Shyam Metalics and Energy (SME), an integrated metal producing company, listed at about ₹367 — a gain of nearly 20 per cent compared to its issue price. The stock is currently trading with a gain of around 25 per cent.

This has driven up the valuation of the firm. At the issue price of ₹306 itself, SME was valued at 11.8 times its annualised FY21 earnings which was not cheap enough considering that standalone operations of Tata Steel (primarily India-based operations) and JSPL are valued at around 9-10 times, and about 5-6 times respectively. Given SME’s business is almost entirely based out of India and more than 50 per cent of its products overlap with the major steel players, these are considered to be comparable in terms of valuation. With listing gains, the valuation of SME has now moved up to almost 15 times.

Given higher valuations versus well established peers, investors who got allotment can book profits at the current level.

SME’s Business

SME has three manufacturing plants having capacities across steel value chain constituting pellet (2.4 mtpa), sponge iron (1.38 mtpa), billet (0.9 mtpa), finished products (0.8 mtpa) and ferro alloys (0.2 mtpa).

In 9MFY21, about 51.4 per cent of revenues were from steel (including billets), 21.8 per cent from pellets, 15.5 per cent from ferro alloys and about 11 per cent from sponge iron. Being a well-diversified entity helps the company to have flexibility to sell as intermediaries as well as use them for captive consumption for finished value-added products like TMT, Wire Rods etc.

Growth drivers for the company look decent with the government’s push on infrastructure and company’s focus to double the TMT bars’ capacity by FY25.

While the company’s fundamentals look good, there is lack of clarity on how earnings will fare across the length of a volatile commodity cycle. Since the company is valued higher than some of the established steel players, investors who have been allotted shares can exit for now.

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