I checked for SAIL’s thread on VP, couldn’t find it so starting one myself. The VP page on it was created 4 years back and has since been untouched so it is of very minimal relevance. The case for SAIL is simple and neat:
MCap = 30000 Crores
Debt = 25000 crores
Cash = 3157 Crores --> EV = 30000+25000-3157 = 51843 crores.
CFO avg in the last 2 years = 4100 crores
So the company is selling at 4100/49345 = 8.3% yield, if it DOESN’T DO anything. Its installed capacity is close to 12.5 mn tonnes and it proposes to increase it to 4 times of current capacity by 2025 and by 2016 it wants to increase its capacity by 100%. For 2018 capacity increase, it has already incurred capex cost of 53000+ crores.
Current replacement cost of steel plant = 83,880 INR/ton (Tata Steel is setting up a 3 MnTonnes greenfield plant, total outlay would be 25,164 crores)
Here is the comparison:
Company Cap.(MTPA 2014) Cap.(MTPA 2016) EV(Cr.) EV/Ton(In 2016)
Tata Steel 28 31 106846 34,466
SAIL 12.5 24 5184320,737
JSW 14.3 15 46040 30,693
SAILâs MEP which envisaged increase in capacity from 12.5 mn tonnes to 24 mn tones will be over in next 15-24 months, most of the orders have been placed and construction work is in progress. Yes, there is huge delay in the project, it was supposed to be completed in 2-13-14 but still not over but I think it happens with most of the plans and that is the thing of past, we should think about right now and future. The biggest advantage with SAIL is that they have sufficient ore to fulfil future requirements too, yes they will have to import coal, right now they import 82% of their need, in future they would be importing 90+% if CIL doesnât increase its production. They r taking all the right steps for that, recent acquisition of Rio-Tintoâs mine in Mozambique thru ICVL is an example. I guess similar is the case with JSW too, they r based in India mostly, they have ore but coal they have to import. Most pathetic situation is of Tata Steel. Its India plants have same situation as of SAIL but in EU, where they have major capacity, they have neither ore nor coal, everything is bought!!!
Now no one is increasing capacity like SAIL, if tomorrow someone decides on that too, it will be late before capacity gets commissioned. Also, raw material security should have been there. SAIL has 75000 acres of its own, no forest/environmental clearances r required for developing anything there, this is not available to anyone in India.
As can be read from the table above, valuations wise SAIL is damn cheaper than Tata Steel and JSW, but is even cheaper if we take the case of greenfield plant being set up by Tata steel, for 3mn tons, they have to fork out 25,164 crores. From this calculation, SAIL should have been selling@25/3*25,164 = 200,000 crores EV. If we apply discount of even 50% for being it sarkari company, EV comes around 100,000 crores INR. Assuming debt goes up from 24,000 crores currently to 36,000 crores in2016, Mcap should be 100,000-36,000 = 64,000 crores. Right now its close to 31,000 crores. So potential is >100% returns.
There are additional triggers like new plants would be modern ones and old ones are also getting refurbished/automated so less manpower will be needed so there would be savings on salaries so margins wont go down because of that if they donât go up. Raw material prices are going down, but we need to keep track of the steel prices too.
The biggest disadvantage I see is that itâs a sarkari company and due to some stupid decisions of govt like disinvest and other crap, it can see short term turmoils like the current ones but I think we have already taken 50% discount on replacement cost for that. Also, think about SAIL when it has 50mn tons capacity, do the above calculations again, I think opportunity is huge. Yes, there would be delays in projects, management says 2025, take it 2030 but then if calculation is done for FCF/CFO/EV per tonnes for that situation, with appropriate discounting, I think opportunity is huge. Views invited, especially negative.
Disclaimer: Invested and hence I m biased.