Why Jefferies Is Upbeat On India’s Metal Sector
Jefferies remained upbeat on India’s metals sector as global steel and aluminium prices rebound, and demand improves amid supply pressures on account of the focus on lowering emissions in China and Japan.
“Asian hot-rolled coil (flat) steel prices softened ahead of the Chinese New Year but have strengthened again since mid-February, and are up nearly 10%, after rising close to 40% in 2020. European steel prices have rallied even harder, up 26%,” the research firm said in a report. “Steel prices in China and Europe are now at the highest in a decade. LME aluminium price has also risen 13% since mid-Feb and is now at a three-year high.”
Indian HRC steel prices, according to Jefferies, corrected from their peak of Rs 57,500 a tonne in January to Rs 53,500 in March, but have since slightly improved to Rs 54,500 per tonne. “With the recent rally in Asian steel prices, Indian HRC prices are now at a 7-10% discount to landed imports.”
Demand in India, it said, too, has risen more than 13% year-on-year in the first two months of 2021. That caused net exports to fall from an average of 0.9 million tonnes per month between May and September to 0.1 MT a month in the October-February period. “Hence, Indian prices have room to rise in the near term if Asian prices hold up,” Jefferies said. “The sustainability of Asian spot steel prices at the current high levels remains a key uncertainty, but our FY22-23 estimates for Indian steel prices are 11-12% below spot and already factor in a large cushion.”
Also, the metal and mining sector is facing a rising intensity of environmental pressures. The steel industry is responsible for 14-15% of the carbon emissions in China and Japan, Jefferies’ note said. China’s Tangshan city has imposed production restrictions on 23 steelmakers, which is likely to impact the country steel production by about 2% in 2021. In Japan, Nippon Steel is closing down five of its 15 blast furnaces, shutting down 10-MTPA of capacity, the research firm said. China’s rising green focus could start to weigh on the country’s aluminium production as well. “These supply pressures are manifesting amid improving demand led by a synchronised recovery in global manufacturing and potential infrastructure stimulus across regions.”
Jefferies listed Tata Steel Ltd. and Hindalco Industries Ltd. as top picks in the metals segment despite their recent outperformance. “Both stocks have almost doubled since end-September, outperforming the Nifty by 60-70%. However, valuations at 1x FY22 estimated price-to-book still offer room for upside.” The research firm raised its price targets on JSW Steel Ltd. and Tata Steel and maintained its ‘hold’ rating on Coal India Ltd.
Here’s what Jefferies said about its picks within the sector...
- Maintains ‘buy’ rating and raises price target to Rs 915 apiece from Rs 900.
- Recovery in global and Indian steel demand and prices are driving margins for the company.
- The availability of captive Iron ore in India is positive amid elevated global prices.
- A focus on deleveraging ahead of India capacity expansion is prudent given a stretched balance sheet.
- European business has been a drag but prices are recovering here as well.
- Maintains ‘hold’ rating and a price target of Rs 130 apiece.
- Expects dispatches of 575 million, 611 million and 642 million tonnes over FY21-23E.
- Factor in linkage price hikes of 5% and 3% in FY22 and FY23, respectively.
- Ebitda may fall to Rs 18,100 crore in FY21E but may rebound to Rs 21,100 crore and Rs 22,400 crore in FY22E and FY23E.
- Maintains ‘buy’ rating and a price target of Rs 390 apiece.
- Expects Novelis Ebitda per tonne to rise to $460 in FY21 and to $495-500 in FY22-23.
- Strong volume and margin outlook for Novelis.
- Expects sharp deleveraging over the next two years.
- Higher share of downstream has resulted in lower Ebitda volatility versus Tata Steel and JSW Steel.
- Maintains ‘buy’ rating, hikes price target to Rs 510 apiece from Rs 450.
- Start of 5-MTPA brownfield expansion, along with improving steel prices should drive strong top-line growth.
- Margins may improve despite a shift in iron ore sourcing to captive mines, which may push up costs.
- Bhushan Power acquisition remains uncertain but the scope for brownfield expansion provides scope for long-term value creation.