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CPI Preview: Inflation to fall below 14% YoY in May

Engineering Sector: Uptick in demand and higher selling prices to boost profitability in 2QFY21

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January 13, 2021 (MLN): The engineering sector’s raw material prices have been on an upward trend since September 2020 owing to covid induced supply disruption, higher freight charges, robust demand from China, winter led drop in production globally, and higher industrial demand.

Over the last few months, International scrap prices have shown significant growth. Since Nov’20, the prices surged by 52% which now currently hover around USD 426 per ton. The increase in international scrap prices caused the Rebar prices to grow by Rs 17,000 per ton i.e. around 15% during the month of Dec-2020 alone.

According to the report by Taurus Securities, the prices of international scrap are expected to hover around USD 480 to 490 per ton going forward. This will put extra pressure on steel players to pass on the costs as 60 to 70% of raw material cost is attributable to imported steel scrap.

Going by the report, on account of soaring scrap prices, domestic long steel players have been increasing rebar prices lately, currently selling at price levels of Rs 139,500 –140,500 per ton, as per industry sources.  The estimates projected in the report suggest that on average, rebar prices have increased up to around 21% since Nov’20, increasing the cost of construction activities. In addition, prices of ungraded scrap have also surged, currently selling at around Rs 84,000 -85,000 per ton, up by 18% since Dec’20.

This indicates that soaring international prices may shift the demand curve towards locally available scrap, widening the market for ungraded steel, especially for use in low-cost housing projects.

On the earnings front, the engineering sector is expected to post significant growth during 2QFY21 led by an uptick in demand and higher selling prices during the quarter (leading to inventory gains) amid rising international prices, another report by Ismail Iqbal Securities revealed.

As per the projections put forwarded in the report, within flat steel manufacturers, International Steels Limited (ISL) is expected to post earnings per share (EPS) of Rs 2.8 in 2QFY21 against Rs 0.3/share reported in the corresponding period last year. While Aisha Steels Limited (ASL) is expected to post EPS of Rs 1.7 compared to a loss per share (LPS) of Rs 0.2 reported in the corresponding quarter of last year.

With regards to gross margins, due to the increase in selling price, the average gross margin for the flat steel manufactures is projected to float around 17% during the quarter against 7.5% reported in 2QFY20.

In the long steel manufacturing segment, Amreli Steels Limited (ASTL) is anticipated to report an EPS of Rs1.6 in 2QFY21 as opposed to the LPS of Rs 0.8 in the same quarter, a year ago. Similarly, Mughal Iron & Steel Industries (MUGHAL), is anticipated to report a higher EPS of Rs 2.7 against Rs 0.4 posted in 2QFY20.

The recovery in profitability is supported by better absorption of fixed costs due to growth in volumetric sales, higher selling price during the quarter, and inventory gains, the report added.

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Posted on: 2021-01-13T17:05:00+05:00