PL Sector Report: Metals & Mining - Sector Report – Strong India growth & gradual global recovery
Prabhudas Lilladher Pvt Ltd
Metals & Mining - Tushar Chaudhari - Research Analyst, Prabhudas Lilladher Pvt Ltd
Sector Report – Strong India growth & gradual global recovery
India’s metal sector plays a pivotal role in fulfilling nation's increasing infrastructure demands and supporting its evolving manufacturing sector. Indian steel consumption is expected to grow strong 9% to 142mt over FY23-25E led by a) GOI’s strong focus on building infrastructure, b) recovering automobile industry volumes with rising affordability and electrification trend, c) rising urbanization driving strong volumes in realty sector and d) increasing private capex utilization across industries. Indian steel companies are expected to add ~22mt of capacities over next two years and drive volume growth. However, near term global demand is muted led by weaker China and developed nations struggling from inflation and higher interest rates, both peaking out. Though coking coal prices are expected to moderate due to improved supply conditions, Iron ore prices are weak and would trend depending upon China’s gradual recovery over next few 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 industry is making losses. With curtailed production in 2HFY24, we expect pricing to get support and thereby Indian players would be ultimate beneficiaries of the same.
Considering strong underlying demand along with healthy growth momentum, we initiate coverage on Metals sector and recommend ‘BUY’ rating on JSW Steel (JSTL; on 7x EV/EBITDA based TP of Rs926), Tata Steel (TATA; on SOTP based TP of Rs137), Jindal Steel & Power (JSP; on 6x EV/EBITDA based TP of Rs812), Jindal Stainless (JDSL; on 6.5x EV/EBITDA based TP of Rs484) & Hindalco Industries (HNDL; on 6x EV/EBITDA based TP of Rs557) and ‘ACCUMULATE’ rating on Steel Authority of India Limited (SAIL; on 5.5x EV/EBITDA based TP of Rs95) and National Mineral Development Corporation (NMDC; on 5x EV/EBITDA based TP of Rs136) & National Aluminium Company Limited (NACL; on 5x EV/EBITDA based TP of Rs97).
§ Metals demand driven by India’s GDP growth momentum: India is expected to grow at much higher rate relative to world and GoI’s continued strong push to infrastructure capex is expected to boost steel demand. With demonstrated resiliency in containing costs and inflation over last 18 months, we expect developed nations to start contributing to metals demand over next two quarters. As there’s strong push on refurbishing infrastructure in most parts of Europe and given US’s commitment to generate employment, we expect demand for metals to improve over next two years supporting prices. We believe global steel prices are bottoming out and can show uptick if there is gradual recovery in demand.
§ Softening raw material prices to aid in margin improvement: With improved supply conditions, coking coal prices are expected to moderate and drive EBITDA margin improvement for steel players. We believe JSTL, JSP and TATA are well placed to benefit from upcoming capacities. With GoI’s increasing shift towards using stainless over carbon steel, usage has increased in India benefiting JDSL. HNDL is biggest beneficiary of gradual recovery in developed nations driving CAN sheet volumes. NMDC is improving its focus on volumes while NACL & SAIL would be pure play on prices.