Sharp rise in realisation inflates steel earnings

Higher steel prices offset higher iron ore prices for non-integrated producers like JSW Steel and JSPL.

New Delhi: For steel companies, Q1FY22 is expected to be sequentially better as higher steel prices (by Rs 4,500-8,000/t qoq) will offset lower volumes (down 7-17 per cent) due to localised lockdown amid second wave of Covid and higher raw material cost (iron ore cost to increase by ~Rs1,500/t qoq).

A report by Centrum Broking said as a result, we expect EBITDA/t to be higher by Rs 3,200-5,400/t qoq with Tata and SAIL gaining the most while JSPL to be at bottom. Similarly, higher average aluminium (up ~15 per cent qoq) and zinc prices (up ~7 per cent qoq) is expected to improve Q1FY22 earnings sequentially for Hindalco, Hindustan Zinc and Vedanta.

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During Q4FY21, domestic steel producers reported robust operating performance (EBITDA rose by Rs10-24 billion, average 31 per cent up qoq) aided by sharp increase in steel prices offsetting higher iron ore prices.

The average increase in realisation was better than estimated at Rs 7,900-10,000/t qoq except for SAIL where price increase was lower at Rs 3,900/t qoq which inturn was due to lower exports and adverse product mix. The steel volumes remained nearly flat (-0.9 per cent to +5 per cent) qoq as domestic demand was subdued in Jan-Feb’21 before recovering in March 2021.

Higher steel prices offset higher iron ore prices for non-integrated producers like JSW Steel and JSPL. Tata Steel benefitted the most due to 100 per cent iron ore integration.

The surge in operating profits helped in repairing the balance sheets among the coverage companies. On a qoq basis, Net debt declined by ~Rs 108 bn for Tata, Rs 89 bn for SAIL and Rs 35 bn for JSPL while it increased by Rs 8bn for JSW Steel as it acquired Bhushan Power in March this year. The strong deleveraging placed steel companies in a comfortable position (net debt/EBITDA improved to 1.5x – 2.9x). This along with better cash flow visibility for FY22 encouraged all steel companies (except SAIL so far) to go ahead with the next phase of growth via brownfield expansion, the report said.