Weak demand, trade war to impact metals companies’ numbers

Steel-2---reutersET Intelligence Group: Latest earnings of the top metals companies show that earnings cycle for the sector has peaked out in 2019. In the March quarter, top seven metal companies reported a decline in earnings after consecutive strong seven quarters, primarily due to metal prices coming off. Going forward, earnings could come under further pressure given the weak global demand and overhang of global trade war.

Out of top eight metal companies which include JSW Steel, Jindal Steel, Hindalco, Vedanta, Hindustan ZincNSE -0.20 %, SAIL, Tata Steel (after adjusting for Bhushan SteelNSE 0.16 %) and Jindal Stainless witnessed 8 per cent to 28 per cent earnings(EBIDTA) decline. Lower earnings and high debt of most metal companies could put these companies under severe pressure. Some of the companies including SAIL and Jindal Steel already have debt to EBIDTA of near 5 times. Considering this, any bounce back in their stock prices could be a good opportunity to exit.

The earnings of Indian metal companies are primarily linked to steel, aluminium and zinc prices. Despite the sharp bounce back from the lows of 2018, steel prices are still 15 per cent down from the peak of previous year. Analysts expect the steel prices to remain under pressure owing to cheap imports in India after trade restrictions in the US. This is negative for Tata Steel, JSW Steel, SAIL and Jindal Steel & Power. While the recent acquisitions of Bhushan group’s assets have risen the debt of Tata Steel and JSW Steel and hurt their profitability in the coming quarters besides rising leverage. Other steel companies Jindal Steel and SAIL are already heavily leveraged. LME Aluminium prices are at two-year lows (near 30 per cent down from a year ago levels). This is negative for Hindalco and Vedanta. While the debt does not appear high for these companies on the consolidated levels, the groups remain heavily leveraged as cash from one subsidiary to other leads to heavy tax leakages thus impacting debt paying abilities.

With the recent developments, analysts have turned negative and this could result in earnings downgrades.

“Domestic steel demand remains muted in May 2019, due to slower demand growth in auto and demand postponement in infra. Declining import offers amidst slow demand kept domestic prices under pressure. Domestic producers will try to increase prices in June to offset part of hike in iron ore prices, but it would be difficult for the market to absorb the hike,” said Ashish Kejriwal with IDFC securities in a recent note.

Amix Dixit, lead metals analysts with Edelweiss Securities, too, has a similar view and is concerned about the profitability of metal companies. “We expect profitability to come under further pressure as steel/aluminium prices have eroded further and global demand is placid,” he said.