Tata Steel falls 2.5% on KIE’s rating downgrade amid unfavourable risk-reward

KIE feels the recent the 20 percent surge in the stock price of Tata Steel in the past two months has stretched its valuations beyond fundamentals, making the risk reward unfavourable.

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Shares of Tata Steel fell 2.5 percent in trade on January 3 after brokerage firm Kotak Institutional Equities downgraded the stock to ‘reduce’ citing unfavourable risk reward at the current valuations.

On that account, the brokerage has also assigned a price target of Rs 145 for the stock which reflects an upside potential of merely 3 percent from the previous day’s closing level.

At 12.54 pm, shares of Tata Steel were trading at Rs 136.60 on the National Stock Exchange.

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KIE noted the 20 percent surge in the stock price of Tata Steel in the past two months, largely driven by the broader market buoyancy, which has stretched its valuations beyond fundamentals, making the risk reward unfavourable.

The firm also highlighted the steelmaker’s deteriorating fundamentals on the margin front, which along with the spike in raw material prices hints at a downward pressure on the company’s spreads in the Indian market from 4QFY24.

Moreover, the persistent pressure in Europe’s steel spreads and the risk of delay in UK’s resolution and completion of the KPO-II 5 mtpa expansion are seen as other downside risks for Tata Steel according to the firm.

Though the expansion of the KPO Phase II plant in UK is likely to aid the steelmaker’s earnings, the plant could face delays of 3-6 months from the earlier anticipation of commissioning by March. This means that substantial volumes may only come into effect from FY2026, taking away another growth lever for the company, the firm stated.

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