Commodity prices have skyrocketed in recent weeks, helped by the Russian invasion of Ukraine. The Nifty Metal index has zoomed 13.7% since February 24.
Commodity prices have skyrocketed in recent weeks, helped by the Russian invasion of Ukraine. The Nifty Metal index has zoomed 13.7% since February 24 with stocks such as Tata Steel, Vedanta, and Jindal Steel & Power up at least 10% each. However, analysts at Kotak Securities have cut fair values for steel stocks under their coverage to reflect the current macro uncertainty. “The extent of disruption in supply-demand remains unclear and we see a potential of a sharp downside in costs-prices in case of a positive surprise around de-escalation,” the brokerage firm said in a report.
Steel stocks target prices trimmed
Analysts at Kotak Securities have cut fair values factoring nearly 0.5X lower multiple. Analysts said that a de-escalation between Russia and Ukraine could result in a sharp downside in costs-prices.
- Tata Steel fair value has been trimmed to Rs 1,500 (from Rs 1,625)
- Jindal Steel and Power to Rs 565 (from Rs 600)
- JSW Steel to Rs 630 (from Rs 700)
- SAIL to Rs 90 (from Rs 100)
- NMDC to Rs 175 (from Rs 190)
Kotak Securities recommends buying Jindal Steel and Power shares and those of NMDC. Analysts advise a buy on dips strategy for Tata Steel. JSW Steel and SAIL have a ‘reduce’ tag.
Tata Steel shares have zoomed 18% since February 24 while Jindal Steel and Power stock price is up 27% during the same time period while that of NMDC has gained 12%. SAIL share price has jumped 12% and JSW steel stock is up 15% since February 24.
Overall steel sector outlook still strong
While target prices have been trimmed the overall sector outlook is still attractive. The brokerage firm said that steel prices are gradually catching up with cost inflation. “NMDC has hiked fines prices recently however, 32% discount to import parity versus 20% discount historically, suggests further upside,” they added. Steel prices across India, China and Europe have increased by 10-15% in the past one month, led by Europe. Although some gains have been trimmed as China faces another wave of covid-19, the disruptions in trade flows have helped Indian mills’ export market and have increased.
Analysts at Kotak Securities said that the steel price hikes, so far, do not cover the expected increase in costs as per spot prices. “However, given the 30-60 days of consumption lag, the recent surge in costs would hit companies in 1QFY23E whereas price hikes should result in stronger margins in 4QFY22E,” they added. “Current high level of steel prices would lead to demand destruction in the domestic market part of which should be offset by higher exports by Indian mills.”