Why is Steel Authority of India a Buy for us

For Steel Authority of India it might be the tough time but being patient and waiting for a cyclical turnaround might be profitable for you. We reiterate a BUY for the stock.

Talking of the performance we see faltered domestic demand remains a concern, but there is still room for improvement this fiscal. If we look at the Indian steel demand growth during FY13, we see a decline to just 3.3%. However historically steel consumption grew by 5.5% in FY12 and 9.9% in FY11.

Read more about List of Top Steel Companies in India.

World Steel Association, the leading body governing steel industry, expects a growth of nearly 6% for India’s steel demand. This will be supported by easing monetary environment which is generating investment activities. Thus it is expected that the domestic steel demand is likely to improve from this point, as the dual rate cut by RBI in last few months has improved consumer demand. Also the expectation of future rate cut will drive the demand to a greater extent. Being the election year, it is expected that there will be increased government spending on infrastructure, which will again boost steel demand.

Steel Demand & Supply

Weak domestic demand obviously barred any anticipated increase in steel prices during Q4FY13. There was a slow demand despite strong seasonality where global steel prices were increasing by 7-8% Q-o-Q. SAIL happens to be a captive iron ore miner which proved to be beneficial for the company as there was a sharp rally in prices of iron ore export to China. Hard coking coal (HCC) price too became favorable for SAIL as it is the largest importer of coking coal in India. The price settled at present $151/t FOB levels post correction of over 10% from $172/t.

Good news for the company came when the mining activity at Gua mines restarted. The activity was suspended since June 2011 due to the absence of clearance from environment and pollution department. Gua mine is one of the oldest and largest mechanized mine having capacity at 2.4 mtpa. The capacity is expected to be increased manifold to 10 mtpa over next 2-3 years. Also in January 2013, Bolani iron ore mine at Orissa restarted its operations which are crucial for Durgapur steel plant. Thus starting of mines would ease street concerns on iron ore availability for new steel plant which is likely to be commissioned over next 6-8 months.

SAIL Stock Valuation

The stock is at 7 year lows thus being a solid investment bet which definitely has massive growth lined up over next year. Recently the Government divested 5.8% stake in SAIL via an Offer for Sale mechanism in March 2013. The offer included 240 mn equity shares of face value of Rs.10 at a floor price of Rs.63/share.

Historically it is seen that the stock has reached the current level twice over last seven years (early 2006 and 2009). However, both the times in a time span of two years stock jumped astonishing 5x. This cyclical tendency is somewhat surprising but again gives a strong recommendation for Buy now which will turn out to be a boom for with high returns to patient investors.

It is expected that the company’s quarter results will be positive, as in the past years the company delivered extra-ordinary high Q/Q growth in sales volumes in Q4.

Lastly, the company has a strong balance sheet performance as well. Present CWIP of SAIL is 1.4 times the prevailing market capitalization. Even after completion of 60% capacity growth by next year, company will have its debt leverage at 0.6x only which is lowest in the industry globally. Not to forget, SAIL’s biggest strength is its iron ore reserves which is largest having high quality iron ore reserves globally. Thus a BUY for us.