Kotak Institutional Equities has downgraded Tata Steel to 'Sell' from 'Reduce', citing concerns about declining steel spreads in both Indian and European markets. Kotak also considers Tata Steel overvalued following a recent rally in the stock and has hence slashed its target price down to Rs 145 from Rs 150. Additionally, the brokerage has cut its EBITDA estimates for FY25 and FY26 by 19 percent and 13 percent, respectively.
At 2 PM, Tata Steel's shares were up 0.5 percent, trading at Rs 160. Year-to-date, the stock has risen 14 percent, matching the gains of the Nifty 50.
While China's recent stimulus measures have sparked a short-term rally in steel and iron ore prices, Kotak believes the positive impact will be slow and primarily visible in 2025. "In India, higher imports, weaker exports and pressure from regional prices should keep steel margins under pressure in the near term," Kotak said. The firm said that iron ore price recovery has outpaced steel price increases, adding to pressure on European steel spreads.
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One of the key risks outlined by Kotak is the expiration of Tata Steel's mining leases for iron ore by FY30. "We estimate that it would have to meet approximately 75 percent of iron ore requirement from market purchase versus nil currently. This would significantly increase the iron ore cost and impact steel margins," Kotak warned, projecting a Rs 3,600 per tonne rise in steel costs.
Tata Steel's plans for decarbonisation in Europe was also flagged as a medium-term concern by Kotak. The company intends to replace a blast furnace in the Netherlands with a Direct Reduced Iron (DRI) plant integrated with Electric Arc Furnace (EAF) technology before FY30 as part of its broader decarbonisation strategy. However, this project remains contingent on government support.
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