SAIL share price: Motilal Oswal raises target price to Rs 104

Motilal Oswal says with limited capex and higher pricing; SAIL should drive significant deleveraging and boost equity value. Motilal Oswal estimates net debt to decline by Rs 232 bn (Rs 56/sh, 76% of CMP) over FY20-23E to Rs 305 bn. Motilal Oswal also expects higher dividend payouts going forward (implying 5% yield), supported by strong FCF of Rs 19/sh (25% yield). Motilal Oswal are raising our FY22E/FY23E EBITDA estimate by 34%/37% and target price by 28% on expectation of higher realization and volumes. The stock trades at 4.2x FY22E EV/EBITDA, a 25-30% discount to peers Tata Steel and JSW Steel. Motilal Oswal raises target price on SAIL to Rs 104. SAIL Share price closed today at Rs 71.55, down Rs 0.75 or 1%.
 
Motilal Oswal sees Steel Authority of India (SAIL) as the best play on higher steel prices as:

1)       it is backward integrated with captive iron ore
2)      has a higher operating leverage due to high conversion cost
3)      has a higher financial leverage

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Higher realization and volume growth to drive earnings:

Given a strong steel cycle, Motilal Oswal expects realization to remain high in the medium term, which, coupled with an inefficient cost structure (higher conversion cost), should provide disproportionate margin gains to SAIL. Every Rs 1,000/t of higher steel price improves SAIL’s FY22E EBITDA by 11%. Supported by under-utilized capacities, volume growth is expected to be strong at 9% CAGR over FY21-23E. There is also a likelihood of product mix improvement (higher finished steel sales). Sharekhan estimated a 36% EBITDA CAGR over FY20-23E.

Strong FCF to drive deleveraging and higher dividend yield:

With robust EBITDA and limited capex, we estimate FCF to be strong at Rs 78 bn / Rs 86 bn in FY22E/FY23E, implying a FCF yield of 25-28%. Higher FCF should drive significant deleveraging, which should boost its equity value. Net debt has already declined by INR94b (INR23/share) to Rs 443 bn in 9M FY21. As SAIL swings to profit and has limited capex needs, Motilal Oswal expects a higher dividend payout going forward. As against an inconsistent dividend of INR1- 2/sh (nil in FY16-18), Sharekhan expects a consistent higher payout of Rs 4- Rs 5/sh, implying a yield of 5-7%.

SAIL Valuation is attractive, lower steel price the key risk:

At the CMP, the stock is trading at 4.2x FY22E EV/EBITDA, which is at a 25% - 30% discount to peers Tata Steel and JSW Steel. Even on FY22E P/BV, it is trading at an attractive 0.6x, despite an expected strong RoE of 16%. Motilal Oswal values the stock at 5x FY22E EV/EBITDA at INR104/share, implying a target P/B of 0.8x (historical average of 0.7x).

SAIL Key risks:

Lower steel price and higher capex