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Why Jindal Steel Share Price is Falling

May 31, 2022

History may be repeating. If 2008 was something to go by, then the steel sector could be in for a world of pain.

Amid a market meltdown in 2008 and fears of a global recession the then United Progressive Alliance (UPA) government imposed an export duty as global steel prices crossed US$ 1,000 per tonne.

And metal stocks in India came tumbling down by 25%.

Similarly in 2022, metal stocks have been on a freefall and steel behemoths have been under tremendous pressure. This is a massive turnaround from 2021 when the sector was up 65%.

Last week on Monday, 23 May, the Nifty Metal index fell by 6% in early trade. By the end of the day, shares of all major steel companies plummeted by as much as 13%.

Jindal Steel and Power (JSPL) was one of the steel giants to touch lower circuit within a few minutes of the opening bell. Overall, the company witnessed a 26% fall within a month. That is a lot to take in.

So, what could have triggered this phenomenal nosedive in JSPL share price?

Let's find out...

#1 Government's Calibration of Customs Duty

According to a recent government of India announcement, the customs duty on the import of raw materials used by the iron and steel industry has been waived. This includes coking coal and ferronickel, raw materials that find heavy usage in the steel sector.

The government of India has also hiked the export duty on pellets from zero to 45%.

The move toward the waive of the import duty and the raise in export duty is an attempt to lower costs for the domestic industry and reduce prices in the long term.

What this means is that steel or stainless steel exports will now attract a hefty export duty on crucial steel-making raw materials like iron ore at 50% and pellets 45% respectively. Moreover, a 15% export duty has been imposed on hot-rolled, and cold-rolled steel products which as nil before.

Global demand is the lifeblood for steel companies in India and this announcement has rocked companies like JSPL as it directly impacts its exports. With a 15% hit, maintaining a 15% to 20% volume in exports will require a serious balancing act.

With the sluggishness of global demand combined with an extended stay of this export duty and adding the possibility of the Chinese markets reviving, the odds are leaning towards a weak performance for the stock of JSPL in the next few months.

#2 Multiple Downgrades by Brokerage Firms

In a bid to curb inflation and divert supply towards the domestic market, this news of levying export duty on 11 iron and steel intermediates and key steel products by the government of India did not go down well on Dalal Street.

This has resulted in broad based de-ratings by multiple brokerage firms.

Leading the way, ICICI Securities has already downgraded JSPL. The expectation was an increase in the earnings before interest, taxes, depreciation, and amortisation (EBITDA) cycle in the next 3 to 4 quarters, which now seems like an unlikely scenario.

Another brokerage, Prabhudas Lilladher, has also gone ahead with a steel sector downgrade and reduced the target price of its coverage universe by 20% to 55%. This is in line with a similar cut in earnings.

A report by Credit Lyonnais Securities Asia (CLSA) termed it as a huge negative for the sector that could lead to a sharp correction in steel prices. They too have downgraded JSPL.

Meanwhile, Motilal Oswal suggests an 'under review' rating on the sector.

What Does the Future Look Like for the Steel Industry?

A small stone has the potential to rock an already weak cart. The sector was under a lot of strain given the financial slowdown in China, the dollar strengthening, and the change in global demand for steel.

Add to that the measures announced by the government of India, and more fuel has been added to the fire.

A single announcement has brought the best performing sectoral index of 2021 down by 4% year on year (YoY). It fell by 16% in the month of May 2022 alone.

Analysts believe this same measure would have been more effective and yielded the desired outcome had it been done a year ago. At this time, last year, steel prices stood at similar levels and profitability was nearing its peak.

The steel industry would have had the bandwidth to absorb the financial impact without having to sacrifice its capex plans. That is no longer possible today.

How Has Jindal Steel Performed Recently?

The market started out on a strong footing but there have been some massive ups and downs lately.

As recent as April 2022, Jindal Steel shares were trading at a 52 week high in the middle of a market selloff. Since the beginning of the year, JSPL shares had gained a 42%.

The rise was primarily due to JSPL having won the tenders for three out of five coal blocks auctioned by the central government. Winning these coal blocks was a long term positive for the company that not only assured supply but was financially lucrative as well.

The reality today is that metal stocks are falling and JSPL, like other steel companies is a victim of the trend.

The introduction of the 15% export duty put the entire industry in turmoil. JSPL shares are now trading around Rs 380.

JSPL shares were down by 13.4% last week. Over the last 30 days, JSPL shares fell by 28.4%.

Its market cap in May 2022 stands at Rs 394.7 bn, down from Rs 565.3 bn in April.

About JSPL

Jindal Steel is one of India's top steel and power producers and has a dominant presence in the mining and infrastructure sectors.

With an export footprint to 30 odd countries, JSPL intends to boost capacity to 15.9 MTPA by 2025.

Under the leadership of chairman Navin Jindal, the company has recorded healthy profit growth of 179.23% in the last 3 years. Despite the contingent liabilities, JSPL is working towards being a net debt free company.

Backed by significant deleveraging, the company has improved its financial risk profile. JSPL enjoys a superior market position with continuous enhancements in production efficiency and an increasing focus on value-added products.

For more details about the company, you can have a look at JSPL's factsheet and JSPL's quarterly results on our website.

You can also compare JSPL with its peers.

JSPL vs Tata Steel

JSLP vs SAL Steel

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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