In Q3, margins at Indian steel companies should be range-bound q-o-q vs. weak Q2 margins, despite recent hikes in domestic steel prices from Q3 lows. We expect steel margins to expand in Q4, but this appears priced in the recent steel stock price rally. Momentum may sustain near term, but risk reward appears negative across India steel coverage, as we expect a reversal. We expect steady Ebitda at Hindalco q-o-q and stay positive on the stock.
Q3: range bound margins vs. weak Q2
In steel, despite price hikes (+Rs 2,000/ton vs. Dec Q lows) avg domestic HRC prices in Q3 were down Rs 2,100/ton q-o-q (long products down Rs 1,700/ton q-o-q). ASP decline should be cushioned by lower input costs (coking coal -$21/ton q-o-q) and lower fixed cost/ton due to higher volumes, at steel companies. Volume has improved q-o-q, which should drive higher Ebitda q-o-q. In non-ferrous, avg Al LME prices fell 1% q-o-q to $1,756/ton, but weaker INR should offset this. At Coal India, profit should dip y-o-y due to lower volume.
Looking beyond results
(i) Higher regional steel prices due to usual seasonal restock before Chinese New Year, positive sentiment around China stimulus, trade deal, stabilising global macro; (ii) rally in iron ore prices (restock, seasonal supply factors); (iii) restocking in domestic market and (iv) narrowing of domestic prices' discount to import parity has lifted domestic steel prices from Q3 lows. With domestic HRC prices at `37,250/ton (+`2,000/ton vs. Q3 avg) still at 3-6% discount vs. FTA import parity, we expect more hikes (`1,500-2,000/ton).
Steel margins should rise q-o-q in Q4. Indian steel stocks have rallied too reflecting this. But these could reverse as (i) restocking should fade; (ii) Chinese mill margins are above average; and (iii) iron ore prices should ease as seasonal supply factors fade. Steel stocks should reflect this earlier, as seen historically.
Tata Steel (TATA IN, UPF): We forecast group Ebitda of `42.9 bn (8% q-o-q). We expect India Ebitda to rise 13% q-o-q (`36.8 bn). Tata BSL reported 58% q-o-q decline in Ebitda (Ebitda/ton fell by
Rs 2,500/ton q-o-q). At TSE, weak EU spreads would weigh on margins (JEFe $7/ton).
JSW Steel (JSTL IN, UPF): We expect group Ebitda of `28.9 bn (+30% q-o-q). We expect volume to rise 11% q-o-q and Ebitda/ton of Rs 6,800/ton.
SAIL (SAIL IN, UPF): We expect Ebitda of `9.4 bn (Q2 `1.8 bn). We forecast volumes to rise 32% q-o-q and Ebitda/ton of Rs 2,200/ton (Q2 `579/ton).
Hindalco (HNDL IN, Buy): We forecast India Ebitda of `10.5 bn (-1% q-o-q). We expect Al Ebitda (including Utkal) to rise 2% q-o-q, but Cu TCRC to decline 9% q-o-q.
Coal India (COAL IN, Buy): We forecast Ebitda ex OBR of `64 bn (-20% y-o-y) and PAT of `40 bn (-12% y-o-y).