Challenges and Opportunities in India's Metals and Mining Sector: BofA Insights

According to analysts at BofA Securities, the metals and mining sector in India, particularly steel companies, is poised to encounter challenges in 2024. The primary causes of these challenges are the rising cost of raw materials and the decline in Chinese demand. It is advisable to exercise prudence in the near term due to the prolonged slowdown in the Chinese market and rising coking coal costs, even if large Indian steel players stand to gain from increased volume growth, lower capital expenditure intensity, and strong balance sheets in the long run.

Raw Material Price Pressures

According to BofA Securities, spot coking coal prices have increased by $100 per tonne since early July 2023, weighing on steel plant margins. This, together with a significant increase in domestic iron ore prices of ₹450–500 per tonne, has caused spot steel spreads to decrease by $75–80 per tonne. Cost challenges are anticipated in the early half of H2CY24, notwithstanding BofA Securities' probable reduction in coking coal prices.

Steel Companies' Outlook

While acknowledging the possibility of domestic Hot Rolled Coil (HRC) trading at a slight premium versus the landed cost of imports (vs the long-term average of parity), with domestic demand expected to remain strong (we assume a 9% YoY consumption growth in FY25), the report suggests that a material premium is unlikely due to reduced export flexibility and the threat of import substitution. JSW Steel stands out as the sector's only 'Buy' recommendation, with the company well-positioned to benefit from falling iron ore prices. Tata Steel is rated as "Neutral," whereas SAIL is ordered as "Underperforming" because of high valuations and wasteful use of coking coal.

Non-Ferrous Sector

BofA Securities is bullish on aluminium in the non-ferrous market, pointing to controlled output from Chinese smelters, probable closures of European smelters, and strong Chinese demand despite weakening in the real estate market. With investors' emphasis on the status of the stated demerger scheme and the refinancing and redemption of its parent company's debt, Vedanta is positioned as a beneficiary of these trends.
This restructuring will likely result in Vedanta's existing shareholders receiving one share in each new entity for every share held. The brokerage firm stated that Vedanta's parent company should reduce its debt by using the revenues from a possible stock sale in any individual subsidiary.

BofA maintained a 'Neutral' rating on Vedanta, citing balanced risk-reward, and increased the target price to ₹270 per share from ₹235. Moreover, it expanded its FY24–26E EBITDA projections by 3-5%. In keeping with the growth of both domestic and international peers, the brokerage raises its FY25E forecast EV/EBITDA multiple for the Aluminium division to 6.5x (from 5.5x) in its brand fee projections for Vedanta SA.

NMDC and Coal India

BofA restated its 'Underperform' rating on NMDC, citing premium valuations - the company presently trades at 7.5x 1-year future EV/EBITDA vs its long-term and peer averages of 5.6x and 4.2x, respectively - and pricing risks post Q1CY24.

BofA Securities stated that although NMDC's current domestic realisations are between 17% and 33% below spot and Q1CY24 expectations, they would trade at a 26% premium to our Q4CY24 forecasts of $100 per tonne, which might lead to domestic price reductions.

According to BofA, India's thermal power demand will expand at a 7% CAGR from FY23 to FY33E. Thermal power plants will try to raise their PLFs to satisfy demand since they have underinvested in new capacity additions. It projects that Coal India will gain from an 8% increase in volume in FY25, with a 12% increase in the volume share of e-auctions in the overall mix.

Although Coal India's valuations have risen following a 78% surge in FY24TD, they are still not very high. In addition, higher production-driven earnings are anticipated to boost dividend distributions, somewhat offsetting decreased realisations. The report stated that an 8% dividend yield for FY24E and FY25E should provide stockholders with downside protection. Maintaining a "Buy" call with a target price of ₹395 per share was based on undemanding values and a reasonable dividend yield.

The research by BofA Securities offers a thorough synopsis of the potential and problems that India's mining and metals industry faces. Although caution is urged in the near term, fundamentals such as volume growth and strong balance sheets support the long-term prospects, particularly for steel businesses. Investors are encouraged to evaluate the sector's complicated dynamics to manage the developing terrain and take a balanced strategy.