Stock pick of the week: Why it is a good time to accumulate stocks of SAIL

The recent fall in international steel prices— around 20% during the past six months, has put all domestic steel manufacturers, including Steel Authority of India (SAIL), under pressure. This explains the 14% drop in the revenue of this Maharatna company in the third quarter of 2018-19. However, SAIL reported strong Ebitda and net profit growth during the quarter because of improvement in operating efficiencies and leverage, and lower forex hedging losses.

Ebitda stands for earnings before interest, tax, depreciation and amortisation. Growth in Ebitda per tonne for SAIL was also better than peers due to volume ramp up and the low base effect.

Availability of quality coal is one bottleneck for SAIL now. Though SAIL has a small captive clean coking coal facility now with a production capacity of 0.7 metric tonne per annum (mtpa), it is not enough and, therefore, SAIL primarily sources coal from Coal India. However, as Coal India has also not been able meet its demand, SAIL has had to depend on imported coal—around 85%-90% of its coal needs are met through imports. Due to such high imports, volatility in SAIL’s production cost is quite high. To mitigate it, SAIL plans to develop Tasra captive coal mine to produce 4 mtpa of coal. The company has also approached the Ministry of Coal for allocation of new coking coal blocks in line with the recommendations of Niti Aayog.

Analysts’ views
Sell 7
Hold 5
Buy 7

After a deep cut, the domestic and global steel prices have started stabilising offering some relief to steel producers. Though quite slow, revival in the domestic steel demand is another positive factor for companies like SAIL. The growth in domestic steel demand is expected to be about 7.5% during calendar years 2019 and 2020. SAIL is expected to report around 8% sales volume growth till 2019-20, given the smooth execution of its expansion plans.

For instance, SAIL added two additional blast furnaces during the past year. Its new steel melt shop at Bhilai is also expected to be fully operational soon. The better operating leverage due to this increased volume growth will help SAIL report better margins too. Low valuation is another factor that has made analysts bullish on this counter. For instance, the market-cap of SAIL, the largest domestic steel maker, is below Rs 20,000 crore now. As is visible from the valuation table, its price-to-book value is now placed at just 0.54.

SAIL COMPARED WITH SENSEX AND ET METAL INDEX. STOCK PRICE AND INDEX VALUES NORMALISED TO A BASE OF 100. SOURCE: ETIG & BLOOMBERG.

Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.