Metal stocks plunged in the morning trade on May 23 as brokerages downgraded the sector after the government imposed export duties on iron ore and some steel intermediaries.
Jindal Steel & Power fell 15 percent, the most since January 2008, Tata Steel was down 12 percent, the biggest drop since August 2015, JSW Steel 11 percent, its highest loss since May 2020 and SAIL was down 11 percent, the lowest it has been since May 2020.
NMDC was trading 10 percent lower, its biggest fall since August 2020, Vedanta was down 6 percent and Hindalco Industries 5 percent. The BSE metal index was down nearly 8 percent, its biggest fall in two years.
"We see this as an extremely negative development for the steel sector and expect broad-based multiple de-rating. We downgrade steel/stainless equities under our coverage to either hold/reduce/sell", ICICI Securities said in a note to investors.
The government on May 21 hiked duty on iron ore by up to 50 percent and some steel intermediaries by 15 percent to step up domestic availability.
“While the contours of the tax structures and the detailed earnings impact of the steel equities are yet to be known, it can be broadly assessed that Rs5,000-7,000/te of impact on EBITDA is very much possible on integrated steel players, while for unintegrated steel equities like JSW Steel the impact can be Rs5,000/te.
“While there is an inclination (that we can see from our discourse with investors) to club this decline with the expected decline in EBITDA/te caused by cyclical factors, the same should be clearly demarcated", ICICI Securities report said.
The brokerage house downgraded Tata, JSPL, JSW Steel, and SAIL to “reduce”. It also downgraded SMEL and Jindal Stainless to “hold” from “buy”.
According to the Indian Steel Association (ISA), the imposition of export duty on steel would send a negative signal to investors and adversely impact the sector's capacity utilization.
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India could lose export opportunities and the decision could also impact the overall economic activity in the country, it said.
The imposition of export duty would help other countries to increase their share in the global market, which India will vacate, it added.
Analysts said that export duty on iron ore may result in higher domestic supply and is likely to bring down prices. For steel firms like Tata Steel, JSW Steel, and JSPL, exports account for 15-20 percent of overall sales.
According to Motilal Oswal Research, the measure failed to address the problem of elevated international coking coal prices and how would the customers of steel—auto, real estate, infra, etc—pass on the benefit to end-consumers.
“Will it lead to lower prices of housing, automobiles, and construction? We don’t think so,” it said.
"While we believe and hope this is a temporary measure, we note that this can impact the valuation, and ability to invest in capacity growth in the long term. We are putting the sector under review and waiting for the management of all steel companies to elaborate their thoughts and strategies over the next few days on how to deal with the current situation", Motilal Oswal Research report said.
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