Long Steel: 4Q profits to tumble on higher scrap prices
Sample long steel companies to decline by 12% on a sequential basis during 4QFY21 mainly due to higher international scrap prices
We believe the sector’s gross margins will narrow as rising rebar prices will only partially offset the impact of higher international scrap prices, Sherman Research said in a report.
It has presented an earnings preview of sample long steel companies for 4QFY21. Board meetings of long steel producers are yet to be announced.
Industry volumes to decline QoQ
Being a construction allied sector, long steel demand is likely to remain slightly weak on a sequential basis during 4QFY21 due to Ramadan and extended holidays on account of Eid.
Thus, in tandem with cement, domestic rebar demand is likely to contract 5-6%QoQ.
Rising prices to support top-line growth
Average rebar prices during 4QFY21 increased by 3% to 142000 per ton as opposed to 138000 per ton in 3QFY21. This price increase is mainly on account of rising international scrap prices – currently at a multi-year high.
Consequently, it expects the sector-top line to arrive at Rs30 billion, courtesy of better rebar prices, higher international copper prices (up 14%QoQ), and improved volumes in June.
The average rebar price during June 2021 was around Rs146.5k/ton.
Sector profits to shrink on a sequential basis
During 4QFY21, international steel scrap prices increased by 9%QoQ to average around US$480/ton.
Despite taking an inventory lag of 90-100 days, it estimates gross margins to remain slightly lower by 3ppts QoQ to 15% in 4QFY21 as rising rebar pricing will partially offset the impact of higher scrap costs.
Thus, sector profitability is likely to decline by 12%QoQ to Rs1.9 billion.
ASTL
Amreli is likely to post EPS of Rs1.0, down by 42%QoQ on higher scrap prices despite sequential improvement in both rebar prices and volumetric sales.
MUGHAL
Mughal is likely to post EPS of Rs4.0, up by 5%QoQ, as rising copper prices (up 14%QoQ) are likely to mitigate lower margins from the ferrous segment.
Read More: Steel rebar prices increased by Rs5,000 per ton
AGHA
Agha Steel is likely to post EPS of Rs0.8, down by 17%QoQ due to lagged impact of higher rebar prices on account of pre-booking by corporate clients.
Margins to improve in 1QFY22
With the GDP target of 4.8% for FY22 and higher PSDP allocation (Rs2.1trn), we expect local long steel demand to remain robust in the near to medium term. Subsequently, Sherman Research believed long steel producers will be able to swiftly pass on the rising cost pressures.
Hence, assuming rebar prices maintain their current level of Rs160.5k/ton to Rs162.5k/ton, we estimate sector gross margins to improve by 3-4ppts in 1QFY22.
The sector is currently trading at FY22 PE of 6.9x, at a discount of 60% versus the historical average.
