India’s metals sector plays a pivotal role in fulfilling the nation's increasing infrastructure demands and supporting its evolving manufacturing sector. Indian steel consumption is expected to grow strong by 9% to 142 mt over FY23–25E, led by the government's strong focus on building infrastructure, recovering automobile industry volumes with rising affordability and electrification trend, rising urbanization driving strong volumes in the real estate sector, and increasing private capex utilization across industries, said domestic brokerage firm Prabhudas Lilladher.
Prabhudas Lilladher initiates coverage on metals and mining sector; recommends a 'buy' rating on five stocks
Indian steel consumption is expected to grow by 9% to 142 million tonnes over FY23-25E, driven by infrastructure development, recovering automobile industry volumes, rising urbanization, and increasing private capex utilization.
Indian steel companies are expected to add 22 mt of capacities over the next two years and drive volume growth. However, the brokerage said the near-term global demand is muted, led by a weaker China and developed nations struggling with inflation and higher interest rates, both of which are peaking.
The brokerage notes that while coking coal prices are projected to moderate owing to improved supply conditions, the weakness in iron ore prices will hinge on China's gradual economic recovery in the coming quarters.
As Chinese GDP growth is expected to be stimulus and consumption driven, demand recovery will be slow and steel prices may bottom out as the industry is making losses. With curtailed production in 2HFY24, the brokerage expects pricing to get support, and it said Indian players would be the ultimate beneficiaries of the same.
Considering strong underlying demand along with healthy growth momentum, the brokerage has initiated coverage on the metals sector and recommends a 'buy' rating on JSW Steel, Jindal Steel & Power, Jindal Stainless, Hindalco Industries, Tata Steel and the brokerage has given a 'accumulate' rating on SAIL, NMDC, and NACL.
JSWL Steel: Beneficiary of strong volume growth
For JSW Steel, the brokerage sets a target price of ₹926 apiece. It highlighted that the company is well positioned to capitalize on strong volume growth in domestic markets over the next two years given its brownfield expansion at Vijayanagar. This expansion will take the company's total steel-producing capacity to 35 MTPA by the end of FY24.
Being India's lowest-cost steel producer, JSW Steel stands to benefit from fallen raw material prices, while enhanced raw material security contributes to consistency and yield improvement. The company's focus on value-added products and a specialized portfolio is set to improve its product mix and enhance resilience against steel price volatility, the brokerage stated.
Tata Steel: A Mixed Play on Volumes & Margins
The brokerage believes Tata Steel India (TSI) is well-placed to capitalize on strong volume growth in the domestic steel market. The brokerage forecasts solid earnings growth over the next few years, driven by double-digit volume growth potential post-commissioning of 5 mtpa KPO II by Q1FY25.
Continuous deleveraging without compromising planned capex keeps the balance sheet robust while falling coking coal prices and a tight global steel market favourably impact Tata Steel Europe's prospects, it added.
The brokerage has given a 'buy' call on the stock with a target price of ₹137.
Jindal Steel & Power: Dual Benefit of Volumes and Product Mix
The brokerage has assigned a target price of ₹812 apiece for Jindal Steel & Power with a 'buy' rating as it believes the company is well poised to take the dual benefit of strong volume growth and improvement in product mix over FY23–25E, given a strong 16% CAGR in steel volumes owing to ongoing Angul capacity expansion.
Further, it expects the commissioning of a 5.5 mtpa Hot Strip Mill (HSM) will improve the product mix and increase flat products share from 33% to over 60%. Additionally, JSP's upcoming 12 mtpa pellet plant, 18 mtpa slurry pipeline, and acquisition of four coal blocks are expected to bolster margins and overall operational efficiency, it noted.
Jindal Stainless: Beneficiary of strong volume growth
The brokerage points out that the company is well placed to capitalize on strong volume growth in domestic markets over the next two years given its recently completed brownfield expansion at Jajpur, which is projected to yield a 17% volume CAGR.
Jindal Stainless is likely to benefit from the strong demand for stainless steel (SS) in India due to its durability and corrosion-resistant properties. The brokerage also highlights the company's strong pricing power demonstrated post-Russian invasion of Ukraine, despite rising raw material prices.
The brokerage also said the company has established the necessary backend infrastructure at Jajpur to facilitate future expansion endeavours.
With a 'buy' rating, Prabhudas Lilladher sets a target price of ₹484 apiece for Jindal Stainless.
Hindalco Industries: Beneficiary of Strong Volume Growth
The brokerage highlights that Hindalco's increased investments in high-margin downstream units in India and the USA have strategically positioned the company to tap into the undersupplied North American 'CAN sheet' market.
It believes that Hindalco is best placed among its metals peers, driven by factors including the anticipated gradual enhancement of Novelis' per ton EBITDA in the upcoming quarters due to resilient European markets and growing consumer demand in China.
Additionally, the brokerage notes the positive impacts of reduced thermal coal prices and the initiation of captive coal mines on Hindalco's Indian operations, as well as the company's heightened focus on high-margin value-added products. Notably, the balance sheet is expected to maintain its health despite significant capital expenditures.
Prabhudas Lilladher assigns a 'buy' rating with a target price of ₹557 based on a SOTP valuation approach.
Steel Authority of India: Pure play on steel prices
"We believe SAIL is a pure play on steel prices, as volume growth would depend on the successful execution of the Capex over the next few years. We expect EBITDA growth to be driven by steel prices in the near term, as its volume growth would depend upon the successful execution of its planned capex in phases from FY25 onwards, and the company has guided 15% volume growth for FY24, which includes 1.4 mt of steel inventory," said the brokerage.
Iron ore mining has multiple issues, which can lead to an uptick in costs over the long term and affect its strategic advantage compared to its peers. Moreover, other legacy costs are declining but are still relatively much higher than peers, it noted.
For Steel Authority of India (SAIL IN), the brokerage assigns an 'accumulate' rating and sets a target price of ₹95 apiece.
NMDC: Play on strong volume growth
According to the brokerage, NMDC is well placed to capitalize on strong volume growth in domestic steel markets over the next two years given its increased focus on mining business post-steel business demerger.
Furthermore, the doubling of railway lines for efficient evacuation and the higher availability of rakes over the next few years are expected to bolster the company's prospects in the upcoming years.
Higher royalty payments could be a concern, expected to be set off by higher volumes. With GoI’s focus on infrastructure and an overall stronger domestic economy, steel demand is expected to remain high over the next few years, supporting iron ore volumes, and the company would be a key beneficiary of the same, the brokerage highlighted.
In light of these factors, Prabhudas Lilladher has given an 'accumulate' rating and a target price of Rs136, factoring in a 20% discount to its 10-year historical average multiple of 5x FY25EV/EBITDA.
National Aluminium: Pure Play on Aluminium Prices
NACL is well placed to benefit from any uptick in aluminium prices given its nearly 100% capacity utilization rate and incremental alumina volumes, expected to flow from 4QFY25.
The timely opening of coal mines would accelerate cost savings in the near term, and the development of strategic minerals would benefit over the long run, according to the brokerage.
The company has stepped up investments in its upstream smelting and refining units, with plans to double the smelting capacity from 460 ktpa to 960 ktpa and add 1 mtpa of refining capacity to reach 3.3 mtpa capacity, it stated.
For NACL, the brokerage has given an 'accumulate’ rating with a target price of ₹97 apiece, based on 5x FY25E EV/EBITDA.
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