CLSA Expresses Caution Over High Valuations and Margin Pressure of Indian Steel Companies
CLSA, a leading brokerage firm, has expressed caution about Indian steel companies due to several concerns, which include high valuations and pressure on margins. As a result, the firm has downgraded Tata Steel to a ‘Sell’ rating and lowered its target price from ₹145 to ₹135 per share. JSW Steel has also seen a downgrade to ‘Sell,’ with its target price cut from ₹810 to ₹730 per share.
Jindal Steel & Power (JSPL), on the other hand, retains an ‘Underperform’ rating from CLSA. However, its target price has been slightly increased to ₹840 from ₹820.
The caution raised by CLSA is primarily based on the shifting profit pool in India from converters to miners, which is a result of steel capacity additions. Additionally, elevated valuations of steel stocks beyond historical median levels and market estimates that do not account for potential compression in spreads are also contributing factors to the firm’s concern.
The brokerage firm anticipates various challenges for the sector, including potential oversupply, increasing reliance on exports, and possible long-term price pressures if domestic prices do not align with import parity. CLSA also points out the risk factor of economic stimuli in China, which could affect its neutral stance on the sector. The optimal scenario for Indian steel mills, according to CLSA, would be a sustained increase in demand from China, considering the domestic abundance of iron ore.
Indian steel companies should take note of these concerns highlighted by CLSA as they navigate through the current market landscape. Heightened vigilance in managing valuations and margins would be essential to mitigate potential risks and ensure sustainable growth in the sector.
Analyst comment
Neutral news.
As an analyst, the market for Indian steel companies is expected to face challenges due to high valuations, margin pressure, and shifting profit pool. Downgrades on Tata Steel and JSW Steel may indicate a decline in share prices. Jindal Steel & Power retains its rating but faces similar concerns. Companies should focus on managing valuations and margins to mitigate risks and ensure growth. Market demand from China could positively impact the sector.
