Investment rationale for SAIL according to Axis Securities
- SAIL’s modernisation & expansion plan is near completion and the company’s total saleable steel capacity will increase to 20.2mtpa post-expansion. FY21 saleable steel production stood at 14.6 MT, much below the rated capacity and thereby provides significant potential for volume growth as the new capacity ramps up. H1FY22 saleable steel production is already at 8.09MT which annualises at 16.2MT in FY22. We expect the company to deliver volume growth of 6.5% compound annual growth rate (CAGR) over FY21-24E.
- In line with our assumptions on steel prices and margins, earnings before interest, taxes, depreciation, and amortization (EBITDA)/tonne is expected to peak in FY22E at Rs13,365/tonne and decline in FY23/24E at Rs10,511/10,505 per tonne but remain above the reported FY19/21 level of Rs 6,478/6,773 per tonne, driving profitability for SAIL. We estimate an EBITDA CAGR of 13.5% over FY21-24E.
- SAIL’s next phase of expansion to 50mtpa is likely to start from FY24 and we don’t foresee a substantial increase in capital expenditures (Capex) until then. The company reported an FCF of Rs 19,758 Cr in FY21. With strong EBITDA and lower Capex, we estimate it to continue posting robust free cash flow (FCF) of Rs 17,985/14,027/13,656Cr in FY22E/FY23E/24E respectively, implying an FCF yield of 30-39%. With higher FCF, we expect the company to undergo significant deleveraging with net debt falling to Rs 2,533Cr in FY24E from Rs 37,158Cr in FY21 (Net-debt in 1HFY22 stood at Rs 23,738Cr). Driven by higher profit after tax (PAT), we expect SAIL to maintain its payout ratio of 28% (in FY21) from FY22 to FY24, which translates into a high dividend yield of 6-8% at the current market price.
Buy With A Target Price of Rs. 150
According to the brokerage “SAIL is currently trading at 3.0x 1Y consensus EV/EBITDA which looks cheap against the 10Y/5Y/3Y average of 8.3x/6.4x/3.7x. Valuation of all the four major steel peers has declined from the peaks and has approached towards the lower end of the 3x-9x range of the steel cycle over the last decade. SAIL in particular trades at the bottom of the pack.”
Axis Securities has said in its research report that “The low multiple indicates investors discomfort towards the direction of the steel cycle going forward. Uncertainty of steel demand arises as China tries to tread a thin line between restructuring its real estate sector and securing economic stability. However, as we discuss in this report, we don’t foresee a recessionary bear steel cycle in the medium term.”
“SAIL’s slow execution of the expansion project and doubts on volume growth/product mix and concerns over its next leg of expansion from FY24 looks priced-in in the current low multiple. However, we see rerating potential from here on given the stock has bottomed out with limited downside. With modest Capex till FY24, potential volume growth/product mix and deleveraging warrants 4.0x multiple (its 3Y average) to value SAIL against its current 3x on its FY24 EBITDA. We arrive at our 1 year forward TP of Rs 150/share using 4.0x EV/EBITDA on our FY24 EBITDA estimate and initiate the coverage with a BUY rating” the brokerage further claimed.
The above stock has been picked from the brokerage report of Axis Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.
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