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Business News/ Markets / Stock Markets/  CLSA cautious on steel companies amid higher valuation, margin pressure; downgrades Tata Steel, JSW Steel
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CLSA cautious on steel companies amid higher valuation, margin pressure; downgrades Tata Steel, JSW Steel

CLSA has downgraded Tata Steel to ‘Sell’ from ‘Outperform’ and cut its target price to ₹135 from ₹145 per share. It has also downgraded JSW Steel to ‘Sell’ from Underperform and reduced the target price to ₹730 per share from ₹810 earlier.

A broad-based demand-driven stimulus in China is a key risk to CLSA’s cautious thesis on the steel sector.Premium
A broad-based demand-driven stimulus in China is a key risk to CLSA’s cautious thesis on the steel sector.

Foreign brokerage firm CLSA has reiterated its cautious stance on the Indian steel sector citing higher valuations and incremental shift in the profit pool towards miners.

The brokerage has downgraded Tata Steel to ‘Sell’ from ‘Outperform’ and cut its target price to 135 from 145 per share. It has also downgraded JSW Steel to ‘Sell’ from Underperform and reduced the target price to 730 per share from 810 earlier. 

CLSA maintained an ‘Underperform’ rating on Jindal Steel & Power (JSPL) and raised its target price to 840 from 820 earlier. The brokerage believes JSPL is relatively better off because weaker industry spreads will be more than offset by the margin expansion projects.

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CLSA’s cautious stance is driven by three key points. Firstly, the profit pool in India should incrementally move towards miners from converters as steel capacity addition picks up pace. Secondly, it believes, unlike past, valuations for steel stocks have risen in the past eighteen months to 1 standard deviation above their median. And finally, consensus estimates are not factoring in spread compression.

“The sharp increase/ramp-up of blast furnace-based steel capacity in India over the next three years is likely to weigh on spreads and shift incremental margins from steel conversion to raw materials," CLSA said.

It believes as supply outstrips demand growth, and reliance on exports rises, domestic steel prices are unlikely to trade above import parity.

CLSA said historically, the sector has given positive returns if bought at trough spreads, which are generally accompanied by low valuations. 

“However, unlike past, valuation (PB) multiples for Indian steel companies have risen in the past 18 months while steel prices/spreads have corrected. This is likely driven by a better demand outlook, the expectation of a stimulus in China and overall elevated valuations in Indian markets," it added.

Also Read: Why investors should keep track of macroeconomic indicators - explained

Moreover, a broad-based demand-driven stimulus in China is a key risk to CLSA’s cautious thesis on the sector.

“A sustained higher demand in China, driving up spreads, is the best outcome for Indian mills given the self-sufficiency of iron ore in the country. However, if China production remains elevated, with weak demand, spreads could remain lower for longer," CLSA said.

Chinese spreads are currently at decadal-low levels, which CLSA thinks is unsustainable.

“However, if spread improvement is driven by lower iron ore/coking coal cost (favourable sourcing from Mongolia), Indian mills are likely to be worse off," CLSA said.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 05 Mar 2024, 11:04 AM IST
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