SAIL

Beta: 1.13
Institutional Holding: 11.4%
Dividend Yield: 4.7%
P/E: 4.1
M-Cap: Rs 33,000 cr

STEEL Authority of India (SAIL) is the second-largest steel producer in the country, next only to Tata Steel. Unlike the latter, SAIL has grown organically and has a current annual capacity of 13 mt. The company mainly focuses on the domestic market. It is completely integrated for its iron ore requirements. However, it depends on external suppliers for its coking coal requirements. SAIL imports more than 70% of its coking coal requirements from countries like Australia and New Zealand.

The company has paid back a significant portion of its debt over the past five years. This is evident from the fact that its debt was seven times its equity in ’02, whereas currently, its debt accounts for only 16% of its equity. And this has been made possible due to the company’s strong operating cash flows since the past several years.

FINANCIALS:

SAIL’s net sales have almost doubled over the past four years to around Rs 40,000 crore. It has significantly improved its operating margin from 17% to 28% during the same period. At a time when companies are grappling with the credit crisis, SAIL has one of the lowest DER of 0.12 within the industry. High operating profit and low interest expenses have kept the company’s ICR at a very high level of more than 50. The company has also generated good returns on capital employed (RoCE), which have been more than 45% for the past three years. SAIL’s operating margin has come down to around 25% in recent quarters from the earlier 30%. This decline is mainly on account of higher salary expenses arising out of the Sixth Pay Commission recommendations.

GROWTH POTENTIAL:

The company plans to increase its saleable steel production capacity by around 80% in the next 2-3 years to 23 mt. It also plans to set up manufacturing facilities to produce more value-added products like galvanised coils, auto grade cold-rolled products, rails and rail wheels, among others. However, the company will maintain its current raw material strategy of being self-sufficient in iron ore and importing coking coal. The total investment for all these expansion activities is estimated at Rs 54,000 crore, which will be financed such that the company’s overall DER will remain at 1:1. SAIL has cash and cash-equivalents of around Rs 14,000 crore, which can be used for such investment.

RISKS:

The company has not expanded its capacity much during the last commodity boom cycle and is also less leveraged. The fact that its main market for selling its products is India — where the impact of the slowdown is less than that seen in developed countries — makes it less risky. SAIL also has huge cash reserves of around Rs 14,000 crore. The company’s only concern is the import of coking coal as a raw material. The price of this input has not declined as much as steel prices. Overall, the company bears less risk than many of its peers.

TO SUM IT UP:

The above-mentioned factors (less debt, cash reserves and domestic focus) make the stock relatively less risky. However, the second half of FY09 will be challenging for the company. The estimated EPS for FY09 works out to slightly above Rs 17 and translates into a P/E of 4.6. Though it doesn’t provide much upside in the short term, there doesn’t seem to be much downside either from the current level. The stock is a safe bet in the steel sector for risk-averse investors.