Poised for ‘big leap’, SAIL jumps 50% in a month

Shares of state-owned Steel Authority of India (SAIL) have gained more than 50 per cent over the past month. The bulk of the gains have come during the previous four trading sessions, with the stock skyrocketing 28 per cent, from ~100 to ~128. While the entire metal pack has been on fire, SAIL has been the best-performing stock in recent weeks.

Analysts at Equirus believe SAIL is “poised for a big leap”, with key triggers being capacity expansion, more room for a price increase, and captive iron ore resources.

“SAIL is amid its most aggressive expansion plan ever, and is progressively commissioning incoming capacity… Domestic HRC (hot-rolled coil) prices have risen by ~ 7,000 a tonne in April, and are trading at a ~12,500 per tonne discount to Japan-landed prices; this implies more headroom for price hikes… With SAIL allowed to sell iron ore and with most of its capex set to commission in FY22E, we expect operating leverage to drive Ebitda growth and the stock to see a valuation re-rating over the next two years.

Initiate coverage with LONG and a March 22 target price of ~162, set at 5 times one-year forward Ev/ebitda (lower than peers),” says Siddharth Gadekar, analyst at Equirus in a note.

Over the years, SAIL has been a laggard due to project delays, high employee costs, and a high-cost structure compared to its peers.

Most leading steel companies — such as Tata Steel and JSW Steel — are currently trading at their lifetime highs. SAIL currently trades at half its lifetime high made in 2007.

Gadekar says the company will see better operational efficiency, leading to gains of ~2,500-3,000 per tonne in the next two years.

The BSE Metal index was the top-performing sectoral index last month, gaining 24 per cent, even as the benchmark Sensex fell 1.5 per cent.

However, some analysts see this as irrational exuberance.

A note by CGS-CIMB Securities says the increase in steel prices has been underpinned by a decline in productivity due to Covid-19. “Production growth has ramped up since March, but sustained production growth of 15-16 per cent in next 2-3 months in the rest of the world is needed to balance the global supply chain. If steel production growth continues, prices will likely decline in 2-3 months. The risk-reward is unfavourable,” it said.