With a market capitalization of ₹ 7,539 crores, Shyam Metalics and Energy Ltd is a small-cap stock in the iron and steel sector. It produces long steel products and ferroalloys. In fact, it is one of the largest producers of ferroalloys in terms of installed capacity in India.
In a recent research report, ICICI Securities noted that it has maintained a ‘buy’ call on the Shyam Metalics shares with a target price of ₹ 570 apiece. This translates to an upside of 90 percent as compared to its current share price of ₹ 299.25 apiece.
Why does ICICI Securities see such a huge upside?
ICICI Securities believes that the company’s EBITDA will grow by more than 2x by FY25E, as compared to FY23E, even on the assumption of declining commodity prices. It sees a huge upside on the back of a ramp-up and stabilization of the company’s existing capacities, its foray into stainless steel and colour-coated steel, which will likely yield an additional EBITDA of ₹ 6 billion by FY25E, earnings contribution from Ramsarup industries and the company’s niche capacities in aluminium foil and low-carbon ferrochrome, which are likely to be earnings-accretive.
“In our view, by FY25, SMEL will be the world’s only metal company to have revenue streams from carbon steel, stainless steel and downstream aluminium business. As a result, we expect revenues of Rs265bn, and EBITDA of Rs 33.4bn (CAGR of 47 percent from FY23E-FY25E) in FY25E,” the brokerage added.
Moreover, the company has low leverage as compared to its peers, and has a consistent dividend payout, acting as additional sweeteners to the rise in its share price. Going forward, ICICI Securities expects the company’s margins to improve further due to the integration benefits of ferrochrome with stainless steel, and metallics with finished steel.
In the brokerage’s view, there is a possibility that the company might move further up the value chain by harnessing its ferroalloys, sponge iron and pig iron production capabilities in future. This move will help it to save costs.
Shyam Metalics’ shares have gained 8.07 percent in the past month, however, they have lost 15.56 percent in the past year. It has a high return on equity of 36.43 percent and an ideal debt-to-equity ratio of 0.12. Its shares were trading at a price-to-earnings ratio of 7.37, which is lower than the industry P/E of 12.79, indicating that the stock might be undervalued as compared to its peers.
Written by Simran Bafna
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