Metal sector Q1FY24 preview: Margins likely to fall on price weakness, says Kotak Equities; Jindal Steel top buy
Vedanta Ltd, Hindustan Zinc Ltd, Steel Authority of India Ltd, and Vedanta Ltd. The brokerage firm expects Indian metal shares to continue to suffer from the conflict between the downturn in the West and expectations for a Chinese resurgence.
"Steel margins in 1QFY24 should remain under pressure but recover in 2QFY23E on cost deflation. We see attractive risk-reward at current valuations in select stocks, given the strong growth prospects.
We expect aluminum prices and margins to remain under pressure due to fading global energy cost support and find risk-reward unfavourable in base metals," said the brokerage in its report. Price reductions and the utilisation of high-cost coking coal inventory, according to the brokerage, will cause margins to fall by around ₹2,000/ton (quarter-on-quarter) qoq in 1QFY24E.
Additionally, the brokerage anticipates an average decline in steel realisation of approximately ₹1,250/ton qoq, driven by price cuts, partially offset by contract resets and better product mix during the quarter; an increase in coking coal costs of approximately US$10/ton and an increase in iron ore prices of approximately ₹500–600/ton for non-integrated producers, assuming a lag in consumption; and an estimate of approximately 19% volume growth year over year (yoy) during the quarter. “For Tata Steel’s Europe division, we estimate an Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) loss of US$81/ton (US$92/ton loss in 4QFY23), led by weak demand, shutdowns and higher costs.
While for NMDC, we estimate EBITDA/ton to decrease sequentially to ₹1,709/ton (down 30% yoy and 1.7% qoq), mainly due to back-ended price cuts in 1QFY24E," said the brokerage in its report. For base metal companies in
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