Uptick in demand to continue for the next 1-2 quarters – SAIL

Update on the Indian Equity Market:

On Thursday, the Indian equities ended with gains despite the weekly options expiry led volatility. The Nifty50 ended at 14,874 (+0.4%) lower than the day’s high of 14,984. METAL (+3.9%), IT (+1.2%), and REALTY (+0.8%) led the sectoral gainers while PSU BANK (-0.9%), PRIVATE BANK (-0.6%), and BANK (-0.6%) led the losers. JSWSTEEL (+9.6%), TATASTEEL (+5.4%), and SHREECEM (+4.8%) were the top gainers among Nifty50 components. SUNPHARMA (-1.1%), INDUSINDBK (-1.1%), and SBILIFE (-1.0%) led the laggards.

Excerpts of an interview with Ms. Soma Mondal, Chairman, Steel Authority of India Ltd (SAIL) published in The Economic Times on 7^th April 2021:

• There are three reasons why steel prices are among the highest in a decade. One, there have been supply-side constraints, even in the second and third phase of Covid, which has impacted the ramping up of capacities in certain parts of the world. Second, China is expected to close down some inefficient units as they have a target for reducing carbon footprint. Last, being raw material supply constraints have led to a rise in iron ore prices. These factors are driving steel prices up and the demand has picked up.
• The uptick in demand is likely to continue for the next 1-2 quarters. As prices go up, many closed capacities expected to open up, supply constraints will be eased. The increased supplies are expected to put downward pressure on prices.
• As the vaccination drive in on, the Covid situation is expected to come under control. This will lead to some pick-up in production, which is currently hampered due to increasing Covid cases.
• The Company is focusing on reducing its borrowing. In April-20, the debt was Rs 520 bn, which was reduced to ~ Rs 350bn by March-21. They would like to bring the debt level even more because they want to start the next phase of expansion.
• A total focus on the balance sheet, increased volume thrust on increasing efficiencies, reducing cost, and techno economic improvement will help improve the balance sheet and leverage position.
• The conversion costs are high for SAIL because of wages and salaries. At higher volumes, this would go down. They are reducing their manpower, hence they are not recruiting as much. With a balanced approach to recruitment and increasing their volumes, the cost of production and conversion costs will be reduced.
• Their primary aim is to meet the domestic demand and having a strategic presence in the export market.
• With major capacities not coming up anywhere other than in India, she expects the demand and prices to remain strong. With a lower leveraged position, SAIL would plan the next phase of expansion.

Asset Multiplier Comments

• The demand from the auto, construction, and white goods sector and infrastructure focus by the Indian government has led to the creation of demand for steel.
• The strong demand and rising prices since the easing of lockdown restrictions are expected to continue driving the profitability of Indian steel manufacturers.

Consensus Estimate: (Source: market screener and investing.com websites)

• The closing price of SAIL was ₹ 96/- as of 08-April-2021. It traded at 7x/ 6x the consensus earnings estimate of ₹ 14.6/ 15.8 per share for FY22E/FY23E respectively.
• The consensus target price of ₹ 82 implies a PE multiple of 5x on FY23E EPS of ₹ 15.8/-.

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