23 March 2021
Update | Sector: Metals
SAIL
SAIL
Buy
BSE SENSEX
50,051
S&P CNX
14,815
CMP: INR72
TP: INR104 (+44%)
Best play on higher steel prices
Strong FCF to drive deleveraging and higher dividend yield
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Financials & Valuations (INR b)
Y/E March
2021E 2022E
Sales
695.1 809.8
EBITDA
137.7 157.8
Adj. PAT
59.6
76.6
Adj. EPS (INR)
14.4
18.5
EPS Gr. (%)
-3,167.0
28.5
BV/Sh. (INR)
110.7 124.8
RoE (%)
13.7
15.8
RoCE (%)
11.6
13.6
Payout (%)
10.5
25.9
Valuations
P/E (x)
5.0
3.9
P/BV
0.7
0.6
EV/EBITDA (x)
5.1
4.2
Div. Yield (%)
4.2
5.5
SAIL IN
4,130
298.4 / 4.1
82 / 20
2/75/122
2271
We see Steel Authority of India (SAIL) as the best play on higher steel prices as it: 1) is
backward integrated with captive iron ore, 2) has a higher operating leverage due to
high conversion cost, and 3) has a higher financial leverage. With limited capex, higher
pricing should drive significant deleveraging and boost equity value. We estimate net
debt to decline by INR232b (INR56/sh, 76% of CMP) over FY20-23E to INR305b. We
also expect higher dividend payouts going forward (implying ~5% yield), supported by
strong FCF of INR19/sh (25% yield). We are raising our FY22E/FY23E EBITDA estimate
by 34%/37% and TP by 28% on expectation of higher realization and volumes. The
stock trades at 4.2x FY22E EV/EBITDA, a 25-30% discount to peers TATA and JSTL.
Higher realization and volume growth to drive earnings
2023E
823.8
145.1
70.0
17.0
-8.6
136.2
13.0
12.0
35.5
4.3
0.5
4.2
6.9
Given a strong steel cycle, we expect realization to remain high in the
medium term, which, coupled with an inefficient cost structure (higher
conversion cost), should provide disproportionate margin gains to SAIL.
Every INR1,000/t of higher steel price improves SAIL’s FY22E EBITDA by 11%.
Supported by under-utilized capacities, volume growth is expected to be
strong at 9% CAGR over FY21-23E. There is also a likelihood of product mix
improvement (higher finished steel sales).
We estimate 36% EBITDA CAGR over FY20-23E.
Strong FCF to drive deleveraging and higher dividend yield
Shareholding pattern (%)
As on
Promoter
DII
FII
Others
Dec-20 Sep-20 Dec-19
75.0
75.0
75.0
13.0
13.7
14.8
4.2
3.2
3.6
7.9
8.1
6.7
FII Includes depository receipts
Stock performance (one-year)
SAIL
90
70
50
30
10
Sensex - Rebased
With robust EBITDA and limited capex, we estimate FCF to be strong at
INR78b/INR86b in FY22E/FY23E, implying a FCF yield of 25-28%.
Higher FCF should drive significant deleveraging, which should boost its
equity value. We estimate net debt to decline by INR232b (INR56/share,
76% of CMP) over FY20-23E to INR305b (2.1x of FY23E EBITDA). Net debt has
already declined by INR94b (INR23/share) to INR443b in 9MFY21.
As SAIL swings to profit and has limited capex needs, we expect a higher
dividend payout going forward. As against an inconsistent dividend of INR1-
2/sh (nil in FY16-18), we expect a consistent higher payout of INR4-5/sh,
implying a yield of 5-7%.
Valuation is attractive, lower steel price the key risk
At the CMP, the stock is trading at 4.2x FY22E EV/EBITDA, which is at a 25-
30% discount to peers TATA and JSTL. Even on FY22E P/BV, it is trading at an
attractive 0.6x, despite an expected strong RoE of 16%.
We value the stock at 5x FY22E EV/EBITDA at INR104/share, implying a
target P/B of 0.8x (historical average of 0.7x).
Key risks are lower steel price and higher capex.
Amit Murarka – Research Analyst
(Amit.Murarka@MotilalOswal.com)
Basant Joshi – Research Analyst
(Basant.Joshi@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
4 November 2020
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.