Tata Steel, JSW Steel: Why CLSA and other analysts have turned cautious on steel stocks

Tata Steel share price, JSW Steel share price: Steel stocks were trading in the red in the opening deals on Monday, March 4, after global brokerage CLSA said in its report that steel companies' valuations have turned expensive after a sharp run-up in the past 18 months. 

Moreover, the brokerage has downgraded Tata Steel and JSW Steel to 'Sell' from the earlier 'Underperform' rating. The target prices have been revised to Rs 135 and Rs 730, respectively.

On Jindal Steel and Power (JSPL), the global brokerage continued with an 'underperform' rating and raised the target to Rs 840 from Rs 820 apiece. 

CLSA says JSPL is relatively better off, as margin expansion projects will offset weaker industry spreads.

As of 11:15 a.m., individually, shares of Tata Steel were down over 1 per cent, JSW Steel slipped over 2 per cent and Jindal Steel and Power were flat with a negative bias. 

CLSA lists the following key reasons behind the cautious stance in the Indian steel sector:

(1) The profit pool in India should incrementally move towards miners from converters as steel capacity addition picks up pace.

(2) Unlike in the past, valuations for steel stocks have risen in the past eighteen months.

(3) Consensus estimates are not factoring in spread compression.

Echoing a similar view, Abhijeet Bora, Deputy VP Research Analyst, Sharekhan by BNP Paribas, has suggested remaining cautious about Indian steel companies.

"Soft steel prices and steady coking coal prices would have continued margin concerns for steel players, which would offset the benefit of material volume growth for the domestic steel companies. A high-capex plan would also keep the debt at an elevated level," said Bora.

Sharekhan has given a'reduce' rating to JSW Steel and a 'hold' rating to SAIL. Among metals, we like NMDC given its strong earnings outlook (expect 21 per cent PAR CAGR over FY23–26E), supported by steep iron ore prices and robust sales volume growth. NMDC has a high cash flow of Rs 11,500 crore (or 16 per cent of its current market capitalisation).

Similarly, Chokkalingam G, Founder, Equinomics Research Pvt Ltd (Formerly known as Equinomics Research & Advisory Pvt Ltd) also remains cautious on the mining and metal sector as he sees deflationary conditions affecting global economies, especially that of China. 

Chokkalingam G added that a delay in the Fed rate cut would also affect the sector negatively.

Conversely, BOB Capital Markets expects Indian steel sector margins to remain at mid-cycle levels over the next two years. While they expect a gradual stabilisation of global steel demand, they believe supply pressure from a likely surplus in China will keep a lid on margins.

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