“BUY” This Maharatna Metal Stock With A Target Price of Rs. 142 Says Motilal Oswal

In the last 1-year metal stocks have generated multi-bagger returns. Metal stocks have witnessed a strong buying appetite, resulting in a robust surge in the Nifty Metal Index. Motilal Oswal, a brokerage firm, is also optimistic on the shares of Steel Authority of India Limited (SAIL), a Maharatna company. The brokerage expects the stock to reach a target price of Rs. 142 from its current market price of Rs. 113, representing a 26 percent growth. In its latest report, the brokerage has said that SAIL has not chalked out its growth CAPEX and has maintenance CAPEX for the current year, in our view. We believe the growth CAPEX may not start before 2HFY23 as the company plans the entire CAPEX, scopes the land requirement and matches the availability, works out the end product configuration, and finalizes the suppliers. By this time, the company will have achieved the net debt nil status, which it had almost a decade ago. The report has also confirmed that SAIL is unlikely to embark on a big bang CAPEX - which the company had initiated in FY10, as a result of which it was saddled with debt and had challenges commissioning its plants in various locations. The current management has decided to implement a modular strategy, i.e., it plans to adopt the one location at a time approach - SAIL will initiate CAPEX at a single location; when this nears completion, it will initiate CAPEX at another location. In this manner, cash flow from the newly commissioned facilities should augment the cash flow needed for the next round of CAPEX. According to the brokerage Notably, the company has made a big shift in its CAPEX strategy and is unlikely to fall into the debt trap again, which should allay investor concerns regarding its CAPEX plans. We believe SAIL may construct a single blast furnace with a capacity of 3-4mt at each of its locations, with matching downstream as a part of the next round of growth CAPEX. Although, the new norm for most economical blast furnaces is 5mt. However, these plans are still in the drawing board stage. Motilal Oswal has also highlighted that The management highlighted that coking coal costs would be higher by INR7,000-7,500/t on a QoQ basis. NSR is also down in the quarter for the reasons discussed above. Exports have been lower on a QoQ basis due to EU quotas for the quarter being exhausted on the first day of the quarter. With sales volumes down QoQ, fixed cost absorption should also be lower, resulting in reduced overall EBITDA. However, the stock has corrected 30% from the peak in anticipation of this reduction and now priced in the steel price correction.Advertisement Motilal Oswal has claimed that The management has reiterated its decision to turn net debt zero by 1QFY23. The company has already made cumulative provisions of INR20b towards wage revision, and we believe any further provision may not be material. Additionally, the company would benefit from the normal attrition process (retirement). Positions have not been filled completely due to process improvements, automation, and productivity improvements. Furthermore, the replacements are at a significantly lower cost, with higher productivity. The report of the brokerage has stated that SAIL has higher exposure to the Construction segment vis-à-vis peers. Hence, any revival in the Construction segment in 4Q should help the company improve its margins on a QoQ basis. It also has a lower proportion of exports compared with peers - which are likely to witness a sharper correction in NSR (v/s SAIL) as export opportunities have reduced sharply in 3QFY22. While coking coal prices would impact 3QFY22 margins significantly, we believe this is already priced in. The coking coal impact is likely to ebb in 4Q as prices have already softened from the peak, while steel prices are likely to pick up from Jan/Feb. By staying bullish on the stock, Motilal Oswal has said that We expect commodities to revive in China post the Beijing Olympics as the country eases construction activity and strives to lower carbon emissions - to ensure clear skies during the Winter Olympics. We further note that the downturn in Steel and Real Estate, the two most important components in Chinas GDP, is unlikely to sustain. The stock is trading at 3.4x/4x/2x our FY22E/FY23E EV/EBITDA. It is trading at a P/B of 0.8x on FY22E/FY23E; we do not build in a recessionary scenario and expect demand to revive in 4Q. We maintain a BUY rating, with a Target Price of INR142 at 5x FY23E EV/EBITDA. A key risk to our call is the prolonged downturn in China steel prices. The stock has been picked from the brokerage report Motilal Oswal. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.