Most analysts who track steel stocks have maintained their cautious stance on the sector despite the Ministry of Finance reversing export duties that it imposed in May to combat inflation. A key reason behind the reversal of the duties was the build-up of steel inventories, which moved to their highest level in 20 months during September and October.

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Another reason for the decision could be the fact that India became a net importer of steel in October 2022, with steel imports rising to their highest monthly levels since October 2019.

Analysts at CLSA have maintained their cautious view of the steel sector as they see downside risks to steel prices. They do not expect the cut in duties to drive prices higher, as domestic prices are already trading at a sharp premium to both import and export parity.

However, they expect this to be positive for iron ore and pellet prices.

Also Read: Industry welcomes export duty withdrawal on iron and steel items

A similar view is echoed by Morgan Stanley, which also sees near-term challenges persisting for the industry given the premium in domestic prices. They expect inventory destocking within the industry due to the duty revision.

JPMorgan sees no near-term earnings improvement due to this decision, although it called it a sentiment positive. It only sees earnings improvement if demand in China improves and Hot Rolled Coil export prices in China move higher.

Domestic steel prices are already at a 15-20 percent premium to landed imports, according to Citi. Therefore, it does not expect the government's decision to aid prices in the near term. It does expect a recovery in export volumes and eases the supply glut in the domestic market.

It has maintained a hold rating on Tata Steel with a price target of Rs 95, and an underperform rating on JSW Steel with a price target of Rs 385, which is a potential downside of nearly 45 percent from current levels.

Also Read: Tata Steel quarterly net profit plunges 90% as steep material costs eat into margin

On the other hand, Nomura sees a 5 percent upside risk to JSW Steel's financial year 2024 Earnings per Share (EPS). It also expects the steel prices to not decline as expected had the duties been in place.

ICICI Securities expects pellet producers like Shyam Metalics, Godawari Power & Ispat and Jindal Saw to benefit from this move. The brokerage says that central and eastern India pellet producers have already increased prices by Rs 1,000 to Rs 1,500 per tonne.

Higher pellet prices will push iron ore prices higher, putting companies like NMDC in focus. Odisha-based miners are contemplating hiking prices by Rs 500 to Rs 700 per tonne, according to ICICI Securities.

While Philip Capital believes that the move is positive for the entire ferrous space in the medium to long term, it offers no immediate benefits.

First Published:Nov 21, 2022 8:38 AM IST