CLSA lowers rating on JSW, Tata Steel over local concerns

Mumbai: CLSA has further downgraded its ratings on Tata Steel and JSW Steel to ‘sell’ from ‘underperform’ as it believes the recent rally in these stocks is unjustified. Steel stocks have gained 15-21 per cent in the last one month, driven by gains in global commodity-linked stocks and lower coking coal prices. Here are the reasons why CLSA downgraded these stocks:

Local concerns

CLSA believes the concerns surrounding the sector are more local in nature and are likely to last longer. The government’s stimulus is directed more towards construction activities, which is a relatively smaller driver for flat steel. This has fewer benefits for JSW and Tata Steel, said CLSA.

The brokerage also believes leverage is high, making risk-reward unfavourable.

Back-ended demand recovery

Outlook for consuming sectors, mainly for flat steel, remains weak, said CLSA. Construction demand could rise when activity picks up but that would help rebar more than flat steel, where demand could remain lower for longer, said CLSA.

Exports to weigh on margins

Steel inventory at the mills has risen as a result of the lockdown. Mills would look to export more as utilisations increase, said CLSA. This would lead to lower realisations as export realisations are lower than domestic ones.

Unfavourable risk-reward

CLSA said risk-reward is unfavourable for Indian steel stocks due to weak price outlook, high leverage and negligible dividend yield versus global peers.