This PSU stock can fetch you 44% returns

In the past one year, metal stocks have performed very well. The nifty Metal index has surged around 150% compared to 86% returns generated by Nifty. The primary reason for this outperformance strong recovery in the domestic demand of the Indian steel sector led by auto and infra spending.

Amidst this situation, a public sector undertaking Steel Authority of India Limited (SAIL) is the best play on higher steel prices as it has backwards integrated with captive iron ore, has higher operating leverage due to high conversion cost, and has higher financial leverage, said a report released by domestic brokerage firm Motilal Oswal.

“With limited capex, higher pricing should drive significant deleveraging and boost equity value,” said Amit Murarka, Research Analyst at Motilal Oswal.

At the CMP, the stock is trading at 4.2x FY22E EV/EBITDA, which is at a 25-30% discount to peers like Tata Steel and Jindal Steel. Given a strong steel cycle, the 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 Rs 1,000/t of higher steel price improves SAIL’s FY22E EBITDA by 11% and EPS by 17%. At the same time, valuation rises by 22%, added the note.

Many industry experts believe domestic steel prices can rise by Rs 2,000-3000/tonne since supply is getting disrupted in China due to output cuts being implemented to control pollution making export markets more lucrative for local steel mills.

“As SAIL swings to profit and has limited capex needs, a higher dividend payout going forward is possible. As against an inconsistent dividend of Rs 1-2/share (nil in FY16-18), a payout of Rs 4-5/share, can be expected implying a yield of 5-7%,” added Murarka.

The brokerage house is raising its FY22E/FY23E EBITDA estimate by 34%/37% and target price by 28% to Rs 104 on the expectation of higher realization and volumes.

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