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Steel Authority of India Limited (SAIL) has been buzzing on Dalal Street due to its outperformance in the metal pack since the lows of March 2020. Shares of the company have soared 447.94% to Rs 119.45 on April 30, 2021. The scrip was at Rs 21.80 on March 24 last year.
The rally indicates that an investment of Rs 25,000 in March last year would have now become Rs 1,36,984 at present. Brokerage Equirus Securities believes that SAIL is poised for a big leap now. It has set a March 2022 target price of Rs 162 for the steel major.
Delay in project execution and falling profitability has affected SAIL’s balance sheet negatively. SAIL incurred capex of Rs 87,600 crore during FY09-20. As a result, net debt to equity increased from 0.04 times in FY11 to 1.35 times in FY20.
“With steel prices rising by around Rs 20,000 per tonne over past nine months and with debt reduction of around Rs 13,900 in FY21E, we believe the sharp uptick in steel prices globally is likely to repair SAIL’s balance sheet significantly with debt to decline substantially and net gearing improving to 0.16x in FY23E,” Equirus Securities said in a report.
How did other metal majors perform?
On the other hand, other steel majors including Jindal Steel & Power, JSW Steel, Hindalco Industries, Vedanta and Tata Steel have also gained between 280%-390% since March last year. On the other hand, the BSE Metal index has rallied 228% during the same period.
Will the ongoing rally in steel stocks sustain?
Global financial services firm CGS-CIMB said that with many stocks trading at lifetime highs and valuations touching 2x P/B, the market appears to be pricing in sustained 4QFY21F margins for at least four to five years.
“If production growth continues at 14-15% for a couple of months, the end game for steel stocks will be near,” it said while retaining underweight on the sector. CGS-CIMB holds a ‘Reduce’ rating for Steel Authority of India and Tata Steel with a price target of Rs 54 and Rs 575, respectively.
“SAIL did Rs 63,000 of capex in the last 10 years but capacity remains uncommissioned (4-5mt) and efficiency did not increase. This leads to FY21 net debt-to-EBITDA to 7.33 times,” CGS-CIMB said.