Steel demand is expected to grow at a healthy rate of 6.7% and 6.3% in CY08 and CY09, respectively, led by strong growth in the BRIC countries.
To take advantage of the rising demand, SAIL is aggressively expanding its capacities, which is expected to increase from 13 mtpa to 23 mtpa by 2010. However, rising cost pressures could delay the time estimates as well as increase the initial estimated cost of the expansion projects.
However, pressure from the Indian government to curb steel prices in the scenario of rising inflation will adversely impact margins.
At the current market price (CMP), the stock is trading at a forward EV/EBITDA of 4.1x for FY09E and 3.6x for FY10E. Over the past few weeks, SAIL’s stock price has taken a beating. We believe that the stock is currently undervalued as against our target price of Rs192 for FY09E, and hence upgrade our rating to BUY.