Commodity prices have skyrocketed in recent weeks, aided by the Russian invasion of Ukraine. The Nifty Metal Index is up 13.7% since Feb. 24.

Commodity prices have skyrocketed in recent weeks, aided by the Russian invasion of Ukraine. The Nifty Metal index is up 13.7% since Feb. 24, with stocks such as Tata Steel, Vedanta and Jindal Steel & Power each up at least 10%. However, analysts at Kotak Securities have lowered the fair value of the steel stocks under their cover to reflect the current macro uncertainty. “The degree of supply and demand disruption remains unclear and we see the potential of a sharp decline in costs in the event of a positive surprise around de-escalation,” the brokerage firm said in a report.

Target prices for steel stocks lowered

Analysts at Kotak Securities have lowered the fair value by a factor of nearly 0.5X. Analysts said a de-escalation between Russia and Ukraine could lead to a sharp drop in cost prices.

The fair value of Tata Steel has been reduced 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 shares of Jindal Steel and Power and those of NMDC. Analysts recommend a buy-on-dip strategy for Tata Steel. JSW Steel and SAIL have a ‘reduce’ tag.

Tata Steel shares are up 18% since Feb. 24, while Jindal Steel and Power’s share price is up 27% over the same period, while NMDC’s is up 12%. SAIL’s share price is up 12% since February 24 and JSW’s steel stock is up 15%.

Overall outlook for the steel sector still strong

Although target prices have been lowered, the overall outlook for the sector is still attractive. The brokerage firm said steel prices are gradually catching up with cost inflation. “NMDC has recently increased fines, however, but a 32% discount to import parity versus 20% discount in the past suggests a further benefit,” she added. Steel prices in India, China and Europe have risen by 10-15% in the past month, with Europe leading the way. While some gains have been curtailed as China faces another wave of Covid-19, disruptions in trade flows have helped and increased the export market of Indian factories.

Analysts at Kotak Securities said the steel price increases so far do not cover the expected increase in costs according to spot prices. “Given the 30-60 day consumption slowdown, the recent rise in costs should hit businesses in 1QFY23E, while price increases should result in stronger margins in 4QFY22E,” she added. “The current high level of steel prices would destroy demand in the domestic market, some of which would have to be offset by higher exports from Indian factories.”

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