SAIL shares: SAIL best stock to play higher steel prices, say analysts

MUMBAI: Steel stocks surged Thursday, defying the broader weakness, on market talk that major steel players are planning to raise flat steel prices by Rs 2,000-3,000 per tonne, given the strength in China HRC export price and tight demand supply scenario in the domestic market.

While Tata Steel, SAIL and Tata Steel BSL gained nearly 3%,

and & Power ended in green when the benchmark Nifty fell more than 1.5%.

“Domestic steel producers are expected to see sustained steel margin upcycle as domestic steel price could see further increase of Rs 2,000-3,000 per tonne, given the strength in China HRC export price and tight demand-supply scenario in the domestic market as exports become lucrative,” said Abhijeet Bora, senior analyst, Sharekhan. “We expect domestic steel majors to benefit from high profitability of Rs 13,000-14,000 per tonne in near term to medium term and volume growth.”

China HRC export price has risen 16% to $740 per mt since early February. Currently, export prices are at a premium of Rs 6,000-7,000 per tonne to domestic prices.

According to analysts, Steel Authority of India (SAIL) is the best play as the company is backward integrated with captive iron ore and has a higher financial leverage.

“With limited capex, higher pricing should drive significant deleveraging and boost equity value of Sail,” said Amit Murarka, analyst,

. “Given a strong steel cycle, we expect realization to remain high in the medium term, which, coupled with an inefficient cost structure, should provide disproportionate margin gains to SAIL.”

At current price, the stock is trading at 4.2 times FY22 estimated EV/EBITDA and 0.5 times price to book, a 25- 30% discount to its peers Tata Steel and Jindal Steel. For every Rs 1,000 per tonne of higher steel price improves SAIL’s FY22 estimated operating profit (EBITDA) by 11% and earnings per share by 17%. Analysts also expect higher dividend payouts going forward, supported by strong free cash flow of Rs 19 per share.

SAIL has captive iron ore mines that meet its entire raw material requirement for steel production. It has nine iron ore mines and seven flux mines (limestone, dolomite, etc.), which provides captive raw materials

According to Dewang Sanghav of

Direct, healthy growth in sales volume coupled with relatively firm steel prices augur well for SAIL. It is expected to register a volume CAGR of 10% during FY20-23 on the back of capacity expansion.