Jefferies Group LLC, an American transnational independent investment bank has downgraded TATA from Buy to Hold, and JSTL from Buy to UNPF and retained Buy on HNDL, it highlighted in its report released on January 10, 2022. The bank has diminished its sanguinity on Indian metals just after the commencement of the year 2022.
“We lower our optimism on Indian metals as we enter 2022. Weak macro and demand concerns in China are weighing on metal prices. Although easing policy could lift Chinese demand, we still find risk-reward much inferior to a year ago. We cut FY23 EPS for TATA/JSTL by 18%/26%, and are 23%/22% below the street. We downgrade TATA from Buy to Hold, and JSW from Buy to UNPF. We like Novelis’ downstream business, and prefer aluminium to steel; we retain Buy on HNDL,” the key takeaway of the report read.
The bank stated that after a powerful FY22E, they witness EPS dipping 44%/21% YoY for TATA/JSW in FY23. For HNDL, they have boosted FY23 EPS by 5%, and see a 5% YoY gain.
“We believe the backdrop for metals remains better than the last decade as decarbonization in China should limit exports. Global steel capacity utilization average ~76% over 2011-2020; JEF expects CY22-23 utilization to be at a decade-high 83-84%. However, unlike early-2021, the case for a big rally in metal prices is behind, and we find risk-reward for Indian steel stock far inferior to a year ago,” the report added.
Addressing the steel margins to contract sharply, the report highlighted that the coking coal, conversely, almost doubled in 2HCY21, pushing up costs. Indian HRC steel price has doubled from Jun-20 to Oct-21 but is down 12% since then to Rs 64K. It is speculated by the bank that the Indian steel margins have been at their highest in 1HFY22. And will fall snappily by FY23, albeit settle above documented levels. It is supposed that the FY23 steel price of Rs 58K (6% cut, 9% below spot) and coking coal price of $230/t (36% below spot). Aluminium rose ~60% Jan-Oct but is down 7% since then to $2,913; the bank has expanded its FY23 assumption from $2,500 to $2,600 (11% below spot).
Global entity prices rebounded through 2HCY20 and 1HCY21 as the strong post-Covid recovery in China, on the back of an assertive policy impulse, drove closer market credits. Chinese macro conditions plunged in 2HCY21 as the effect of stimulus withered and government focus shifted to environmental issues, deleveraging and redistribution of capital. The slowdown in the property sector added to the pressures
of an already waning thrift.