Tata Steel, JSW Steel downgraded by CLSA on three key factors

3) Consensus estimates are not factoring in spread compression

The global brokerage has downgraded Tata Steel to 'Sell' from 'Outperform' and slashed its target price to ₹135 from ₹145 per share. CLSA has also lowered the rating for JSW Steel to 'Sell' from 'Underperform' and cut the target to ₹730 from ₹810.

Both Tata Steel and JSW Steel ate expected to see robust volume growth due to capacity expansion in the next two years. However, the foreign brokerage predicts lower margins due to weaker spreads.

CLSA has kept an 'Underperform' rating but raised the target price to ₹840 from ₹820 per share for Jindal Steel and Power, considering it's relatively better off due to margin expansion projects, even in the face of weaker industry spreads. A potential risk is a China-driven stimulus impacting its outlook.

The foreign brokerage notes a shift in steel sector dynamics, with rising valuations in the past 18 months, driven by optimistic demand outlook and Chinese stimulus expectations. Despite recent spread compression, consensus estimates for FY25-26 profitability seem inflated. China's potential stimulus remains a key risk, impacting Indian mills based on sustained or weak demand.

It highlighted potential positive surprises in China's policy continuity, as current spreads in China are at unsustainable lows. If the spread improvement comes from lower costs, favouring Mongolia, Indian mills might face challenges, the report adds.