JSW Steel and Tata Steel shares lose sheen as brokerages warn of risk to steel prices

Tata Steel shares declined  3.4 percent intraday. At 1:45 pm, the stock was trading at Rs 106.50, down 3.18 percent from previous close on BSE. In the past month, the stock has rewarded investors with over 15 percent returns.

Jindal Steel shares, meanwhile, fell nearly 4 percent in today’s session at Rs 390. Though the stock has lost sheen in the last five sessions, In the one-month period, it has made investors 10 percent richer.

The recent downtrend in steel stocks comes as Credit Suisse, in its latest report, has said it remains cautious on the Indian steel sector. The brokerage said future spreads are likely reverting to the historical average and that it sees a risk to regional prices with weak China property.

CS has maintained its underperform rating on JSW Steel's stock while it has a neutral stance on Tata Steel.

Major steelmakers have urged the government to reduce or remove export duty on steel products amid falling prices and rising domestic supply. The Centre had in May levied a 15 percent duty on major steel products to improve the availability of the alloy in the domestic market, though it removed the import duty on key raw materials for the sector.

According to an ICICI Securities report, the imposition of export duties on iron and steel, and petroleum products was a retrograde step (introducing uncertainty on tax policy and hurting credibility in export markets), but it is having the desired effect of dampening domestic prices.

Export growth, however, slowed sharply to 2.1 percent year-on-year (YoY) in July with exports of engineering goods (the largest export category, of which steel and steel products are the largest sub-component) declining 2.1 percent YoY in July (and up by a modest 8.1 percent YoY in Apr-Jul’22), as steel and steel-product exports declined 37.5 percent in the last month(and - 7.9 percent YoY in Apr-Jul), the brokerage explained.

Steel Futures prices cooled off 18 percent from Rs 63,100 per tonne peak touched in April this year to Rs 51,630 at 1:25 pm today.

Vinit Bolinjkar, Head of Research, Ventura Securities, likes Kirloskar Ferrous (5.3x FY25 EV/EBITDA) among steel stocks as the company recently acquired metal tubes manufacturer ISMT and is looking to turn around the same. Besides, it has taken various cost-cutting measures like installation of a waste heat recovery system (WHRS) and railway line, he said.

Bolinjkar said it was difficult to say how long steel rates would fall and that his company is currently negative on the prices, given slowdown expectations in large markets like US and China.

While steel stocks were in the red, Bolinjkar believes real estate and automobile stocks would benefit from the fall in raw material cost and hence the companies’ gross margins may go up.

Jatin Damania, Vice President - Fundamental Research, Kotak Securities Ltd, is of the view that net profits of metals and mining stocks in the Nifty 50 Index will see a large 41 percent decline in the 2022-2023 financial year because of a sharp decline in global metal prices on muted demand and a steep decline in domestic steel profitability on the back of export duties.

He noted that the Nifty 50 Index has two steel stocks and one aluminum stock and his firm models a sharp decline in profitability of steel companies post imposition of export duties.

Kotak Securities has a ‘reduce’ rating on Jindal Steel and Power, Tata Steel, and NMDC and a ‘sell’ rating on JSW Steel and SAI, he said.