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.
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
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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