Firm steel prices have continued to drive prospects and the company has seen a significant turnaround in profitability post coming out of the lockdown
Steel Authority of India Ltd's (SAIL) stock prices have more than doubled since the start of November amid several positives. Firm steel prices have continued to drive prospects and the company has seen a significant turnaround in profitability post coming out of the lockdown.
From losses at the operating level during the first quarter to the company being able to report per tonne Ebitda of ₹12.241 in third quarter, the turnaround has been phenomenal. For a company having higher cost structure compared to peers, the steel price environment remains favourable.
Key raw material prices as that of iron-ore are on the rise. But SAIL, having captive iron-ore supplies, remains insulated from the rising prices. In fact, the company had been allowed to sell some iron ore in the open market and this should drive its performance further.
With the significant rise in performance, the company is also seeing increase in free cash flows (FCF). The same should help SAIL reduce debt on its books. The steelmaker's net debt had reduced to ₹46,600 crore in Q3 compared to ₹54,400 crore in Q1.
“With limited capex, higher pricing should drive significant deleveraging and boost equity value," say analysts at Motilal Oswal Financial Services Ltd (MOFL). They estimate net debt to decline by ₹23200 crore ( ₹56 a share) over FY20-23E to ₹30,500 crore. Notably per share debt reduction or ₹56 is more than 75% of the current market price of SAIL. This should also help higher dividend pay-out for shareholders (5% yield expectations by analysts supported by strong FCF of about RS 19 a share).
The key to all this, however, remains the sustenance of higher steel prices. The improvement in product mix too can help improve per tonne realization and profitability. Any sharp rise in coal prices, though unlikely as per analysts, however, can pull down the company’s operating profits.
For now, analysts maintain a positive view on the stock. “We see SAIL as the best play on higher steel prices as it is backward integrated with captive iron ore has a higher operating leverage due to high conversion cost, and has higher financial leverage," say analysts at MOFL.