profit and margin. Novelis declared its June quarter results on Aug 3.

In Apr-Jun, flat shipment volume and high operating costs restricted Novelis' operating profit growth to just 1% on the year to $561 mln. In rupee terms, Novelis' operating profit went up to 43.3 bln rupees in the June quarter from 40.9 bln rupees a year ago.

Novelis' operating margin contracted sharply to 11% in Apr-Jun from 14.4% a year ago. The company attributed the sharp rise in operating costs to high energy costs.

Hindalco's consolidated power and fuel expenses were up 67% on year to 40.2 bln rupees while raw material expenses were up 36% on year to 353.1 bln rupees.

Segmentally, the aluminium upstream segment recorded a moderate increase in shipment volume in Apr-Jun to 333,000 tn from 325,000 tn a year ago. But aluminium downstream sales volume fell 5% on year to 78,000 tn.

Copper cathode rod sales jumped 73% on year to 80,000 tn while copper metal sales increased to 101,000 tn from 80,000 tn.

Sequentially, Hindalco's consolidated net profit was up only 7% and net sales were up by only 4%.

The consolidated net debt of the company went up to 421.9 bln rupees on Jun 30 from 391 bln rupees on Mar 31.

JSW Steel Jul output 1.57 mln tn, up 1.6% month on month, flat rolled products output down 4%

10 Aug 2022

JSW Steel Ltd's crude steel production stood at 1.57 mln tn in July on a standalone basis, the company said in an exchange filing on Tuesday.

It was up 14% on year. But it was only 1.6% up as compared to June.

In June the crude steel production by the company was 1.54 mln tn, as calculated from the company's quarterly production data for Apr-Jun and its monthly production data for April and May.

Of the crude steel production in July, flat rolled products output was 1.07 mln tn, down 4% on month and up 15% on year.

The long rolled products output stood at 365,000 tn, up 22% on month and 19% higher than the year ago period.

Earnings Review: SAIL net profit falls 80%, hit by steep EBITDA fall

 10 Aug 2022

Steel Authority of India Ltd's bottomline in the June quarter was hit severely by a volume decline and a drop in operating profit.

The company's net profit for the June quarter fell 80% on year to 7.8 bln rupees. It, however, topped analyst estimates of 5.3-7.6 bln rupees.

The steel company in which the government holds a 65% stake reported net sales of 240.3 bln rupees, up 16% on year. It was below analysts' estimate of 244.7 bln rupees.

The sales growth was restricted as volume declined 5.4% on year to 3.2 mln tn in Apr-Jun even though crude steel production rose 15% to 4.3 mln tn.

The company said that the volume decline was on account of subdued market demand.

It said that the decline in global demand for steel had a direct bearing on the domestic market. The weak demand and fall in steel prices during May-Jun had a bearing on the price realisation, the company said.

Among SAIL's largest three steel plants, the one at Bhilai saw net sales rise to 70.3 bln rupees in Apr-Jun from 55.8 bln rupees a year. Net sales from the Rourkela steel plant were up at 64.7 bln rupees from 59.2 bln rupees while that from the Bokaro steel plant increased to 67.2 bln rupees from 64.5 bln rupees.

The operating profit, defined as earnings before interest, tax, depreciation and amortisation, dived 61% on year to 26.1 bln rupees.

The company's operating margin contracted substantially to 10.9% in Apr-Jun from 32.3% in the year ago period. It was also lower than previous quarter's 15.6% margin.

The company attributed the operating profit fall to challenges in sales realisations, and high cost of production due to increase in imported coking coal prices.

Sequentially, SAIL's net profit was down 68% and net sales declined by 22%.

The company's consolidated net profit stood at 8.1 bln rupees in Apr-Jun, down from 39 bln rupees a year ago. Its consolidated net sales were up 16% on year to 240.3 bln rupees.

Pidilite Ind PAT up 61%, sales up 60%, but margin contracts 70 bps

10 Aug 2022

Pidilite Industries Ltd's consolidated net profit jumped 61% on year to 3.5 bln rupees in Apr-Jun on the back of a 60% rise in consolidated net sales to 31 bln rupees.

The operating profit, defined as earnings before interest, tax, depreciation and amortisation, of the company, was up sharply by 52% on year to 5.3 bln rupees.

But high operating costs during the quarter reined in the operating margin which contracted to 17.1% from 17.8% a year ago.

Sequentially, Pidilite's consolidated net profit rose 39% while net sales were up 24%. The operating profit was also up 32%.

The profitability of the company was hit due to a jump in raw material expenses. The cost of materials consumed, which made up for nearly 60% of total expenses, rose 72% on year to 15.7 bln rupees.

The cost of purchase of traded goods was also up substantially by 79% to 2.5 bln rupees.

Pidilite's managing director Bharat Puri said that the sales growth in volume and value terms was broad-based across business segments and geographies.

He said that due to rising input costs the company took calibrated pricing action.

"While the near term remains challenging, we remain cautiously optimistic on the medium term given the recent softening of input prices led by lower oil prices, a good monsoon and continued good demand conditions in the housing and home improvement sector," Puri said.

Grasim's Apr-Jun net profit seen up 8-26% YoY, down 43-51% QoQ

10 Aug 2022

Grasim Industries is expected to report a net profit of 5.2 bln-6.1 bln rupees for the quarter ended June according to estimates by three brokerage houses.

The company will declare its quarterly results on Friday.

The net profit estimates put it higher by 8-26% from the net profit of year ago period and 43-51% lower than the previous quarter.

The estimates peg Grasim's net sales between 63.8 bln rupees and 70.2 bln rupees, 70-87% higher than a year ago and flat to 10% higher than the previous quarter.

The sales growth in June quarter will be aided by the low base of year ago period and ramp up of capacities during the quarter.

Brokerage ICICI Securities expects Grasim's operating profit, as denoted by the earnings before interest, tax, depreciation and amortisation, to jump 38% on year "on the back of strong profitability in chemicals division."

It expects the viscose staple fibre segment EBITDA to go up due to better realisations and ramp up of new capacities.

When the company reports its June quarter results on Friday investors will be monitoring the company's outlook on demand in viscose staple fibre and overall input costs for the rest of the current financial year.