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Foreign brokerage Jefferies has downgraded Indian steel stocks and said it finds risk-reward for the country's steel far inferior to a year ago.

"After a very positive stance on the Indian metal sector since September 2020, we believe it's time to turn cautious on steel," Jefferies said.

"We believe margins for Indian steel companies have peaked and will fall sharply by FY23, although still settle above the last 10-year average. We cut FY23 EPS for TATA/JSW Steel by 18 per cent/26 per cent — first big cut in more than a year, and we are 23 per cent/22 per cent below street.

"After a big rise in FY21-22E, we see EPS falling 44 per cent/21 per cent YoY for TATA/JSW Steel in FY23. We assume FY23 Indian steel price of Rs 58,000 (6 per cent cut, 9 per cent below spot) and coking coal price of $230/t (36 per cent below spot).

After a year-long rally, global steel and aluminium prices have softened on weak macro and demand concerns in China.

China PMI is bottoming and policy could ease, but there is still risk of muted Chinese growth given the significance of property sector to metal demand, Jefferies said.

The backdrop for metals is better than the last decade as decarbonization in China should limit exports. However, unlike early-2021, the case for big rally in metal prices is behind and steel earnings are starting to see big cuts.

Chinese demand and supply post CNY is key where visibility is low. We find risk-reward for India steel far inferior to a year ago, Jefferies added.

Jefferies said Chinese demand is structurally shifting from urbanization and industrial development to new economy infra such as renewables and EVs. This should drive a shift from steel and coal to copper, aluminium and other 'energy transition' metals.

"We find Novelis also well-placed for the global shift to aluminium from steel in autos, and from plastics and glass in beverage cans. For 2022, Jefferies is most bullish on copper and aluminium," it said.