Jhunjhunwala’s latest stock pick is a play on deleveraging, dividends

Price targets for the stock suggest analysts are valuing it at 4.55-5.5 times FY22 EV/Ebitda and a P/B of 1.1 compared with a historical average of 0.7 times. They see 25-63 per cent potential upside for the stock from here on.

Jhunjhunwala bought a 1.39 per cent stake in the state-run steelmaker in June quarter, which at Friday’s share price was worth to Rs 769 crore, making it his sixth largest stock bet.

Centrum Broking said it remains upbeat on the steel cycle and expects steel prices to remain elevated in FY22, with firming up of domestic demand and higher global prices. It expects SAIL as a stock to perform well due to continuous deleveraging and high dividend yields.

The brokerage pegs FY22 dividend per share of Rs 10.2 — a 7 per cent yield, while it has increased average steel price estimates by 14 per cent in FY22 and by 5 per cent in FY23, whose benefits may partly be offset by higher coking coal and employee cost.

The company management said a wage revision settlement is likely to be finalised in the September quarter. It has lowered its steel sales volumes guidance to 16.5 million tonnes for FY22 from its earlier guidance of 18.3 million tonnes. Analysts largely estimate volumes for FY22 at 16 million tonnes.

They expected marginally better steel prices for the September quarter over June quarter levels. Notwithstanding a likely soft September quarter, analysts largely stay positive on the company’s prospects.

“Increasing volumes would continue to drive the operational efficiency. Though the September quarter looks weak at this point, on increasing coking coal prices and seasonal weakness, we expect a large price of price softness have already be played out and overall spread would remain around March quarter levels. Strong cash flows will continue to drive aggressive debt reduction in the near to medium term. Approval from Jharkhand to sell iron ore will be an added bonus,” Phillip Capital said.

Motilal Oswal Securities looks at SAIL as the biggest beneficiary of improved steel prices.

“The company is working on finalising the new leg of expansion to increase its total capacity to 50 million tonnes. In Phase I, it is looking to expand capacity by 12-14 million tonnes in Bokaro, IISCO, and Rourkela steel plants. Meaningful capex on expansion would likely start from FY24 onwards. The management said it would like to repay most of its long-term debt before embarking on its expansion plans and finance the new phase of expansion at a 1:1 debt-to equity ratio,” it said.

Motilal expects a net debt reduction of Rs 15,700 crore or Rs 38 per share over FY21-23 to Rs 21,000 crore on the back of higher operating cash flows. It sees Ebitda to grow at 21 per cent CAGR over FY21-23 to Rs 18,600 crore, led by 8 per cent volume CAGR to 17.5 million tonnes.

SAIL reported a consolidated net profit of Rs 3,897 crore for the first quarter compared with a loss of Rs 1,226 crore a year ago. It recorded a revenue of Rs 20,642 crore in the quarter to June, more than double from Rs 9,067 crore in the year-ago period. The company’s Ebitda stood at a record Rs 6,741 crore . SAIL said that it brought down its gross debt by Rs 5,063 crore during the quarter. The company’s total debt was at Rs 35,330 crore as of March 31.

IDBI Capital said SAIL remains exposed to a sharp fall in profitability in case the steel cycle weakens due to its high and sticky fixed costs. But it believes the steel cycle is likely to remain positive over the coming two years and SAIL is likely to benefit from higher volumes, improvement in profitability and falling debt. “The stock valuation at 3.5 times FY23E EV/Ebitda is inexpensive in our view,” it said

Centrum sees the stock at Rs 218, Motilal Oswal at Rs 175, IDBI Capital Rs 168 and Phillip Capital at Rs 167. From its Friday’s closing price of Rs 134, these targets suggest 25-63 per cent potential upside.