Why you should accumulate SAIL shares even after its 460% rise

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With steel companies continuing to reap profits from rising steel prices and strong demand for the metal – both globally and nationally – shares of the sector have soared over the past decade. last year. The central public sector entity in this space – SAIL – is no exception. The stock has risen nearly 460% since its March 2020 low.

In fiscal year 21, the company recorded the best annual sales in its history with 14.94 million tonnes (up 5% year-on-year). In the last quarter of June, the company reported its highest ever EBITDA at 6,674 crore.

With government infrastructure spending expected to stimulate economic growth, domestic demand for steel is expected to be decent in the future.

In addition, the Chinese government’s decision to reduce steel production due to environmental concerns will be favorable to Indian steel players to meet demand in the export market (around 10 percent of SAIL’s total sales ). The company’s plans to increase capacity from 12 million tonnes (mt) to 14 million tonnes (mt) at its Bokaro and Rourkela steel plants will meet the expected growth in demand for steel. At the current market valuation, the company is attractive compared to its peers. SAIL is trading at EV / EBITDA of 4.08x (Bloomberg Consensus FY22). SAIL stock is cheaper in terms of this metric compared to other major players in the industry (Tata Steel – 4.64 times; JSW Steel -6.53 times). It’s also much lower than its past three-year average of 20 times.

Note that the replacement cost measured per EV / tonne is also less than 50,000 per tonne for SAIL, less than half of what the big industry peers – Tata Steel and JSW Steel – are ordering. Therefore, investors with a long-term horizon and a high risk appetite may consider accumulating the stock if it falls from current levels.

Good prospects

SAIL operates and owns five integrated steel plants in Bhilai, Rourkela, Durgapur, Bokaro and Burnpur (Asansol) with a crude steel capacity of 21.4 million tons per year.

SAIL meets the needs of the construction, engineering, energy, railroad, automotive and defense industries. The company is the largest supplier of rails and heavy plate in India and enjoys a near monopoly position in this market.

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

However, based on recent developments, industry experts believe that steel prices may be limited in a range and may not experience a drastic drop from current levels, at least in the near term. This is due to the rising prices of coking coal (a key raw material) internationally and also to the high demand for the metal with the reopening of world economies.

Even with some discount from the current steel achievements (65,250 yen per ton of hot rolled coil), SAIL’s profits are expected to grow decently from now on. Growth in the company’s volumes is expected to offset the decline in achievements (unless sharply), if applicable.

The company is also focusing on its expansion plans to increase its total capacity to 50 mt. In phase I, it seeks to increase capacity from 12 to 14 million tonnes at the steel plants of Bokaro, IISCO and Rourkela. A significant expansion in investment would likely start from FY24.

Decent finances

In FY21, as net sales increased 12% (year-on-year) to 69,113 yen, net profit jumped 91% to 3,680 yen, driven by strong operating performance at during the second half of this exercise. It is relevant to note that salary costs have increased by around 20 percent in FY21 due to salary reviews, which will continue.

In the first three months of the current fiscal year, the company doubled revenue to 20,642 yen crore and posted a profit of 3,897 yen crore compared to losses in the same period of l ‘Previous exercice.

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

The net debt to equity ratio stands at 0.69 times compared to 1.36 times at the end of FY20, which leaves the possibility for the company to invest for the expansion / growth of its capabilities in the future. According to management, the company wants to repay most of its long-term debt before investing in its expansion plans.

The main risks to watch are a higher than expected cooling of commodity prices and an effective wage revision retrospectively from FY17.


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