Slurry Pipeline And Captive Iron Ore Will Sustain Long-Term Earnings Despite Near-Term Industry Pressures

Catalysts

About Lloyds Metals and Energy

Lloyds Metals and Energy is an integrated mining and metals company focused on iron ore mining, pelletization, DRI and planned downstream steel capacities.

What are the underlying business or industry changes driving this perspective?

• Although the slurry pipeline and captive iron ore are structurally lowering logistics and input costs, any sustained softness in domestic iron ore and pellet prices could cap the benefit from this cost advantage and slow revenue growth.
• While the first 4 million tonne pellet plant has ramped to full utilization quickly and a second plant is progressing, incremental capacity is coming into a market where the steel cycle is currently weak, which could pressure realizations and compress EBITDA per tonne even as volumes rise.
• Despite the planned ramp-up from 10 million to 26 million tonnes at Surjagarh and higher ECs across mining assets, the high fixed cost base and monsoon related disruption risk mean that any delay in volume normalization can materially dilute margins and earnings quality.
• Although BHQ beneficiation and integrated mine to pellet to DRI to steel expansion are designed to secure long term resource visibility, execution in difficult terrain and potential slippages in commissioning timelines may elevate CapEx intensity and weigh on near to medium term free cash flow and leverage metrics.
• While the industry push toward lower carbon, more efficient iron and steel supply chains should support demand for high quality pellets and DRI, prolonged weakness in secondary steel and export markets could limit pricing power and restrain improvement in consolidated net margins and return ratios.

Assumptions

This narrative explores a more pessimistic perspective on Lloyds Metals and Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Lloyds Metals and Energy's revenue will grow by 40.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 20.3% today to 34.7% in 3 years time.
• The bearish analysts expect earnings to reach ₹85.6 billion (and earnings per share of ₹152.07) by about December 2028, up from ₹18.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, down from 38.1x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 22.2x.
• The bearish analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.99%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The rapid scale up of new capacity in pellets, DRI and the planned 3 million tonne steel plant, alongside BHQ beneficiation, could coincide with a cyclical upturn in steel and pellet prices. This could allow Lloyds Metals and Energy to monetize low cost integration more fully and drive faster than expected growth in revenue and earnings.
• Structural cost advantages from captive iron ore, the slurry pipeline savings of around INR 600 per tonne and further reductions from LNG and green power adoption could entrench industry leading pellet EBITDA of around INR 4,000 to INR 5,000 per tonne. This may support sustained expansion in consolidated EBITDA margins and net margins.
• Long term volume growth from expanded environmental clearances, Surjagarh ramp up from 10 million tonnes to 26 million tonnes and Thriveni’s project additions in iron ore and coal mining could create a much larger, more diversified mining platform. This could materially lift consolidated revenue and help stabilize earnings through cycles.
• The integration of Thriveni, with a targeted EBITDA margin of 30% to 35% and revenue guidance of INR 7,800 crores to INR 8,000 crores, combined with IPS incentives of around INR 350 crores to INR 400 crores annually, may deliver stronger cash generation than expected. This could support deleveraging and improve earnings and return ratios over the medium term.
• Execution on BHQ beneficiation delivering around 10 million tonnes of output by FY '28, combined with the company’s focus on higher value products such as wire rods, value added flats and exports to premium markets like Europe, could shift the business mix toward structurally higher realizations. This may drive a step change in revenue quality and long run earnings power.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Lloyds Metals and Energy is ₹1410.0, which represents up to two standard deviations below the consensus price target of ₹1692.0. This valuation is based on what can be assumed as the expectations of Lloyds Metals and Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2100.0, and the most bearish reporting a price target of just ₹1410.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be ₹246.4 billion, earnings will come to ₹85.6 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 15.0%.
  
• Given the current share price of ₹1301.6, the analyst price target of ₹1410.0 is 7.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.