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Steel Authority of India (SAIL) Stock Analysis

HomeStock AnalysisSteel Authority of India (SAIL) Stock Analysis

Date of Research – 24 May 2016

Price – Rs. 39.00

SAILSteel Authority of India Limited (SAIL) is the largest state owned steel company. It is a fully developed iron and steel maker, and fulfills both basic and special demands in domestic construction, power, railway, engineering, automotive and defense industries. With five integrated steel plants, three special plants, and a subsidiary in different parts of country, SAIL is among the seven Maharatnas of the country’s Central Public Sector Enterprises (CPSE).

SAIL accounts for 14% of steel market (FY 2015) share in India with its diverse range of products including regular and customized steel.

Total Revenue generated by SAIL in 2015-16 is Rs. 43,816.06 Cr. For Complete Financial Report – visit here

 

What’s Driving the Stock?

Healthy Balance Sheet

SAIL’s reserves stand at Rs.35, 859.61 Cr. and its long term borrowings stood at Rs. 16,310.65 Cr. as on 31 March 2016. The Company has been a consistent dividend payer and has registered a net loss for the first time in a decade for FY 2016.

Consolidated (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Total Income from Operations 46,372.55 44,697.61 46,837.28 45,843.56 39,462.84
Expenses 40,266.86 39,997.06 42,700.35 41,209.65 42,732.69 
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 6,105.69 4,700.55 4,136.93 4,633.91 (3,269.85) 
Depreciation 1,567.47 1,404.80 1,718.56 1,775.19 2,219.85 
Finance Costs 677.71 747.67 967.68 1,454.29 2,120.40 
Other income 1,555.91 936.67 838.01 988.45 582.40 
Exceptional items 262.02 229.32 (959.12) – 
PBT 5,154.40 3,255.43 3,247.82 2,392.88 (7,027.70) 
Tax 1,609.22 1,074.91 615.93 275.37 (3,026.44) 
PAT (before Minority Interest and share of Associates) 3,545.18 2,180.52 2,631.89 2,117.51 (4,001.26) 
Profit/ (loss) attributable to Minority Interest – 
Share Of Profit/Loss Of Associates (0.26)
Consolidated Profit / (Loss) for the year 3,545.18 2,180.52 2,631.89 2,117.51 (4,001.00) 

Product Catalogue and Distribution

A major strength of SAIL is its diverse product catalogue which features unmatched array of mild steel, both in long and short categories. Its availability is boosted with wide-distribution network with presence in every district of India ensuring that every product reaches its end customer. The company has wide variety of special and stainless steel, and also fulfills customized steel demands for both domestic and foreign markets.

Growth Potential

The Maharatna PSU has planned to increase their hot metal capacity to 50 Million Tonnes by 2024-25 which would make it one of the top steel producers globally. It has already achieved the feat of the largest iron ore operation in India. Ongoing Modernization and Expansion Programme (MEP) led by the company despite facing some challenges has been successfully implemented in IISCO Steel Plant, Rourkela Steel Plant and Salem Steel Plant. These advancements have fostered the technology and boosted the efficiency of manufacturing process.

Prospect of Joint Venture

In May 2015, SAIL inked a Memorandum of Understanding (MoU) with ArcelorMittal Steel led by NRI billionaire Lakshmi Mittal, the world’s largest steel producer, to set-up an automotive steel manufacturing facility under joint venture in India. ArcelorMittal’s senior official later in August said that the facility could take 18 to 24 months to convert into a formal venture but their intent is clear. In addition to boosting the government’s “Make in India” campaign, the proposed steel plant would come in major auto congregate in India and provide technologically advanced steel products to tend to the demand of India’s rapidly growing automotive sector.

Expansion in Export Market

Despite declining sales in India, Sales Revenue of SAIL from Foreign Countries has increased to Rs. 1567.68 Cr. (FY15) from Rs. 1158.23 Cr. (FY14) (~35%). With the increasing steel consumption of Middle East and Southeast Asia, International Trade Division unit of SAIL has high export potential with the freight advantage of Indian ports over China, Japan and South Korea. Mumbai port enjoys minimum of $20 per Tonne advantage over counter Chinese port for Middle Eastern and African destinations which makes a sizeable difference from importer’s perspective.

What’s Dragging the Stock?

Increasing Competition

The increase in competition from major players like Tata Steel, JSW Steel and VISA Steel is a threat to SAIL in domestic as well as in foreign market. TATA steel group leads production with 26 Million Tonnes in 2015 and is the India’s largest steel producer.

Company Name

Share Price* (Rs.)

Market Cap (Rs. Cr.)

Net Profit** (Rs. Cr.)

SAIL

41.85

17,286

(4137.26)

JSW Steel

1,377.95

33,205

(3498.28)

Tata Steel

343.55

33,435

4,900.95

Steel Exchange

32.70

170

7.39

VISA Steel

12.90

142

(583.55)

*As on 6/7/2016 **For FY16

Chinese Market Slowdown

Despite the 7% increase in domestic steel consumption, SAIL dropped a large chunk of market share in FY 2015 on account of cheap imports from countries India has Free Trade Agreement (FTA) with viz. China, Japan, South Korea and ASEAN. SAIL registered a net loss for the first time in a decade for FY 2016.

Due to the market slow down in China, Chinese steel demand has declined which coupled with China’s large surplus capacity has resulted in more cheap imports to India. This dumping of steel is a major concern for steel industry and justification for the 54% increase in steel import in first quarter FY15 in India.

High Cost and Market Risks

Coking coal, main ingredient for producing steel, is sourced externally leaving SAIL at the hands of the market risks and volatility. On top of that, Steel giants usually face high manpower costs with relatively low incoherent manpower productivity. This ultimately ends up increasing cost of production considerably.

Technology Risks

SAIL faces the challenge to ensure that its products have the competitive edge requiring its facilities to be technologically updated and sound. However, the future prospects of joint facility with ArcelorMittal, if successful, will almost guarantee immense success for products in automotive sector. The company has additionally pledged around Rs. 6000 Cr. for MEP and R&D initiatives.

CONCLUSION

Reviewing the financial analysis report of SAIL it is evident that the Company has had a bad couple of years. Putting things in context – In light of Chinese market collapse, dumping of steel and bad performance of whole steel sector in India; SAIL has emerged as a winner among a large group of losers. The path ahead for the largest state owned steel company looks bright provided there is a turnaround in metals cycle.


Written by Abhimanyu Hans

 

3 Responses to “Steel Authority of India (SAIL) Stock Analysis”

By Pralhad Deshpande - 12 June 2016

Rajat, quick question about your conclusion. You say that SAIL is a winner among a large group of losers. But shouldn’t that tag be reserved for Tata Steel? They are the only ones who have shown a profit.

By Rajat Sharma - 12 June 2016

Quick answer – No.

By Pralhad Deshpande - 13 June 2016

Haha, I suppose a quick question deserves a quick answer. Would be happy to know your deeper thoughts on this one.

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