Steel Authority of India Ltd (SAIL) is one of India’s largest steel-making companies with a market cap of ₹55,287 crores. The stock is trading at ₹134, close to its book value of ₹136. SAIL has a low debt-to-equity ratio of 0.55 and a constant promoter holding of 65% with no pledged shares. However, the company’s OPM has been declining, and its PE ratio of 16.4 is higher than the industry average. The 3-year average ROE is also low at 12.6%. Considering the mixed financial indicators, investors should exercise caution and monitor SAIL’s performance closely before making an investment decision.
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TLDR of the article focusing on the data:
Key Financial Data:
- Market Cap: ₹55,287 Cr.
- Current Price: ₹134
- Book Value: ₹136
- Dividend Yield: 1.10%
- ROCE: 5.89%
- ROE: 3.57%
- Debt to Equity Ratio: 0.55
- Debt: ₹30,714 Cr.
- Promoter Holding: 65.0% (constant)
- Pledged Percentage: 0.00%
- OPM: 9.94%
- PE Ratio: 16.4
Pros:
- Stock trading at 1.00 times book value
- Healthy dividend payout of 28.6%
- Improved debtor days from 26.3 to 18.8 days
Cons:
- Low 3-year average ROE of 12.6%
- High contingent liabilities of ₹43,765 Cr.
- Promoter holding decreased by 10% over last 3 years
Recommendation: The company has a low debt-to-equity ratio and the promoter holding is constant at 65% with no pledged shares, which are positive factors. However, the decreasing OPM, high PE ratio compared to the industry average of 16.1, and the decrease in promoter holding over the last 3 years raise some concerns. Given the mixed indicators, the recommendation for Steel Authority of India Ltd (SAIL) would be CAUTION. Investors should closely monitor the company’s performance and look for improvements in OPM and ROE before considering an investment.
Company Introduction and Profile
Steel Authority of India Limited (SAIL) is one of India’s largest steel-making companies, with a market cap of ₹55,287 crores. SAIL operates five integrated plants and three special steel plants, primarily in the eastern and central regions of India, close to raw material sources. As of March 31, 2022, the company’s total crude steel and saleable steel capacity stood at 19.63 million tonnes per annum and 18.54 million tonnes per annum, respectively. In FY22, SAIL achieved 88% utilization for crude steel and 92% for saleable steel. The company plans to incur a capex of ₹60,000-80,000 million in FY23, funded equally by debt and internal accruals. SAIL’s current stock price is ₹134, with a P/E ratio of 16.4, a book value of ₹136, and a dividend yield of 1.10%. The company’s sales for the latest quarter were ₹23,349 crores, with an OPM of 9.94%.
Should We Buy, Sell or Hold This Stock and Why?
Investors should exercise caution when considering SAIL stock. While the company has a low debt-to-equity ratio of 0.55 and a constant promoter holding of 65% with no pledged shares, there are some concerns. SAIL’s OPM has been declining, and its PE ratio of 16.4 is higher than the industry average of 16.1. The company’s 3-year average ROE is low at 12.6%, and the promoter holding has decreased by 10% over the last three years.
Additionally, SAIL has high contingent liabilities of ₹43,765 crores. On the positive side, the stock is trading close to its book value, and the company has maintained a healthy dividend payout of 28.6%. Debtor days have also improved from 26.3 to 18.8 days. Given the mixed indicators, investors should closely monitor SAIL’s performance and look for improvements in key metrics before making an investment decision.
Vital Company Ratios for a Layman
- Debt-to-Equity Ratio: SAIL’s debt-to-equity ratio is 0.55, indicating a low level of debt compared to equity. This suggests that the company is not heavily reliant on borrowing to finance its operations.
- Price-to-Earnings (P/E) Ratio: The company’s P/E ratio is 16.4, which is slightly higher than the industry average of 16.1. This implies that investors are paying a relatively higher price for each rupee of SAIL’s earnings compared to its peers.
- Return on Equity (ROE): SAIL’s 3-year average ROE is 12.6%, which is considered low. This indicates that the company is generating a lower return on the money invested by shareholders compared to its peers.
- Operating Profit Margin (OPM): SAIL’s OPM for the latest quarter is 9.94%, which has been declining over time. This suggests that the company’s operational efficiency and profitability have been under pressure.
- Dividend Yield: SAIL offers a dividend yield of 1.10%, which is the percentage of the current stock price that the company pays out as dividends to shareholders annually.
- Promoter Holding: The promoter holding has remained constant at 65.00% from March 2021 to December 2023.
- FII DII Holding: FII holding has fluctuated between 3.69% and 5.38% during the period, while DII holding has varied between 8.79% and 16.63%.
- Sales Trend: Sales have shown an increasing trend over the years, with a 5-year sales growth of 12.7% and a 3-year growth of 19%. However, the TTM sales growth is 0%.
- Profit Trend: Profit growth has been mixed, with a 10-year compounded profit growth of -2%, a 5-year growth of 59%, and a 3-year growth of -10%. The TTM profit growth is 3%.
- Debt Trend: Debt has fluctuated over the years, with the latest debt figure standing at ₹30,714 crores as of September 2023.
- Margin Trend: OPM has declined from 26% in March 2021 to 9% in December 2023.
- Latest News Updates: No specific news updates provided in the given information.
- Company PE and Industry PE: The company’s PE ratio is 16.4, while the industry PE is 16.1.
- Gap Between Intrinsic Stock Value and Current Market Price: The current market price is ₹134, while the intrinsic value of the stock is ₹97.24, indicating that the stock is trading at a premium to its intrinsic value.
Market Cap of the Company and its Peers:
SAIL’s market cap is ₹55,287 crores.
The market caps of its peers are as follows:
- JSW Steel: ₹203,853.07 crores
- Tata Steel: ₹193,681.92 crores
- Jindal Stainless: ₹57,014.57 crores
Cash in Hand: Cash flow data is provided, but the exact cash in hand figure is not mentioned.
Dividend Payout: The dividend payout percentage has varied over the years, with the latest figure being 28% in March 2023.
Competing Companies and SAIL’s Performance
SAIL’s main competitors in the Indian steel industry are JSW Steel, Tata Steel, and Jindal Stainless. Compared to its peers, SAIL has a lower market cap of ₹55,287 crores, while JSW Steel and Tata Steel have market caps of ₹203,853.07 crores and ₹193,681.92 crores, respectively. SAIL’s P/E ratio of 16.4 is lower than JSW Steel’s 18.85 and Jindal Stainless’ 20.13 but higher than Tata Steel’s 100.14. SAIL’s dividend yield of 1.10% is higher than JSW Steel’s 0.42% and Jindal Stainless’ 0.21% but lower than Tata Steel’s 2.34%. In terms of ROCE, SAIL’s 5.89% is lower than its peers, with JSW Steel at 8.33%, Tata Steel at 12.63%, and Jindal Stainless at 20.77%. SAIL’s quarterly sales growth of -6.76% is lower than JSW Steel’s 7.17% and Jindal Stainless’ 0.72% but higher than Tata Steel’s -3.10%.
Recommendation: Based on the provided data and parameters, the recommendation for SAIL would be CAUTION. While the company has a low debt-to-equity ratio of 0.55 and a constant promoter holding of 65% with no pledged shares, there are concerns regarding the declining OPM, high PE ratio compared to the industry average, and decreasing promoter holding over the last 3 years. Investors should closely monitor SAIL’s performance and look for improvements in key metrics before making an investment decision.
Is This Stock Overvalued or Undervalued?
Based on the provided data, SAIL’s stock appears to be slightly overvalued. The current market price of the stock is ₹134, while the intrinsic value of the stock is estimated to be ₹97.24. This indicates that the market price is trading at a premium of about 37.8% compared to its intrinsic value. However, the stock is trading at just 1.00 times its book value, which suggests that it may not be significantly overvalued.
Should We Buy This Stock and Why?
Given the mixed indicators, investors should exercise caution when considering investing in SAIL stock. While the company has a low debt-to-equity ratio of 0.55 and a constant promoter holding of 65% with no pledged shares, there are some concerns. The OPM has been declining, and the PE ratio of 16.4 is higher than the industry average of 16.1. Additionally, the company’s 3-year average ROE is low at 12.6%, and the promoter holding has decreased by 10% over the last three years.
On the positive side, SAIL has been maintaining a healthy dividend payout of 28.6%, and its debtor days have improved from 26.3 to 18.8 days. The stock is also trading close to its book value.
Considering these factors, a CAUTION recommendation is appropriate. Investors should closely monitor SAIL’s performance and look for improvements in key metrics such as OPM and ROE before making an investment decision.
How Is the Industry of This Company Growing?
The steel industry, in which SAIL operates, has shown growth in recent years. SAIL’s 5-year sales growth stands at 12.7%, and its 3-year sales growth is even higher at 19%. However, the company’s TTM (trailing twelve months) sales growth is 0%, indicating a slowdown in the most recent period.
When compared to its peers, SAIL’s quarterly sales growth of -6.76% is lower than JSW Steel’s 7.17% and Jindal Stainless’ 0.72% but higher than Tata Steel’s -3.10%. This suggests that while the industry has been growing, SAIL’s growth has been lagging behind some of its competitors.
It is important to note that the steel industry is cyclical and can be affected by various factors such as global economic conditions, infrastructure spending, and raw material prices. Investors should keep an eye on these factors and their potential impact on the industry’s growth prospects.
Risk Factors related to SAIL and the steel industry:
Business/Commercial Risks:
- Competition: SAIL faces intense competition from domestic and international steel producers, which may impact its market share and profitability.
- Regulatory changes: Changes in government policies, such as import tariffs or environmental regulations, can significantly affect the steel industry and SAIL’s operations.
- Raw material prices: Fluctuations in the prices of key raw materials, such as iron ore and coking coal, can impact SAIL’s production costs and profitability.
- Global economic conditions: The steel industry is cyclical and sensitive to global economic conditions. Economic downturns can lead to reduced demand for steel products.
Key Risks Associated and Risks to Consider Before Investing:
- Debt burden: SAIL has a significant debt of ₹30,714 crores, which may limit its financial flexibility and increase its vulnerability to economic downturns.
- Declining profitability: SAIL’s OPM has been declining, which could adversely affect its financial performance and returns to investors.
- Low return on equity: The company’s 3-year average ROE is low at 12.6%, indicating that it may not be efficiently using shareholders’ funds to generate profits.
- Contingent liabilities: SAIL has high contingent liabilities of ₹43,765 crores, which may materialize in the future and impact its financial position.
Potential Risks of the Steel Industry:
- Overcapacity: The global steel industry has been grappling with overcapacity, which can lead to price pressures and reduced profitability for steel producers.
- Environmental concerns: The steel industry is energy-intensive and has a significant environmental impact. Stricter environmental regulations could increase compliance costs for companies like SAIL.
- Geopolitical tensions: Trade disputes and geopolitical tensions can disrupt global steel trade flows and affect the demand and prices of steel products.
Management Quality Assessment:
As per the provided information, there are no specific details about criminal cases against the promoters or management of SAIL. However, it is essential for investors to conduct thorough research on the company’s management team, their background, and any potential red flags before making an investment decision.
Based on the analysis of the provided data and parameters, the recommendation for SAIL would be CAUTION. While the company has a low debt-to-equity ratio of 0.55 and a constant promoter holding of 65% with no pledged shares, there are concerns regarding the declining OPM, high PE ratio compared to the industry average, and decreasing promoter holding over the last 3 years. Investors should closely monitor SAIL’s performance and look for improvements in key metrics before considering an investment.
Long-Term Performance (6-10 years)
Predicting SAIL’s long-term performance requires careful consideration of various factors. The company’s 10-year compounded sales growth of 9% and 5-year growth of 13% indicate a positive trend. However, the 10-year compounded profit growth is -2%, while the 5-year growth is 59%, suggesting inconsistency in profitability. SAIL’s debt-to-equity ratio of 0.55 is low, which is favourable for long-term stability.
The company’s capital expenditure plans, including the INR60,000-80,000 million capex for FY23, could drive future growth. However, the success of these investments will depend on factors such as demand for steel, global economic conditions, and the company’s ability to manage costs and improve operational efficiency. Given the cyclical nature of the steel industry and the potential risks involved, investors should exercise caution and monitor SAIL’s performance closely over the long term.
Short-Term Performance (2-5 months)
In the short term, SAIL’s performance may be influenced by factors such as quarterly results, market sentiment, and short-term fluctuations in steel prices. The company’s latest quarterly sales stood at ₹23,349 crores, with an OPM of 9%. While the promoter holding remains constant at 65% with no pledged shares, the recent decline in OPM and the high PE ratio of 16.4 compared to the industry average of 16.1 could impact short-term investor sentiment.
Additionally, the gap between the current market price (₹134) and the book value (₹136) is small, suggesting limited room for short-term price appreciation. Investors should keep an eye on SAIL’s quarterly performance and any short-term developments in the steel industry before making investment decisions.
Medium-Term Performance (2-6 years)
SAIL’s medium-term performance will likely be influenced by its ability to capitalize on its expansion plans, improve operational efficiency, and navigate the challenges in the steel industry. The company’s 3-year compounded sales growth of 19% is encouraging, but the 3-year compounded profit growth of -10% raises concerns about profitability.
SAIL’s low debt-to-equity ratio and constant promoter holding are positive factors, but the declining OPM and high PE ratio compared to the industry average may limit medium-term growth prospects. The company’s 3-year average ROE of 12.6% is lower than some of its peers, indicating room for improvement in terms of efficiently utilizing shareholders’ funds. Investors should monitor SAIL’s progress in implementing its capex plans, improving profitability, and reducing costs over the medium term.
Recommendation: Based on the provided data and analysis, the recommendation for SAIL would be CAUTION. While the company has some positive factors, such as a low debt-to-equity ratio and constant promoter holding, there are concerns regarding the declining OPM, high PE ratio compared to the industry average, and inconsistent profitability growth. Investors should closely monitor SAIL’s performance, particularly its ability to improve operational efficiency, manage costs, and successfully implement its expansion plans. They should also keep an eye on the overall steel industry dynamics and global economic conditions before making any investment decisions.