Metals and mining companies hit hard due to shrinking margins

- Adverse impact of sharp increase in cost of production including higher cost of raw materials and power-fuel

In the second quarter of the current financial year i.e. from July to September 2022, the financial performance of mining and metal companies suffered a major blow. Consolidated net profit of listed metal and mining companies fell by 91.4 percent in the quarter to Rs. 2,139.3 crores which is Rs. 24,738 crore, metal and mining companies contributed the least to corporate earnings during the second quarter of FY2023 while their contribution was the highest in FY2022.

Metals and mining companies such as Tata Steel, JSW Steel, Vedanta, Hindalco and Coal India were the most profitable after oil and gas companies in the non-financial category in FY22. In FY22, these companies reported a year-on-year growth of 125 percent in consolidated earnings.

In contrast, top steel companies such as Tata Steel performed worst in the second quarter of 2023. For example, in the second quarter of the current financial year, JSWA made Rs. 1,396 crore reported an adjusted net loss.

Which in the previous year period was Rs. 7,170 crore against an adjusted net profit of Rs. Tata Steel's consolidated net profit also fell by 87 percent in the second quarter of the current financial year to Rs. 1,524 crores which is Rs. 11,503 crores.

Earnings of metals and mining companies were hit by margin contraction during the second quarter. Revenues on sales started to decline due to increase in operating expenses during the quarter. The industry's Ebitda or operating margin fell by more than 50 percent to 12.1 percent during the quarter from 29.7 percent in the year-ago quarter.

Industry margins were the lowest in five years during the second quarter. The first quarter of financial year 2020 is an exception as during that time the economy was under lockdown due to Corona.

Margins were under pressure mainly due to sharp increase in production costs including raw material, power and fuel costs. In the second quarter of fiscal 2023, metals and mining companies' raw material head expenditure increased by 49.6 percent year-on-year. Thirty-two percent of companies in the sector grew consolidated net sales by just 12.3 percent, the weakest pace in eight quarters.

During the quarter, out of every Rs 100 spent on raw materials by these companies, around Rs. 48 was 36 percent higher than the same period a year ago. Also, this is the highest figure in the last five years, similarly, power and fuel costs were 8.8 percent of net sales in the September 2023 quarter as against 5.3 percent in the year-ago period.

Although the industry made savings on wages during this period, it was not enough to meet the large increase in other operating costs. During this quarter, the consolidated expenses of these companies under the head of salaries have decreased by 3 percent. Analysts believe that earnings in the metals and mining industry are likely to remain under pressure in the near-medium term.