Steel Earnings Preview | Operating profit per tonne may improve after four quarters

A sequential cool off in raw material costs will aid non-integrated players to a larger extent. Coking coal costs are expected to decline by $80-100 per tonne, while iron ore costs may decline by nearly $500-750 per tonne.

Volumes for the industry may grow 13 percent from last year on a low base, despite exports being weak. Steel margins may recover by as much as Rs 4,000 per tonne during the quarter, but it will still be nearly half of the same period last year.

On to the operating profit or EBITDA per tonne front, JSW Steel will delivery the biggest jump on a sequential basis, followed by SAIL, Tata Steel, and JSPL. EBITDA per tonne for Tata Steel's European business is likely to be a loss, due to a significant drop in prices and weak demand, resulting in an adverse product mix.

As the operating profit of companies may fluctuate, lets take a look at the price-to-book ratios for companies to understand their valuation picture. The ratio is at par with averages, but as we know, metals is more about momentum.

Going ahead, China's reopening will be the most critical element for these companies. What also needs to be seen is the kind of stimulus the Chinese government provides its ailing real estate sector.

Back home, a pick up in domestic demand will be tracked as restocking takes place. Volumes can improve further as the export avenue reopens post the duty removal. There could also be some benefit of higher prices, but that would partly be offset by higher raw material costs.

Amit Dixit of ICICI Securities said that there is still headroom for domestic players to increase prices. Dixit also said that here is too much optimism around China and one will have to wait for Chinese policies post their new year.

Among specific stocks, Dixit prefers JSPL and believes that it is well placed as long steel players may fare well. He does not see much growth in SAIL's spreads from a risk-reward perspective, adding that JSW Steel's valuations are at an absolute high. Dixit further said that global factors may not play out as well as investors are factoring them.