India’s competitive steel leader-board is led by the Tatas and the JSW Group. In their midst, Steel Authority of India (SAILNSE -0.12 %) is often described as a producer with a high cost base. But it could surprise the Street by its positive performance in the coming two years.
SAIL’s operating profits in the latest quarter were the highest in the last seven years and the management has guided for an aggressive 28 per cent production growth, along with margin expansions, for the current year.
After the recent completion of its capex cycle, albeit after a five-year delay, the steel producer now is in a sweet spot to capitalise on the improving demand supply situation. While demand is expected to grow at 7-8 per cent , other large players such as Tata SteelNSE -1.85 % and JSW Steel are operating at around 90 per cent of capacity.
Steel imports, especially from China, are also on the way down due to improving global demand and government measures. With an increased capacity of 21MT, and industry supply limitations, the management has guided that production would be at 18MT in FY19 (with acceleration in the second half) against 14MT in FY17.
Concerns over high costs, which include higher staff expenses vis-à-vis the industry, are also receding. Around 5,000 employees should retire in the coming year, and a similar number next year. This is expected to bring down staff costs by 13 per cent in the next two years.
Employee expense to sales at 15 per cent in FY18 was almost twice that of the industry average. SAIL also has its own iron ore mines, giving it an edge over peers in an improving demand scenario. For coking coal, it depends on imported coking coal (70 per cent ) and remaining from Coal India, prices of which have remained range bound for the last one year.
In the March quarter, SAIL did an adjusted EBIDTA per tonne of Rs7,000 against Rs 3,800 in the preceding quarter. This was the highest since FY11, thanks to a ramp up in production and firm steel prices. This is expected to inch higher, given further ramp up in production and higher steel realisations. Steel prices in the current quarter are 4per cent higher than the March quarter.
SAIL could Surprise Street
Also, with the capex cycle over, SAIL’s debt has peaked. With improving earnings, debt and interest outgo should reduce drastically in the coming two years from Rs 42,000 crore in the end of FY18.
At the current price of Rs 81, SAIL’s stock does not reflect the positives, as the Street is sceptical of such aggressive ramp up in production. Analysts are building in a ramp up in production. Analysts are building in a ramp up of only 2 MT against 4 MT as guided by the management. But if the management delivers on what it has said, the stock could surprise positively.
Based on management’s production guidance and an average EBIDTA per tonne of Rs8,000 for FY19 (could further improve to Rs8,500- Rs9,000 in FY20), the company’s stock is trading at 5.6 times FY19 estimated EV/EBIDTA. This is much cheaper than other players that trade at 7 to 8 times. In the past, SAIL’s stock has also traded in the band of EV to EBIDTA of 8 to 10 times.
Source: The Economic Times
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