The shares of one of India’s leading steel producers received a sell recommendation from Kotak Institutional Equities, with a projected downside of 43%.The company has a market capitalization of ₹61,669 crores.
Steel Authority of India Limited (SAIL) is one of the largest steel-making companies in India and one of the Maharatna of the country’s Central Public Sector Enterprises.
SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials. SAIL manufactures and sells a broad range of steel products.
The company ranks among India’s leading steel manufacturers, boasting a combined annual capacity of 19.63 million tonnes for crude steel and 18.54 million tonnes for saleable steel.
The company’s revenues declined by 4 percent year on year from ₹29,131, crores in Q4FY23 to ₹ 27,959 crores in Q4FY24, while net profit decreased by 3% from ₹1,159 crores to ₹ 1,126 crores.
Steel Authority of India Ltd shares have gained 50 percent in the last six months and 79 percent in a year.
Brokerage firm Kotak Institutional Equities gave a sell recommendation on Steel Authority of India Ltd to ₹ 85 per share, This implies a downside of 43 percent from the thursday trading price of ₹149. CNBC TV 18 news reported.
Kotak Institutional Equities expects muted volume growth for SAIL from the financial year 2024 to 2027. Currently, SAIL’s utilization rate is at 84%. Additionally, the firm noted that SAIL’s market share, which has already dropped from 22% in 2009 to 12%, may decline further.
SAIL is embarking on its next phase of expansion after a period of deleveraging its balance sheet, aiming for expansions totaling nearly 15 MTPA by the end of the
financial year 2031. As a result, Kotak Institutional Equities warns of a risk of an extended period of high capex and negative free cash flow.
Kotak Institutional Equities also noted that SAIL, at current valuations, is trading at a 25% premium compared to its steel industry peers. Specifically, it is trading at an Enterprise Value to EBITDA (EV/EBITDA) multiple of 8.4 times, while its peers average a multiple of 6.8 times.
SAIL has been in the news due to a potential privatization move. However, Kotak Institutional Equities believes that the narrow majority obtained by the NDA in the current Lok Sabha election reduces the likelihood of such “unpopular reforms,” as stated in a note by Kotak.
The company generates 93% of its revenue from the Indian market and 7% from international markets.
In Q4 FY24, SAIL’s crude steel production increased to 5.02 million tonnes from 4.95 million tonnes in Q4 FY23, while saleable steel production stood at 4.72 million tonnes in Q4 FY24.
As of March, the company’s shareholding pattern indicates that the promoter holds a 65% stake, FIIs hold a 3.18% stake, and DIIs hold a 15.86% stake.
Written by Omkar Chitnis
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