Metal Q1FY23 Review: Better than expected Q1FY23 performance, aids recent rally in metal stocks

What's Buzzing:

During Q1FY23, within our coverage universe, Coal India, Tata Steel and Hindalco reported better than expected performance.

Context:

During Q1FY23, in general, the performance of large cap metal sector companies has been better than expectations, which has aided the recent rally in metal stocks. For the quarter, Tata Steel healthy performance was supported by robust performance of Tata Steel’s European operations, while healthy performance from Hindalco’s Indian aluminium business was supported by utilisation of lower costs inventory, which resulted in lower costs for the quarter (for Hindalco Indian Aluminium Business). On the mining front, Coal India reported a stellar performance for Q1FY23, aided by healthy e-auction realisations.

Our Perspective:

During Q1FY23, the topline our coverage universe was at Rs 195908 crore, up 26% YoY, but down 10% QoQ, higher than our estimate of Rs 186979 crore. EBITDA for our coverage universe for the quarter was at Rs 40224 crore, down 12% YoY and 15% QoQ, higher than our estimate of Rs 33005 crore. For Q1FY23, aggregate EBITDA margin of the coverage universe was at 20.5% compared to our estimate 17.7%. Ensuing PAT of the coverage universe for the quarter was at Rs 22242 crore higher than our expectation of Rs 17743 crore. Going forward, both for ferrous and non-ferrous players, there could be some margin pressure seen in Q2FY23E. In-case of ferrous players, margin pressure could be due to steep fall in steel prices sequentially, while for non-ferrous players both lower realisation as well as higher costs on a QoQ basis could induce a fall in operating margins sequentially. However, over a medium term, metal companies could witness operating margin recovery during Q3FY23E. As ferrous companies generally carry couple of months of coking coal inventory, the benefit of sharp fall in coking coal costs will likely to reflected during Q3FY22E, thereby aiding their operating performance. Even for non-ferrous players’ operating costs in general are likely to ease during Q3FY22E, which augurs well for them.