SAIL considered as the best play on higher steel prices

Steel stocks rose on Thursday, defying widespread weakness, in market negotiations that major steel players plan to increase flat steel prices by Rs 2,000-3,000 per tonne, given China’s HRC export price and the tight supply situation in the domestic market. While Tata Steel, SAIL, and Tata Steel BSL gained about 3%, JSW Steel and Jindal Steel & Power ended up green when the Nifty benchmark dropped by more than 1.5%.

 

“Domestic steel producers are expected to see a rise in the steel line as domestic steel prices could see an increase of more than Rs 2,000-3,000 per tonne, China’s HRC export prices and China’s domestic demand-supply scenario as exports become profitable,” said Abhijeet Bora, senior analyst, Sharekhan. “We expect domestic steel majors to benefit from a maximum profit of Rs 13,000-14,000 per tonne in the near term to medium term volume growth,” he added. China HRC export prices have risen by 16% to $740 per mt since the beginning of February. Currently, export prices are at a premium of Rs 6,000-7,000 per tonne for domestic prices. According to analysts, the Steel Authority of India (SAIL) is the best play as the company has been repatriated with captive iron ore and has higher financial leverage.

 

“With limited Capex, high prices should drive greater distribution and increase the value of the Sail equity,” said analyst Amit Murarka, Motilal Oswal Financial Services. “Given the strong steel cycle, we expect firmness to remain high over the medium term, that is, combined with inefficient cost structure, which should provide unequal benefits to SAIL,” he added.

 

At current prices, the stock is trading at 4.2 times FY22 estimated EV / EBITDA and 0.5 times the price of bookings, a 25- 30% discount on its peers Tata Steel and Jindal Steel. For every Rs 1,000 per tonne of high steel prices, it enhances the operating profit of SAIL’s FY22 (EBITDA) by 11% and earnings per share at 17%. Analysts also expect higher dividend payments to go forward, backed by a free cash flow of Rs 19 per share.

 

SAIL has held iron ore mines that meet all the requirements of raw materials for the production of steel. It has nine iron mines and seven flux mines (limestone, dolomite, etc.), which provide captive raw materials.

 

According to Dewang Sanghav of ICICI Direct, healthy growth in sales volume is in line with SAIL’s relatively firm steel price. It is expected to register a 10% CAGR volume during FY20-23 on the back of capacity expansion.

 

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