Comments
Motilal Oswal
SAIL (BUY)
Target: ₹104
CMP: ₹79.15
We see Steel Authority of India (SAIL) as the best play on higher steel prices as it is: 1) backward integrated with captive iron ore 2) has a higher operating leverage due to high conversion cost, and 3) has a higher financial leverage. With limited capex, higher pricing should drive significant deleveraging and boost equity value.
Given the strong steel cycle, we expect realisation to remain high in the medium term, which, coupled with an inefficient cost structure (higher conversion cost), should provide disproportionate margin gains to SAIL. With robust EBITDA and limited capex, we estimate free cash flow (FCF) to be strong at ₹7,800 crore/₹8,600 crore in FY22/FY23, implying an FCF yield of 25-28 per cent.
We estimate net debt to decline by ₹23,200 crore (₹56/share, 76 per cent of CMP) over FY20-23 to ₹30,500 crore.
We also expect higher dividend payouts going forward (implying about 5 per cent yield), supported by strong FCF of ₹19/share (25 per cent yield). We are raising our FY22/FY23 EBITDA estimate by 34 per cent/37 per cent and target price by 28 per cent on expectation of higher realisation and volumes.
The stock trades at 4.2x FY22E EV/EBITDA, a 25-30 per cent discount to peers TATA and JSTL.
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