One of the big contributors to the Indian market's bull run was the metal sector, which gained nearly 30 percent in the last one year due to lower input/raw material cost.
Input costs were a key driver of steel prices, while iron ore prices should remain under pressure given weak fundamentals, according to Jefferies report.
According to brokerage house, the domestic steel prices are down 4-5 percent versus fourth quarter average and should fall further given prices are still at 6-8 percent premium to anti-dumping duty (ADD) based import parity (FTA countries).
Meanwhile, research firm expects the domestic demand growth to improve (6.5 percent CAGR FY 17-19E), but new capacities and lower exports would weigh on utilization.
Lower domestic prices will put pressure on margins especially on integrated steel firms i.e. Tata India, SAIL on lower input cost flexibility, while the non-integrated player JSW Steel should be better placed, the brokerage house said.
Tata Steel, SAIL and JSW Steel will underperform as valuations appear unattractive post their outperformance versus global peers, and lower steel margins could weigh on share prices.
S&P BSE Metal Index were trading 1 percent lower, in which stocks like Tata Steel, JSW Steel and Steel Authority of India were down between 2-3 percent intraday Friday.
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