PL Sector Report - Metals & Mining - Oct-Dec'23 Earnings Preview – Quarter affected by imports and higher RM

Metals & Mining – Tushar Chaurdhari – Research Analyst, Prabhudas Lilladher Pvt Ltd

Oct-Dec'23 Earnings Preview – Quarter affected by imports and higher RM

We expect our metals coverage universe to report weak performance in 3QFY24 with Revenue/EBITDA/PAT growth of ~0%/0%/-17% QoQ (~4%/30%/121% YoY) given sluggish steel prices and higher coking coal prices. Domestic demand was relatively weak in this quarter, affected by festivities and state elections. Steel prices declined post October on higher imports. Though low cost coking coal inventory of earlier months will aid profitability in this quarter yet steel companies may require price hikes in upcoming months to maintain margins, in our view. Key monitorables to watch out are 1) GoI’s stand on rising imports, 2) rising coking coal prices, 3) progress on capex and 4) demand from China & developed countries. Our top picks are NMDC, Jindal Steel & Power and Hindalco.

Weak sequential performance for steel: Steel companies are expected to deliver weak sequential performance as 1) EBITDA per ton stands impacted by lower increase in NSR, 2) RM prices remain higher and 3) op. leverage stands relatively lower. Companies will benefit from prior period low cost coking coal inventories in 2HFY24 and depending upon inventory lag will deliver 3Q performance. We expect average realization to increase 1-3% for the quarter, despite weak HRC prices due to long term OEM contracts and relatively better long product prices. Flat steel products have declined 1% QoQ, while long steel products have increased 4% QoQ. A recent sharp jump in coking coal prices may dent steel margins in 4QFY24, unless price hikes are taken. Currently, domestic steel prices are at substantial discount on import parity basis and this may restrain imports going forward.

LME prices remains range bound: Performance of non-ferrous companies under our universe are expected to improve on stable LME aluminium prices (+2% QoQ) and better volumes. HNDL’s copper volumes would be impacted due to maintenance shutdown, while Novelis is relatively weaker in seasonally weak quarter. Falling TcRc margins due to reduction in global concentrate mining could impact in near term. NALCO is expected to benefit from ramping up of Utkal-D mine & alumina volumes and better alumina prices (4% QoQ).

Key changes in estimates/ratings: TATA- We cut our FY24/25E EBITDA estimates by ~9% each given weak TSE spreads plus high repairs/maintenance expenses at TSUK and downgrade the rating from Buy to ‘Accumulate’ at revised TP of Rs140 (from earlier Rs138) on higher than expected losses from TSE in the near term. Progress on ongoing consultation with unions is awaited and can delay the entire TSUK transition by few quarters. SAIL- We downward revise our FY24E EPS by 14%, given reduction in steel spreads and maintain ‘Accumulate’ rating with revised TP of Rs92 (earlier Rs95). NMDC- We increase our FY24/FY25E earnings estimates by 7%/17% given rising iron ore prices in mid-November (NSR +7% QoQ) then again in January and upgrade the rating to ‘Buy’ from Accumulate with revised TP of Rs261 based on 6xFY26E EV/EBITDA (from earlier TP of Rs176 on 5x multiple) on stronger than expected delivery on both volumes and prices.

For all companies in our universe, we roll forward to Mar-26E and maintain ratings with revision in TP (Refer to Exhibit19).

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