Out of the four major steel companies in India, Steel Authority Of India Ltd. has the highest number of analysts who are bearish on the counter.
Out of the four major steel companies in India, Steel Authority Of India Ltd. has the highest number of analysts who are bearish on the counter.
Of the 29 analysts tracking SAIL on Bloomberg, 48% have a 'sell' rating, while only 17% to 28% of the total analysts tracking companies like Tata Steel Ltd., JSW Steel Ltd., and Jindal Steel & Power Ltd have a bearish stance on the counters.
Historical Underperformance
Despite the recent optimism seen in the stock performance of SAIL (up 6% in the last five days versus peers gaining 2-4%), the street still takes into consideration the counter's long term underperformance. In the past one year, out of the four major listed steel companies on Indian exchanges, SAIL is the only counter that has seen negative performance. Even in the five-year period, shares of SAIL have made lesser gains compared to peers.
Near Term Optimism
SAIL's recent optimism stems from the proposed 12% safeguard duty on flat steel imports, benefiting its 50% flat steel sales mix and potentially boosting domestic steel prices by Rs 1,000-Rs 2,500 per tonne. This price increase significantly impacts SAIL's Ebitda, with a Rs 1,000 per tonne rise translating to 10% Ebitda increase, the highest among its peers.
Furthermore, due to the stock's 40% correction from last year’s highs, the company's one-year forward EV/Ebitda multiple has cooled down from 9.1 times to 7.3 times now. As per Emkay, while there is no potential for significant value creation, the stock is currently tactically placed.
Key Concern: Capacity Expansion Plans
The company aims to increase capacity from 20 MTPA to 35 MTPA by FY31, requiring a significant Rs 1.1-1.2 lakh crore capex. Emkay projects a more conservative 28 MTPA target. This planned expenditure compounds SAIL's historical struggles with consistent profitability and return ratios.
SAIL's prior FY10-20 expansion phase resulted in 9-10 years of negative free cash flow and a debt surge to Rs 53,400 crore compared to a Rs 6,000 crore net cash position in FY10. Kotak Securities and Emkay Research warn that the upcoming expansion, slated for FY26, risks further weakening SAIL's already strained balance sheet, as the capex is yet to commence.
Current Balance Sheet Picture
Steel Authority of India's net debt as of H1 FY25 stood at Rs 35,611 crore, marking a 16% increase from its position at the end of FY24. On the other hand the company's cash in balance remains very low at just Rs 68 crore, which is very similar to the level at the end of the last financial year.
The company's net debt to Ebitda also stands high at 6.9 times versus 2.7 times at the end of FY24.
SAIL's cash flow from operations have also turned negative in H1 FY25. The company's net cash flow stood at almost Rs 26 crore.
Kotak expects an extended period of negative free cash flows yet again due to the start of the next expansion phase in FY26. Emkay expects the company's net debt to equity ratio to hit 1 times in FY29, a level beyond which management is not comfortable raising debt.
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