Broker's call: SAIL (Long)

| Updated on May 04, 2021

Equirus Securities

SAIL (Long)

Target: ₹162

CMP: ₹127.95

Steel Authority of India (SAIL) is amidst its most aggressive expansion plan ever, and is progressively commissioning incoming capacity. The company’s expansion plan has been delayed by more than ten years now, hurting its balance sheet; not surprisingly, net gearing increased from 0.04x in FY11 to 1.35x in FY20.

Domestic HRC prices have risen by about ₹7,000/t in April 2021 and it is trading at about ₹12,500/t discount to Japan landed prices; this implies more headroom for price hikes. With SAIL allowed to sell iron ore and with most of its capex set to commission in FY22, we expect operating leverage to drive EBITDA growth and the stock to see a valuation re-rating over the next two years. We initiate coverage with ‘Long’ and a March 22 target price of ₹162, set at 5x 1-year forward EV/EBTIDA (lower than peers). With MIP in place, we don’t expect domestic steel prices falling below ₹36,000-37,000/t. However, given that companies export HRC as well, export realisations could be at risk. Having said that, any sharp recovery in domestic demand could reduce exports significantly, leading to stable prices in the domestic market.

Key risks: Steel is a cyclical industry and we have assumed that domestic steel prices will trade close to MIP. Besides, with domestic prices below $489/t, we don’t expect imports to flow into the country; and slowdown in China.

Published on May 04, 2021

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