Jefferies Turns Cautiously Optimistic on Metals & Mining Outlook for 2024; Sees 28% Upside in Coal India

Manoj Prasad

Global brokerage Jefferies has turned cautiously optimistic on the metals and mining sector outlook for 2024, expecting a more positive macro backdrop in the developed world and stability in China.

This, along with strong volume growth and lower costs, has significantly improved earnings outlook for companies like Coal India (NSE: COALINDIA), where Jefferies sees a 28% total stock return potential.

Jefferies Forecasts Supportive Backdrop for Metals and Mining in 2024

Jefferies’ global metals team expects the macro environment to turn more constructive for the metals and mining space in 2024, aided by several factors:

  • Potentially weaker US dollar and lower bond yields if the Fed pauses rate hikes and cuts rates later
  • Demand strength returning in several key emerging markets
  • Greater stability in China with more supportive fiscal policies focused on investment and growth
  • Continued strong demand growth in India amid rapid industrialization
  • Ongoing demand for metals driven by global energy transition and decarbonization trends
  • Supply-side constraints limiting production growth for many mines

This confluence of factors, both on the demand and supply side, has made Jefferies cautiously optimistic on the sector outlook after recent downturns.

Why Jefferies Prefers Coal India Over Tata Steel and Hindalco

Updating its coverage of leading Indian metal and mining names, Jefferies indicated its preference for Coal India over Tata Steel and Hindalco Industries:

  • For Coal India (CMP: Rs 330, PT: Rs 425, Upside: 28%), Jefferies highlighted greatly improved volume growth trajectory likely to sustain given robust power demand in India. The impact of wage hikes and lower e-auction prices has already been absorbed, leading to expectations of solid 5% EPS CAGR over FY23-26 despite high base. Attractive valuations at 7x FY25 P/E.
  • Tata Steel (CMP: Rs 112, PT: Rs 160) should benefit from rising India share in total volumes and potential recovery in Asian steel spreads from decade lows. However, spread contraction risk remains higher compared to Coal India’s earnings visibility.
  • In case of Hindalco Industries (CMP: Rs 430, PT: Rs 660), Novelis’s rising penetration in auto and shift from plastics/glass to aluminum in beverage cans provides medium-term earnings tailwinds. But higher volatility in Indian aluminum business versus Coal India’s stable domestic coal outlook.

Thus, Jefferies sees Coal India offering the best risk-reward within the sector presently.

Here’s Why Jefferies Believes Coal India’s Earnings Outlook Has Significantly Improved

Updating projections after 9MFY23 results, Jefferies has raised Coal India’s FY24-25 earnings estimates by 11-18% over consensus forecasts. The key driving factors behind the upgraded projections:

  • Coal India already delivered 14% volume growth in 9MFY23, marking an acceleration over prior years’ single-digit growth
  • Strong power demand environment in India, rising electrification and growing population sets stage for sustaining high mid-single digit volume growth
  • Wage cost increase mostly absorbed in FY23, limiting cost increase going ahead
  • Focus on surface miners improving production mix and average realization
  • Production from high efficiency mines also rising faster, aiding cost performance
  • Jefferies sees earnings visibility over next 3 years higher than typical commodity cyclical names

The confluence of strong volume growthtrajectory along with cost inflation lagging price hikes should drive significant margin expansion and EPS growthsustainability for Coal India after temporary setbacks.

Valuing Coal India at reasonable 8x FY26 P/E, Jefferies arrives at price target of Rs 425. Including dividends, this offers healthy 28% total stock returnover 12 months.

Asian Steel Spreads Could Recover in 2024 from Decade Lows on China Stability

Updating metals segment outlook, Jefferies notes Asian HRC steel prices have rebounded 8% over the past two months as end-user demand shows some signs of bottoming out.

However, Asian steel spread is still lingering around lowest levels seen in the past decade amid China’s struggling real estate sector weighing on construction steel demand along with recession risks in developed markets.

Nonetheless, Jefferies’ China economist team believes risks of deflation have significantly reduced now. With expectations of more supportive fiscal policy focused on infrastructure spending and preventing below-target GDP growth, China’s steel demand could recover gradually through 2024.

Hence, Asian steel spreads could witness upside recovery from current lows as China demand outlook turns stable. This would provide earnings tailwinds for Indian steel makers over the course of next year.

Tata Steel Should Benefit from Rising India Volumes, But Spreads Pose Risk

As part of coverage update, Jefferies has also raised its price target on Tata Steel (NSE: TATASTEEL) by 10% from Rs 145 earlier to Rs 160 now. Drivers for the upward revision:

  • Tata Steel’s ramp-up of new capacity over FY22-24 set to drive healthy 14% volume CAGR
  • India share of Tata Steel’s total volumes has risen to nearly 50% and should continue increasing over medium-term
  • Leading market position in India and strategic downstream growth offers competitive advantages

However, Jefferies remains cautious over the stock’s rich valuations trading at 1.9x price-to-book ratio compared to its 10-year average multiple of 1.3x.

Given still depressed Asian steel spreads, Tata Steel’s earnings could witness further downside risks before a potential recovery materializes in 2024 once China demand stabilizes.

Hence while new capacity ramp-up and rising India share is positive, Jefferies maintains more conservative outlook until clarity emerges on spreads recovery.

So in summary, while metals and mining stocks have witnessed sharp corrections in 2022, Jefferies remains selective on outlook for 2023 with a preference for Coal India given superior earnings visibility now.

Any macro recovery in China next year could act as upside catalyst for Tata Steel and Hindalco. But until then, volatility cannot be ruled out for steel and base metal plays.

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