Fundamental analysts also believe the risk-reward is turning negative for SAIL, following weakness in iron ore prices, which suggests more pain ahead.
Jhunjhunwala bought 1.39 per cent in the PSU during the April-June quarter. But the stock is on a steady fall after it hit its peak of Rs 151.10 on May 10. On Tuesday, the stock closed at Rs 151.10. At this price, Jhunjhunwala’s stake in the steelmaker was valued at Rs 640 crore.
Aditya Agarwala, Senior Technical Analyst at YES Securities, said the stock has turned lower from a Fibonacci resistance level and is now approaching a key support level at Rs 101-103.
“A sustained trade above this support level may resume the uptrend, taking the stock higher to Rs 116-123 levels. Moreover, technical indicator RSI has now reached the oversold zone, suggesting a possible short covering in the coming sessions,” Agarwala said.
Rohit Singre of LKP Securities said the stock looks structurally weak, as it has lost its key support at Rs 110 level in Monday’s fall. Singre does not see any major support in SAIL before Rs 95. “The stock may fall to Rs 95-96 before seeing a pullback. Once the stock moves above the Rs 110 level, it would be in a safer zone,” he said.
The domestic steel sector has seen significant positive consensus earnings revisions against the broader market since August 2020. Bloomberg consensus FY22 earnings estimates for steel sector stocks have risen 256 per cent compared with 11.8 per cent for Nifty year to date. Among steel stocks, consensus earnings revisions have been the most significant for SAIL and Tata Steel, Nomura India noted.
But the 22 per cent fall in global iron ore prices last week does not bode well for companies, especially long product producers such as SAIL. ICICIdirect said lower iron ore prices are positive for unintegrated producers like JSW Steel and JSPL but such prices bring along not so exciting news for predominantly long product producers like SAIL.
Lead indicators of Chinese demand for steel have continued to worsen and weak real estate data in China as well as contagion fears on account of debt defaults are weighing on iron ore prices.
“The last cost support for steel is in elevated coking coal prices and it appears that it is only a matter of time, given the current pace of Chinese steel production decline, before coking coal starts to correct. Higher coking coal prices are currently compressing Chinese steel margins and supporting steel prices. Global steel equities continue to de-rate in expectations of a price decline,” ICICIdirect said.
ICICIdirect, which has a ‘sell’ rating on SAIL, said lower iron ore prices imply lower scrap prices and lower scrap prices imply lower sponge iron prices.
“Sponge iron prices are the trendsetter for long product prices in India. Demand recovery can help inter-product spreads; however, iron ore at less than $100/te does not augur well for long product prices. We see largest MTM earnings drop for SAIL and JSPL (14-17 per cent),” it said.
BOB Capital Markets said Evergrande’s debt crisis in China has the potential to severely weaken global steel demand and induce a sharp correction in steel prices and, in turn, margins for India’s steel industry.
“This event could have a significant impact on close to 60 per cent of steel demand in China, which equals 30 per cent of global steel demand in CY20. The concern is visible in the sharp correction in iron ore price to $90 per tonne from a peak of $239 in May,” it said and suggested a ‘hold’ on SAIL.
Arijit Malakar, head of research at Ashika Stock Broking, said while it is not that the prevailing concerns are undemanded, he expects the Chinese government to eventually bail Evergrande out.
“These fears may be shortlived. Among steel stocks, SAIL is the only stock with reasonable valuation. I would advise investors to buy on dips. I do not see the Evergrande crisis snowballing and changing the long-term outlook for the steel sector. One should not forget that governments globally are announcing infrastructure plans, which should aid steel demand in the years to come,” Malakar said.
Narendra Solanki, Head of fundamental research at Anand Rathi said a default by the second largest Chinese realtor can lead to slowdown in the Chinese real estate market. He, however, feels that a bailout from the Chinese central authority is on the cards.
“SAIL’s valuation is reasonable when compared with its peers. It has been deleveraging its balance sheet thereby reducing borrowings and relying more on internal accruals. It has been constantly focusing on improving its volume, improving its operational efficiencies which is visible from gaining Ebitda Margins. With the government’s increased spending on infrastructure, we expect SAIL’s performance to improve further, driven by realisation uptick and volume growth,” Solanki said.
