Why Jefferies prefers Coal India to Tata Steel, Hindalco shares

Foreign brokerage Jefferies said its global metals team is cautiously optimistic on the metals & mining outlook for 2024 with macro backdrop turning more positive in the developed world and expectation of stability in China.

Improved volume growth, it said, along with lower-than-expected cost trajectory, has significantly improved Coal India's earnings outlook, it said adding that its FY24-25E earrings estimates are 11-18 per cent above that of Street's.

"Despite the very strong rally in the last 4 months, Coal India is trading at a reasonable 7 times FY25 PE. Our revised price target of Rs 425 (at 8 times FY26E PE) implies TSR (total stock return) of 28 per cent including 7 per cent dividend yield. We have buy ratings on Hindalco Industries Ltd (price target raised from Rs 600 to Rs 660) and Tata Steel Ltd (price target raised from Rs 145 to Rs 160), but underperform on Jindal Steel (price target raised from Rs 630 to Rs 700)," Jefferies said.

Jefferies' global metal & mining team expects macro backdrop turning more positive in 2024 with potentially weaker dollar, lower bond yields, Fed rate cuts, demand strength in several emerging markets, stability in China, booming demand in India, ongoing energy transition demand for metals, and mine supply constraints (link). Its China team also expects fiscal policy to be more supportive, and investments to boost economic growth and avoid a deflation in 2024.

On steel companies, Jefferies said Asian flat (HRC) steel prices have risen 8 per cent in the last two months after falling 22 per cent over March-October period. 

"Asian steel spread, however, is still near the lowest level in a decade," it said. Jefferies said  it has a positive stance on Indian metals & mining space, but prefer Coal India Ltd over  Hindalco Industries and Tata Steel Ltd. Jefferies said Coal India's volume growth trajectory has improved and is likely to sustain amid India's strong economic growth outlook and rising power consumption.

In the case of Tata Steel, Jefferies likes Tata Steel's improving asset footprint with rising Indian share in total volumes. Asian steel spread has already contracted to the lowest level in a decade, and any positive macro developments in China could drive an improvement, it said while suggesting a target price of Rs 160 on the stock in a base case scenario.\

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For Coal India, Jefferies said the company's volume growth trajectory has improved and is likely to sustain amid India's rising power demand. The big impact of wage hike and e-auction price fall has already come through, it said adding that it expects a solid 5 per cent EPS CAGR over FY23-26E, despite a high FY23 base. It values Coal India stock at Rs 425 in its base case scenario.

In the case of JSW Steel, Jefferies said a ramp-up of brownfield expansion projects to drive healthy volume CAGR over FY23-25. That said it believes the stock valuations are rich on both PB and EV/Ebitda basis versus its long-term average, leaving little room for disappointments. It sees the stock at Rs 700.

On Hindalco Industries, Jefferies said Novelis's medium-term outlook remains strong, as it is benefiting from the structural shift to aluminium from steel in autos and from plastics and glass in beverage cans. India aluminium Ebitda per tonne should hold up, it said adding that it likes Hindalco's higher exposure to downstream business, as it has resulted in significantly lower Ebitda volatility in comparison with Tata Steel and JSW Steel. Jefferies has a target of Rs 660 on Hindalco Industries.

 

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