Credit Suisse has sharply downgraded ratings and target prices on shares of Tata Steel, Jindal Steel & Power, and JSW Steel, saying that the domestic steel sector’s risk-reward is now becoming unfavourable.
Credit Suisse has sharply downgraded ratings and target prices on shares of Tata Steel, Jindal Steel & Power, and JSW Steel, saying that the domestic steel sector’s risk-reward is now becoming unfavourable. India’s steel sector shares have posted a strong 58% outperformance so far this year. But now, the odds could be turning against the domestic steel sector: the demand from China is softening; supply chain shocks are easing; and the Chinese government is looking to control prices. Credit Suisse’s revised target prices on some of these steel stocks still show upside.
Supply-demand mismatch easing out
Easing supply constraints could soften steel prices. Recent data suggest that supplier delivery times have eased in April over the previous month. “While it is early to call for a peak, as economies open up and supply chains get replenished, we expect the impact of this shock to ease sooner than later, which should reflect in lower prices,” the report said. Although some inventory supplies are still low, Credit Suisse believes these will normalise going ahead into the second half of this fiscal year. Earlier, amid the pandemic, steel prices were hiked across the globe as demand swelled and mills rationalised supply.
China may move to control prices
Further, the Chinese government has recently voiced its concern over the rising commodity prices and some measures to curb the rally in steel prices is expected. Credit Suisse said that the Chinese government’s comments are likely to pause the rally in prices for now. To add to this, China is now entering a weak demand season while its domestic production continues to inch higher. Production has increased sharply across the globe to meet the rising demand. Currently, ex-China production of steel is just 4% below the pre-covid highs, while demand is at the pre-covid peak.
India’s price buffer may not hold for long
If global prices fall in line with China’s domestic prices, India’s steel companies could lose the edge. Currently, domestic steel prices are at an 18% discount to imports. “If export prices follow the domestic prices in China (post price control comments), the buffer is unlikely to remain for long. We remain watchful of how export prices shape up, and our base case assumes a correction in the second half of 2021,” the report said.
Downgraded but targets revised
The recent jump in stock prices has resulted in steel shares trading at significantly higher P/B than at past peaks, which again makes the risk-reward unfavourable. “While there is no denying that these multiples could rise even further if demand materially surprised us on the upside in 2H CY21, we prefer to be on the sidelines for the lack of margin of safety at current valuations,” the brokerage firm said.
*Tata Steel is downgraded from ‘outperform’ to ‘neutral’ with a revised target price of Rs 1,250 per share. This translates to a 15% upside from the current market price.
*Jindal Steel & Power Ltd is downgraded sharply to ‘underperform’ from ‘outperform’ with a target of Rs 450 apiece, which shows 14.7% upside.
*JSW Steel is downgraded to ‘underperform’ from the ‘neutral’ rating. The target price has been revised to Rs 550 per share.
*SAIL is maintained at ‘neutral’, with a revised target of Rs 140, translating to a 16% upside.
(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)