Why Jefferies is bullish on the metals sector in India

Jefferies remained bullish on the Indian metals sector as global steel and aluminum prices rebound and demand improves amid supply pressures due to the focus on reduction of emissions in China and Japan.

“Hot-rolled (flat) steel prices in Asia softened ahead of the Chinese New Year, but have strengthened again since mid-February and are up nearly 10%, after rising nearly 40% in 2020, up 26%, ”the research firm said in a report. “Steel prices in China and Europe are now at their highest for a decade. The price of aluminum at the LME has also increased 13% since mid-February and is now at its highest level in three years.

Indian HRC steel prices, according to Jefferies, corrected from their peak of Rs 57,500 per tonne in January to Rs 53,500 in March, but have since improved slightly to Rs 54,500 per tonne. “With the recent rise in steel prices in Asia, Indian HRC prices are now 7-10% lower than landed imports. “

Demand in India, he also said, grew by more than 13% year-on-year in the first two months of 2021. This caused net exports to fall by an average of 0.9 million tonnes. per month between May and September at 0.1 MT per month in October-February. “Therefore, Indian prices may rise in the short term if Asian prices hold up,” Jefferies said. “The sustainability of Asian steel spot prices at current high levels remains a key uncertainty, but our estimates for fiscal year 22-23 of Indian steel prices are 11-12% below the spot price and already take into account an important cushion. “

In addition, the metals and mining sector is facing an increasing intensity of environmental pressures. The steel industry is responsible for 14 to 15% of carbon emissions in China and Japan, according to the Jefferies note. The Chinese city of Tangshan has imposed production restrictions on 23 steelmakers, which is expected to impact the country’s steel production by around 2% in 2021. In Japan, Nippon Steel is shutting down five of its 15 blast furnaces, thus shutting down 10-MTPA of capacity, says the research firm. China’s growing green focus may also start to weigh on the country’s aluminum production. “These supply pressures are manifesting against a backdrop of improving demand driven by a synchronized recovery in global manufacturing and a potential revival of infrastructure in all regions.”

Jefferies classified Tata Steel Ltd. and Hindalco Industries Ltd. among the best choices in the metals segment despite their recent outperformance. “Both stocks have almost doubled since the end of September, outperforming the Nifty by 60 to 70%. However, valuations at 1x the estimated accounting price for fiscal year 22 still offer room for improvement. The research firm raised its price targets for JSW Steel Ltd. and Tata Steel and maintained its hold rating on Coal India Ltd.

Here’s what Jefferies said about his picks in the industry …

Steel tata

  • Maintains the buy rating and increases the target price to Rs 915 each against Rs 900.
  • The recovery in global and Indian steel demand and prices is boosting the company’s margins.
  • The availability of captive iron ore in India is positive amid high global prices.
  • It is prudent to focus on deleveraging ahead of India’s capacity expansion given a tight balance sheet.
  • European affairs have been a drag, but prices are also picking up here.

Coal India

  • Maintains the “hold” rating and a target price of Rs 130 each.
  • Project shipments of 575 million, 611 million and 642 million tonnes during FY21-23E.
  • Factor in the 5% and 3% link price increases in FY 22 and 23, respectively.
  • Ebitda could fall to Rs 18,100 crore in FY21E but could rebound to Rs 21,100 crore and Rs 22,400 crore in FY22E and FY23E.


  • Maintains the buy rating and a target price of Rs 390 each.
  • Novelis EBITDA per tonne is expected to reach $ 460 in FY21 and $ 495-500 in FY22-23.
  • Strong volume and margin prospects for Novelis.
  • Expects strong deleveraging over the next two years.
  • A higher share of the downstream resulted in lower EBITDA volatility relative to Tata Steel and JSW Steel.

JSW steel

  • Maintain purchase rating, increase target price to Rs 510 each against Rs 450.
  • The start of the 5 MTPA brownfield expansion, as well as improving steel prices are expected to result in strong revenue growth.
  • Margins could improve despite a shift in iron ore supply to captive mines, which could drive up costs.
  • The acquisition of Bhushan Power remains uncertain, but the potential for brownfield expansion offers opportunities for long-term value creation.

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