Brokerage houses expect steel companies to perform better in the first quarter of the current financial year but are vary of the sector as they see the fall in the alloy’s prices to continue.
Global steel prices declined more than expected in May, though in India the price fall was not visible then, due to the rupee depreciation.
The currency decline will limit the impact on operating margins, Credit Suisse said in a research report.
The margins of the companies have flattened or fallen, but depreciation and interest costs have risen, it said.
The brokerage house has downgraded Tata Steel to underperform from neutral.
“Over and above the problems in EU, and the macro troubles in India, the ongoing uncertainty in China, once translated to iron ore/coal prices can meaningfully impact Tata’s valuations,” the brokerage said in a research report.
It has also revised downward the international steel price estimates.
According to SBICAP Securities, global steel prices corrected in May on the back of oversupply and lackluster demand. “On other hand, raw material prices had remained in positive zone due to production led demand from China,” it said.
SBICAP expects the price fall to become evident in India from the second quarter.
“In 1QF13, we see earnings improvement for steel producers on the back of lower raw material costs and better realisations sequentially. But, maintain a cautious stance on 2QF13 performance as decline in steel prices and higher input cost (sequentially) will hit margin,” it said.
“Besides, falling steel prices, we expect China’s production to decline from 61MT in May to 54-55MT as summer season is usually a slow season for demand and production. In India, we expect the demand in 2QF13e will also decline due to lower demand from construction activity,” SBICAP said. Shares of Tata Steel were at Rs 406.35, down 2 percent from Monday.