Domestic brokerage firm Ventura Securities has initiated coverage on Lloyds Metals & Energy with a 'buy' tag and a DCF-based target price of ₹1,040 apiece, which reflects an upside potential of 171% from the stock's previous closing price of ₹383.50.
In the bull case scenario, Lloyds Metals' stock price is projected to scale to ₹1,362/share, an upside of nearly 255% from the stock's LTP. In the bear-case scenario, the brokerage has set the target price of ₹586 apiece, representing a 52% upside.
The company is in the business of manufacturing of sponge iron (DRI), power generation, and iron ore mining activities. It is the largest coal-based DRI manufacturer in Maharashtra.
The company's shares over the last three years have generated a phenomenal return of 3634%, moving from 10.27 apiece to ₹383.50.
Amid this upward trend, the brokerage has identified the following key factors that are expected to propel Lloyds Metals stock to even more heights:
Extension of captive iron ore mines: The company obtained a substantial 30-year extension for its captive iron ore mines at Surjagarh. The lease agreement, originally set to expire in 2027, has now been prolonged until 2057. This extension ensures uninterrupted access to iron ore, benefiting both LMEL's internal consumption and external sales operations, said the brokerage.
As the mining licenses of competitors are set to expire between CY30 and CY40, they will need to participate in auctions, potentially driving up mining costs due to increased competition. LMEL, with its lease extended until 2057, stands as a preferred choice in this scenario, offering favorable return ratios, it highlighted.
Iron ore extraction increased to 10 MMTPA: The company has received official approval to augment the threshold limit of iron ore extraction from 3 MMTPA to 10 MMTPA. The brokerage highlights that the iron ore sector boasts superior EBITDA margins in comparison to the steel business.
With an extended lease period and an increased output capacity, LMEL is poised to generate robust operating cash flows in the forthcoming year, it added.
Strategically located: The brokerage has pointed out that the company's iron ore mines occupy a strategically advantageous position at the heart of India, positioning them equidistant from numerous steel plants spread across the country.
Capitalizing on this geographic advantage, it said the company has adeptly leveraged its proximity to various steel players, effectively selling surplus iron ore output and generating additional income with superior profit margins.
Healthy demand trends going forward for iron ore: India's steel production is projected to reach 300 million tonnes in the next seven years, driven by increasing demand from various sectors. This growth will require a higher iron ore supply, surpassing the current production of 255 million tonnes in India. LMEL's strategic location makes it a viable option for steel plants, the brokerage noted.
Expansion of DRI facilities: The company plans to expand its existing DRI facility in Ghugus to 670,000 TPA by FY26. In addition to the existing facility, LMEL has plans to establish a new greenfield DRI facility of 72,000 TPA in Konsari, which is scheduled to commence operations in FY24.
The company is also establishing a pellet plant in Konsari with an initial capacity of 4.0 MTPA, expected to expand to 8.0 MTPA by FY27. It is also setting up a hot metal facility and a wire rod facility in Ghugus, aiming to increase their capacities in the coming years.
According to brokerage, these investments in Ghugus signify LMEL's dedication to expanding its steel manufacturing capabilities, indicating a strategic shift from being primarily an iron ore and DRI company to a comprehensive steel manufacturer.
Maintaining a debt-free balance sheet: LMEL's expansion plan entails an estimated capex of ₹6,500–7,000 crore over FY24–27, entirely financed by internal accruals. The company anticipates maintaining a debt-free balance sheet and expects significant operating cash flow from increased iron ore production.
Subsidies from the state government (in the form of SGST refunds) are expected to cover 110% of the Chandrapur project and 150% of the Gadhchiroli project's capex over 12 years. This recovery, according to brokerage, will boost operating cash flow and improve the company's financial health.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.