SAIL Shares Have Lagged Consistently. Analysts Are Unfazed.
Shares of all steelmakers have fallen in the last six months, partly reversing a stellar run after the first Covid-19 lockdown was eased. But the state-run Steel Authority of India Ltd. has consistently underperformed. Analysts are unfazed though.
SAIL has been a traditional laggard. After a burst in April-May earlier this year, when it caught up and surpassed peers, it has again lagged along with Jindal Steel and Power Ltd. in the last three months.
That's despite the state-run giant having one of the best debt profiles in the steel sector. And it has a secured supply of raw materials. One key factor that hurts SAIL is what it spends on employees.
Still, of the 27 analysts tracking the stock, 21 suggest a 'buy', two recommend 'hold' and four have a 'sell' call, according to Bloomberg data. The average of price targets implies a potential one-year upside of 43%.
Here’s what’s working and what’s not for one of the country’s largest steel producers:
SAIL has the lowest profitability among its counterparts. After reporting operating losses in the first quarter of the financial year 2020-21, rising prices of the alloy due to pent-up demand post-lockdown helped the company improve its profitability. But that remains below that of its private peers.
SAIL’s lower profitability can be attributed to two factors—higher employee expenses and a lower share of value-added steel in its portfolio.
Employee Expenses Pinch
Being a public sector unit, SAIL’s employee cost per unit of production is the highest among its peers. And that only increased in the first half of the financial year.
The company spends manifold more on employees, according to ICRA’s data. At least seven times the expenses of JSW Steel, India’s largest steelmaker.
Simply put, the new-age plants of peers have left the public sector company far behind on employee efficiency, ICRA said.
SAIL has nearly completed its ongoing modernisation and expansion programme, costing about Rs 70,000 crore. And while it plans to add 29.6 million tonnes per annum in capacity in two phases by 2030, the earlier phase of expansion was plagued by prolonged delays.
Lower Share Of High-Margin Products
SAIL’s share of semi-finished products—like bar and rods, hot-rolled plates, and, pipes and electrical steel—is at 16%. That compares with 4% for JSW Steel.
Tata Steel and JSPL haven't disclosed their semi-finished product mix.
SAIL plans to increase the share of value-added products like railway and galvanised products, which usually earn higher margins.
“SAIL, being a PSU, is not the most efficient in execution. So, while Tata Steel and JSW Steel plan value-added capacity along with primary steel-making capacity and complete both simultaneously, SAIL does it sequentially and hence, has lower value-added components,” said Rakesh Arora, managing partner at Go India Advisors.
But it’s not all bad for the steelmaker.
Leverage Has Dropped
Along with JSPL, SAIL has the best debt profile among India's large peers. The public sector company used cash on books to pare the receivable working loans, lowering leverage.
SAIL’s net debt-to-Ebitda came down from 5.1 times in FY20 to less than 1 time in the first half of the ongoing fiscal.
Like Tata Steel, SAIL is also fully integrated or has its own supply of raw materials and fuel.
The company has diversified sourcing of coal, with long-term agreements from Australia, the U.S., Canada, Indonesia and Mozambique.
For iron ore, SAIL has its own captive iron ore mines.
Similarly, for refractories and ferro-alloys, the company has its own captive plants and SAIL procures limestone under long-term pacts.
The state-owned company also has a wider reach than Tata Steel and JSPL.
JSW Steel has a pan-India presence, dominated by the south and the west.
Coking Coal Benefit
JPMorgan’s upgraded SAIL in October citing a relief on coking coal prices.
The company's single-largest cost is coking coal and its earnings are highly sensitive to the prices of the commodity, the research firm said. With prices peaking and expected to fall, SAIL stands to benefit, it said.
Australian coking coal prices eased to $383 a tonne in November from $432 a month earlier, according to SteelMint data. So the benefit will be seen in the fourth quarter.