Stock Fundamentals

Why you should accumulate SAIL stock even after its 460 per cent rise

Satya Sontanam BL Research Bureau | Updated on August 28, 2021

The company has five integrated steel plants with combined crude steel capacity of 21.4 million tonne per annum

With steel companies continuing to reap benefits on the back of higher steel prices and healthy demand for the metal – both globally and domestically – stocks in the sector have soared in the last one year. The central public sector entity in this space – SAIL – is no exception. The stock has risen almost 460 per cent since its lows in March 2020.

In FY21, the company clocked best ever annual sales at 14.94 million tonnes (up 5 per cent y-o-y). In the latest June quarter, the company reported its highest-ever EBITDA of ₹6,674 crore.

With infrastructure spending by the government expected to boost growth in the economy, the domestic demand for steel is expected to be decent going ahead .

Further, the Chinese government’s decision to cut the steel output due to environmental concerns will be favourable for Indian steel players to cater to the demand in the export market (about 10 per cent of total sales for SAIL). The company’s plans to expand capacity by 12-14 million tonnes (mt) at its steel plants at Bokaro and Rourkela will cater to the expected growth in steel demand. At the current market valuation, the company is attractive compared to its peers. SAIL is trading at EV/EBITDA of 4.08 times (FY22 Bloomberg consensus). SAIL stock stands cheaper in terms of this metric against other top players in the industry (Tata Steel - 4.64 times; JSW Steel -6.53 times). This is also much lower than its past three-year average of 20 times.

Note that the replacement cost measured by EV/ tonne also stands below ₹50,000 per tonne for SAIL, less than half of what the big peers in the industry – Tata Steel and JSW Steel – command. Hence, investors with a long term horizon and high risk apetite can consider accumulating the stock on dips from current levels.

Good prospects

SAIL operates and owns five integrated steel plants at Bhilai, Rourkela, Durgapur, Bokaro and Burnpur (Asansol) with crude steel capacity of 21.4 million tonne per annum.

SAIL caters to the needs of construction, engineering, power, railways, automotive and defensive industries. The company is the largest supplier for rails and heavy plates in India and enjoys a near monopoly position in this market.

While the prospects of the steel sector looks decent in terms of demand for the metal, current higher steel prices are a point to consider.

However, based on recent developments, industry experts believe that steel prices could be range-bound and may not see drastic downfall from the current levels, at least in the near-term. This is due to rise in coking coal (key raw material) prices internationally and also based on the robust demand for the metal with re-opening of global economies.

Even at some discount to current steel realisations (₹65,250 per tonne of hot rolled coil), earnings of SAIL are expected to witness decent growth from hereon. The growth in volumes for the company is expected to make up for decline in realisations (unless sharp), if any.

The company is also focusing on its expansion plans to increase its total capacity to 50mt. In Phase I, it is looking to expand capacity by 12- 14mt in Bokaro, IISCO, and Rourkela steel plants. Meaningful capex expansion would likely start from FY24 onwards.

Decent financials

In FY21, while the net sales went up by 12 per cent (y-o-y) to ₹69,113 crore, net profit shot up by 91 per cent to ₹3,680 crore boosted by robust operational performance in the second half of that fiscal. It is pertinent to note that the employee cost has risen by about 20 per cent in FY21 on account of wage revisions, whcih will continue going ahead.

During the first three months of the current fiscal, the company doubled its revenue to ₹20,642 crore and posted profit of ₹3,897 crore against losses in the same period in the previous fiscal.

Gross debt decreased by ₹16,450 crore to ₹37,677 crore during FY 2020-21. There is a further reduction of ₹5092 crore in the gross borrowing in the quarter ended June 2021.

The net debt-to-equity stands at 0.69 times as against 1.36 times at the end of FY20, which leaves scope for company to invest for capacity expansion/growth in the future. As per the management, the company would like to repay most of its long-term debt before investing on its expansion plans.

Key risks to watch for is any higher than anticipated cooling off in commodity prices and wage revision effective retrospectively from FY17.

Published on August 28, 2021

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