Steel majors Tata Steel and JSW Steel were faltering on Monday after analysts sounded caution over higher input costs and lower demand.

What Happened: CLSA remains cautious on the Indian steel sector, pointing to a shift in profit pool towards miners, anticipation of lower spreads compared to the past and elevated valuations for stocks despite spread compression, not reflected in consensus estimates.

CLSA downgraded Tata Steel to “sell” from “outperform” and slashed the target price to ₹135 from ₹145. Similarly, it lowered the rating for JSW Steel to “sell” from “underperform” and adjusted the target to ₹730 from ₹810.

Both companies are expected to witness robust volume growth due to capacity expansion in the next two years, but CLSA predicts lower margins due to weaker spreads.

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Silver Lining: Maintaining an “underperform” rating on Jindal Steel and Power, however, CLSA acknowledged its relatively better position due to margin expansion projects, even in the face of weaker industry spreads. However, a potential risk lies in a China-driven stimulus impacting its outlook, the brokerage said. The brokerage raised the its target price on the stock to ₹840 from ₹820 per share.

CLSA warns of the impact of India’s rapid blast furnace-based steel capacity expansion, foreseeing lower spreads and a shift towards raw materials. The brokerage expects FY25/26 spread at $360 a tonne, below the 10-year average, due to surplus supply, increased exports and domestic steel prices likely below import parity.

Price Action: Tata Steel’s share price was down 1.29% at ₹153.25 in afternoon trade while JSW Steel’s share price fell 2.5% to ₹823.85 and Jindal Steel’s share price inched up 0.18% to ₹840.