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Tata Steel To SAIL: Steel Stocks Decline On Analysts' Downgrade

India's steel stocks declined after analysts downgraded the mills citing falling prices of the alloy and high raw material costs.

A coil of galvanized steel is transported by a coil grab crane above other coils at a manufacturing facility. (Photographer: Vivek Prakash/Bloomberg)
A coil of galvanized steel is transported by a coil grab crane above other coils at a manufacturing facility. (Photographer: Vivek Prakash/Bloomberg)

India's steel stocks declined after analysts downgraded the mills citing falling prices of the alloy and high raw material costs.

Jefferies downgraded Tata Steel Ltd. and JSW Steel Ltd. from 'buy' to 'hold' and 'underperform', respectively. Kotak Institutional Equities downgraded Steel Authority of India Ltd. to 'reduce' from 'buy'. The research firms also cut target prices for the steelmakers.

"The case for a big rally in metal prices is behind, and steel earnings are starting to see big cuts," Jefferies said in a Jan. 10 note. "It's time to turn cautious on steel."

Kotak Institutional Equities expects surging coking coal costs to cause SAIL's Ebitda to decline by more than half in the second half of the current fiscal.

Shares of Tata Steel and JSW Steel declined as much as 4.8% and 4.29%, respectively—the steepest intraday declines in three weeks. The stocks, however, pared some of the losses to close 3.32% and 3.93%, respectively. SAIL shed nearly 5% in Tuesday's session.

Tata Steel To SAIL: Steel Stocks Decline On Analysts' Downgrade

Jefferies On Steel And Indian Metal Sector

  • Lowers optimism on the metals sector in India.

  • Cuts FY23 earnings per share for Tata Steel and JSW Steel by 18% and 26%, respectively.

  • Cuts price target for Tata Steel to Rs 1,240 from Rs 1,600—still an implied return of 6.07%.

  • Reduces price target for JSW Steel to Rs 600 from Rs 800—an implied downside of 10.73%.

  • Retains 'hold' on Coal India Ltd., price target cut to Rs 160 from Rs 170.

  • Global steel and aluminum prices have softened on weak macroeconomic conditions and demand concerns in China.

  • Finds the risk-reward in Indian steel sector much inferior to a year ago.

  • Margins for Indian steel firms have peaked and will fall sharply by FY23.

  • Weakening steel prices and a sharp rally in coking coal are impacting steel margin outlook.

Tata Steel To SAIL: Steel Stocks Decline On Analysts' Downgrade

Kotak Institutional Equities On SAIL

  • Cuts price target for SAIL to Rs 110 from Rs 135, still an implied return of 4.27%.

  • Higher coking coal costs adversely impact SAIL more than peers due to higher consumption

  • Sees 20% downside risk to consensus Ebitda estimates for FY2022-2023E.

  • Softening of steel prices, sharp decline in iron ore prices and elevated coking coal price to hurt Ebitda.

Jefferies' Aluminum Preference

The research house is only upbeat on Hindalco Industries Ltd. among Indian metal makers.

  • Retains 'buy' on Hindalco, raises price target to Rs 660 from Rs 610.

  • Prefers aluminum business to steel.

  • Novelis Inc. is well placed for the global shift to aluminum from steel in autos.

  • Remains most bullish on copper and aluminum for 2022.

  • Hindalco remains the only 'buy' in Indian metals right now.

Tata Steel To SAIL: Steel Stocks Decline On Analysts' Downgrade

Chinese demand, Jefferies said, is structurally shifting from urbanisation and industrial development to new economy infrastructure such as renewables and electric vehicles. "This should drive a shift from steel and coal to copper, aluminum and other 'energy transition' metals."