The mining and metals sector is anticipated to exhibit a ‘mixed bag performance’ in the second quarter of the fiscal year 2024, according to a report by Nuvama Institutional Equities.
In the Q2FY24 preview report, the brokerage project that reduced costs for coking coal will balance out the decline in steel prices. This balance is expected to result in an increase in earnings before interest, taxes, depreciation, and amortization (EBITDA) for Q2FY24.
On the flip side, the brokerage mentioned that Nonferrous companies' EBITDA is under pressure from lower base metal prices, marginally offset by lower Cop (coefficient of performance) and higher volume.
"Meanwhile, we expect a further increase in steel prices, which should offset rising coal cost, thereby keeping margins steady for ferrous firms in Q3FY24. Jindal Steel & Power Ltd (JSPL) and Coal India are our preferred picks," the Nuvama added in the report.
While there is an anticipation of reduced steel prices, with a decrease of Rs 2,600–3,400 per tonne, this is likely to be balanced out by the decline in coking coal costs, which are expected to drop by $45–60 per ton on a quarter-over-quarter basis. The report foresees that ferrous companies will either maintain stable or potentially even see an increase in their EBITDA per ton, with a potential rise of Rs 14–2,000 per ton quarter-on-quarter.
The estimates also suggest that Steel Authority of India Ltd (SAIL) is poised to outperform, achieving an EBITDA per tonne of approximately Rs 6,262. This notable increase of Rs 2,000 per tonne on a quarter-over-quarter basis is attributed to a surge in production volume and the mitigating effect of decreased coking coal costs, which to some extent counterbalance the impact of lower steel prices.
In the case of non-ferrous industry players, as per the brokerage's analysis, they are expected to experience a margin squeeze, primarily driven by the downward trend in London Metal Exchange (LME) prices.