Metals: Asset valuations are seeing recalibration

Another asset valuation benchmark bites the dust as the last downcycle equity valuation + deleveraging is breached for JSPL and SAIL. This is after the GoI’s export duty imposition led to 1x forward P/B benchmark being breached for the sector. With so much flux in liquidity and rate changes (sharpest single rate hike in 28 years by FOMC), asset valuations are also recalibrating (in our view). This compels us to fall back upon the directional movement of Ebitda/te to be our north star for the moment. We maintain REDUCE on Tata Steel, SAIL, JSWS, NMDC, JSPL. Hindalco is feeling the possible pinch of i) aluminium returning into surplus (from deficit) over FY23/24E, along with the traded instrument facing the headwinds of a rising interest rate environment and ii) possible compression in Novelis margins. APL Apollo remains our preferred pick in the sector; maintain Buy. We maintain Hold on Jindal Stainless and Shyam Metalics.

Asset valuations are recalibrating: Two probable asset valuation benchmarks have been breached:
i) 1x 1 yr.fwd. P/B – given ~0 loss probability, as the sector has seen meaningful deleveraging; and ii) last downcycle valuations add deleveraging (i.e. JSPL, SAIL). In the wake of downcycle, extreme discounting is quite common. We believe asset valuations for the sector are also recalibrating and it would be unfortunate to rediscover 0.5x P/B in this cycle as well (given significant deleveraging that has taken place). What we see is a continuous downtrend in steel Ebitda in the absence of ‘medium term’ Chinese demand recovery, global demand weakness seeping in and a corresponding ‘game of attrition’ in equity valuation to move hand in hand. The play to possible (future) removal of steel export duties (one-time uptick) shouldn’t take precedence over the cyclical bottom that’s taking shape currently.

NMDC: Our latest interaction with the CMD suggests 47mtpa production (Chhattisgarh + Karnataka) is possible without any increase in EC from Karnataka. Investor concerns are on whether iron ore/pellets will ever see (export) duty normalisation again. This implies NMDC’s Ebitda/te reducing to Rs 1,000/te (through cycle).
APL Apollo remains the preferred play: APL Apollo is one of the major beneficiaries of steel export duty. Sharp decline in steel prices is expected to dent Ebitda print in Q1FY23 though, through inventory losses and volume impact due to industry destocking.

Aluminium players (Hindalco/ NALCO) may have to face a demand-supply surplus over FY23/24E: We reduce our aluminium price assumptions ($2,600/2,300/te for FY23/24E from $3,000/2,500/te earlier). We maintain Reduce on Hindalco, while downgrading NALCO to Sell from Reduce.