Global brokerage CLSA maintains caution on the Indian steel sector, downgrading Tata Steel to ‘sell’ from ‘outperform’ and cut the target Tata Steel Share price to INR 135 from INR 145.
Steel stocks seem to have failed to charm CLSA, just like the Tata Steel Share price, as it also lowered the rating for JSW Steel to ‘sell’ from ‘underperform’ and revised the target to INR 730 from INR 810.
CLSA predicts lower margins due to weaker spreads.
The broker kept an ‘underperform’ rating on JSPL considering it’s relatively better off due to margin expansion projects.
China-driven stimulus impacted its overall outlook as a potential risk, but it raised the JSPL target price to INR 840 from INR 820 a share. China’s potential stimulus remains a key risk, impacting Indian mills based on sustained or weak demand.
India’s rapid blast furnace-based steel capacity expansion will have an impact as the brokerage is foreseeing lower spreads and a shift towards raw materials.
The brokerage expects FY25/26CL spread at $360 a tonne, below the 10-year average, due to surplus supply, increased exports, and domestic steel prices likely below import parity.
India’s role in the coking coal balance and rising demand (18mtpa in two years) could offset China avoiding Australian coal, it said.
Higher steel production may strain iron ore and coking coal supply, despite efforts to increase captive iron ore mines.
CLSA also notes a shift in steel sector dynamics, despite recent spread compression, consensus estimates for FY25-26 profitability seem inflated.
As current spreads in China are at unsustainable lows, the brokerage highlights surprises in China’s policy continuity,
Lower costs, favoring Mongolia, might improve spreads, meaning Indian mills might face challenges, the report concludes.
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