Metal stocks offer growth opportunities, says Jefferies; upgrades JSW Steel, maintains 'buy' on Coal India

Global brokerage Jefferies said in a report that its global metals team is cautiously optimistic for 2024, citing stability in China and a positive macro backdrop in the West. The international brokerage house claims that the combination of Fed rate hikes, a strong dollar, a lacklustre China reopening, weak demand in Europe, and cost inflation made 2023 a difficult year for metals.

In 2024, Jefferies anticipates a more positive turn in the global macro environment due to a weaker dollar, lower bond yields, Fed rate holds or reductions, China's stability, India's booming demand, the continuous energy transition, and limitations on mine supply. The report states that the Jefferies China team believes more investment and supportive fiscal policy in 2024, both of which will accelerate economic growth and prevent deflation.

“We see healthy 6 15% volume CAGR over FY24 26 for (rising power demand) and Tata Steel Ltd/ Ltd (capacity expansions). We remain positive on the sector, but prefer Coal India amid global uncertainties. Our FY25 26E EPS for Coal India are 19 21% above street; its 7.3x FY25E PE and 7% dividend yield are attractive," the brokerage said.

The global brokerage has upgraded JSW Steel Ltd from Underperform to Hold, raising the price target from 700 to 800. The brokerage has maintained a "buy" call on Coal India (price target raised from 425 to 450, Total shareholder return +30%), (price target raised from 660 to 725), and Tata Steel (price target 160).

Indian steel price holding up better The brokerage report states that strong domestic demand (+15% YoY in Apr Nov) helped Indian HRC steel prices hold up better in the 55 60K range in 2023. Although imports increased from October to November, they should decline as the premium of Indian steel prices for landed imports has decreased from 11% to 4% at spot.

Oasis of growth The brokerage claims that in a world mainly devoid of commodity volume growth, Indian metal and mining companies present a bright spot. Beginning of new capacity should propel JSW Steel and Tata Steel's India volume CAGR to a robust 12–15% between FY24 and FY26. A healthy 6% volume CAGR for Coal India over FY24 26E (FY24E: 10%) should be driven by India's strong economic growth outlook and rising power demand.

Good earnings outlook Strong volume growth in steel is anticipated by the brokerage, driven by a rebound in global steel spreads. This is expected to drive FY24–26E EBITDA and EPS CAGRs of: 14% and 21% for JSW Steel; and 29% and 73% for Tata Steel (low base). Coal India's earnings outlook has also improved due to better volume growth and a lower than expected cost trajectory.

Despite a high base, the brokerage anticipate 5% CAGR over FY24–26E for Coal India's EPS, which increased from a peak of 28 in FY10–22 to 46–48 in FY23–24E. “A cyclical recovery at Novelis should drive 10% EPS CAGR for Hindalco over FY24 26E. Our FY25 26 estimates assume: 1) India steel price of 58.0 58.5K (spot 56.5K), 2) coking coal price of $275 (spot $327), and 3) aluminum price of US $2,300 (spot $2,294)," the brokerage said.

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