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SAIL April 20 2022


Steel Authority of India Limited (SAIL) is an Indian state-owned steel-making company based in New Delhi, India. It is a public sector undertaking, owned and operated by the Government of India with an annual turnover of INR 66,267 Crore (US$9.32 Billion) for the fiscal year 2018-19. Incorporated on 24 January 1974, SAIL has 71,021 employees (as of 01-Oct-2019). With an annual production of 16.30 million metric tons, SAIL is the 20th largest steel producer in the world and the 3rd largest in India.

SAIL operates and owns 5 integrated steel plants at Bhilai, Rourkela, Durgapur, Bokaro, and Burnpur(Asansol), and 3 special steel plants at Salem, Durgapur, and Bhadravathi. It also owns a Ferro Alloy plant at Chandrapur.
Its total Installed Capacity is 21.4 MMTPA Crude Steel and is No 1 in India by Installed Capacity.


NUMBERS THE LATEST:-

Market Cap:  20000 Cr Apx.         Book Value:  95 Apx          Promoter holding: 75 %

Sales FY19: 66973 Cr                 FY19 Net Profit: 2349 Cr.  CMP on 9Th Feb 2020: Rs 48

POSITIVES:-

  1. Rich Experience of over 4 Decades in the Steel Industry.
  2. No Corporate Governance issues:- As a govt company, there will be no issues with corporate governance, at least losing money because of fraud will not happen, because the recent bear market has taught me a big lesson that the return of capital is more important than return on capital.
  3. Largest Installed Capacity in India with Great Operational Leverage:-Installed capacity of 21.4MMTPA and Current Production around 14 MMTPA, So working at a 65% Capacity utilization, which provides big room for operational leverage to kick in when there is a good demand for steel.
  4. Raw material security for increased production through captive mines:-SAIL has captive iron ore mines in Orissa, Chhattisgarh, and Jharkhand. Iron ore required for production is sourced from its own linkages, hence, SAIL is least affected by supply constraints and pricing fluctuation in the iron ore market.
  5. Debt to Equity Lowest Among the Peers:- SAIL has managed to keep its debt to Equity below 1.2 Times for the past few years, going forward debt will fall sharply and a possibility of achieving debt-free status in the next few years.

INTERESTING INFO:-

  • Lowering Employee Cost:- Employee Cost as a % of Sales has come down from 24% in 2014 to 7% in 2019, this was because of the reduction in The of Employees.  SAIL is thus showing a clear indication that management is seriously thinking to be like a private player. Labour Productivity has increased from 226 Ton/ Man in 2010 to 389 Ton/Man in 2019.

  • One of the Most Hated Stock in Stock Market:- Most People hate steel Authority stock because it has not moved anywhere in the past 10 years and has not created returns for its investors, as of now whenever I talk about steel authority, people are so pessimistic about this stock call and put they don’t believe that PSU stock can create wealth for them.
  • The SAIL Year 2003-2008 Wealth Creation Journey:- Let me take you all on its Journey of Wealth Creation during the last steel upcycle.1996 to 2003 was a Bear Period for Steel Companies where they did not make big money and so the stock languished during the period, however, after the announcement of the golden quadrilateral, demand for steel started picking up in the country and 2003-2008 was a golden period for all commodity companies. SAIL Became 23 Bagger in 5 Years. SAIL had a Debt of 15000+ Crores Apx in 2003 and a Debt to Equity of 2:1, it was doing a loss of 300 Crores in 2003, as the steel pricing environment improved due to robust demand from 2004 to 2008 SAIL Made a Net Profit of 7537 Crores in 2008 and it became a Debt Free Company with 13300 Crore Cash at Bank. Thus stock Rose from mere 12 Rs in 2003 to 280 Rs in 2008, giving a staggering 23 Bagger returns to its investors those who believed in the story.

  • Outlook on Indian Steel Industry:- Indian Steel Industry has an Installed Capacity of 138 MTPA, AS per the National Steel Policy Govt wants to increase the installed capacity to 300 MTPA. Given the past track record of growing at 7% in the past few decades, the Target of 300 MTPA set by the National Steel Policy does look too ambitious. 60-65% of the Demand for steel comes from the Infrastructure sector, so robust demand and pricing will be only when this sector`s spending will be high. Industrial Corridors and Smart Cities are some big announcements by the government that will ensure robust demand.
  • NEGATIVES/POSSIBLE RISKS:-

    • Prolonged Weakness in Indian Economy:- Prolonged weakness in the Indian economy will lead to lower demand for steel and thus the pricing which will affect steel authorities’ operations and weaken their financial profile.
    • Dumping of Steel From China:- China has an overcapacity of 250 MTPA, which is double the installed capacity of India, however many of their plants are shutting down due to pollution issues and winter cuts. Exports from China are also on a declining trend, so I personally don’t think China will be a risk. Also, the Indian govt has many times in the past that has imposed an anti-dumping duty to ensure the protection of the domestic steel industry. At this stage where we have just come out of Hugh steel NPA, India cannot afford to take a hit once again. Govt will take the utmost effort to protect the domestic industry.
    • Delay in ramping Up Capacities:-Any delay in commissioning of the projects will have a direct impact on the sales volumes of the company.

    MY TAKE:-

    With 21.4 MTPA Capacity, as of now, Steel Authority has the largest Company in India in terms of Installed Capacity. JSW Steel has an Installed Capacity of 18MTPA and Tata Steel has an Installed Capacity of 18.5 MTPA both are working above 90% Capacity Utilisation. JSW Steel has announced its Dolvi Plant Expansion and is expected to be commissioned by late 2021, Tata Steel’s Kalingnagar Plant Expansion will come to life by Mid to Late 2022, with all these above scenario’s it is clearly evident that Supply will be tight in the coming 2-3 Years. We are in a situation where demand will be high and Supply will be too tight. During Demand pickup between 2020-2023, JSW Steel and Tata Steel will be at a disadvantage as they are already working at par 90% Capacity, however, SAIL which is currently at 65% Capacity Utilisation will give them enough room to ramp up the sales and with enhanced pricing profile they will make the most in the industry.

    From a Valuation point of View, Steel Authority is trading at a highly pessimistic Valuation. To Install 1MTPA Plant requires 6500Crores, so for 21 MTPA replacement cost for SAIL will be 136500Crores while Current Marketcap is just 20000Crores.

    In the past cycle from 2003-2008, where SAIL was having 15000Cr in 2003 and became a debt-free company with 13500Cr Cash on balance sheets in 2008, the stock call and put became 23X in just 5 Years. During 2006-07-08 Every steel player thought that this demand run will continue and added Hugh capacities and then a global slowdown happened, this was haunting the entire still industry for the next 1 decade from 2008- 2018, with the recent consolidation in the steel industry, it is set for next leg of move for next 5 Years. Possibility of a similar situation in the 2020-2025 Period like 2003-2008 where consumption growth outgrew production is high. It will be a period of supernormal profits for Indian steel companies.

    My Best Bet to play this upcoming Steel cycle is SAIL, Which is trading at a Bankruptcy Valuation. With all the things in place like Captive Iron Ore Mines, Operating Leverage, Increased Labour Productivity, Deleveraging of the balance sheet, SAIL is taking all steps in the right direction. As per capita consumption of steel in India will rise from sub 80 Kg to 120-150Kg Steel Authority is at an inflection point to create huge wealth for its investors. SAIL Which has a Debt of Around 45000Crore, we will see this company at a negligible debt or debt Free or debt-free+ cash-rich by 2024-2025. SAIL has already worked at 110% Capacity utilization earlier in the past in the late ’90s. So it will be not new for them to work again at similar utilization levels, With 21MTPA in place, SAIL can do a Sales of 90000-100000Cr and a Net Profit of 10000-15000Crores in some years. With greater fool theory kicking in then, SAIL which is a cyclical company will be looked at as a growth company and thus valuations will be on the rise. Earlier SAIL has traded at 17-18 times earnings during 2008 top, One can imagine what market cap it can touch if it does a net profit of 10KCr-15kCr in one year, that will be whopping 8 times to 15 times the current market cap.

    SAIL is thus a Low Risk/ High uncertainty opportunity which will be under the few bets, big bets, infrequent bets category. Personally, for me, I was searching for a stock where I could put 50% of my net worth in a single stock. I am ready to wait for 5-6 years to get such an opportunity where heads I win, tails I don’t lose at all. One can make big profits by putting a small in 100 baggers, but it’s very difficult to find 100 baggers and stay put. Instead of that if we find one such low-risk opportunity where we will not lose money, growth on the entire network will be too high enough to fund your risk capital in the future.

    Steel is in my circle of competence, I have worked in JSW Dolvi Complex for a few months as an intern. During that period I understood various plants in an integrated steel plant like sponge Iron plant, steel melt shop, blast furnace, raw material, and its handling systems, Billet caster, Hot rolled coils, cold-rolled strips, etc. I have worked with my father for 10 years relating to the iron and steel industry and metals. The way I understand these businesses is that it becomes easier to study metal cycles. Personally feel we cannot be 100% right about the industry in which we are not worked into. so I have made my utmost effort to bring all this assessment.

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