Rakesh Jhunjhunwala-owned SAIL’s (Steel Authority of India) share price has plummeted 15.18% in the last six months to now trade at Rs 105.85 per share. The stock saw a stellar run on Dalal Street during the last few months of 2020 and the beginning of 2021 but failed to continue the upward momentum. Looking ahead into 2022, analysts at Kotak Securities believe the company could be in for a double whammy of higher coking coal costs and lower steel realization which may result in a sharp contraction in SAIL’s margins. Kotak Securities has downgraded the stock to ‘Reduce’ from the ‘Buy’ rating earlier. A fair value of Rs 110 has been pinned on the stock.
Margin headwinds ahead
SAIL, along with other metal stocks benefited immensely from a combination of strong steel prices led by higher iron ore prices coupled with weak coking coal costs in 2021 and the last months of 2020. However, the picture is changing now steel prices soften, iron ore prices see a decline, and elevated coking coal price. “Factoring the consumption lag, we estimate SAIL’s EBITDA to decline by +50% in secnd half of this fiscal year versus the first half with EBITDA of Rs 40 bn/Rs 27 bn in 3Q/4QFY22E with a margin of Rs 10,300 / Rs 6,000/ton in 3Q/4QFY22E, respectively,” Kotak Securities said.
Coal formed 75% of total raw material cost for SAIL in the previous financial year. With coal prices rising from $180/ton to $360/ton in the last six months SAIL’s costs are expected to inflate from the third quarter.
Deleveraging at risk
SAIL was among the deleveraging PSU plays on Dalal Street for most of 2021 has reduced net debt by more than 50% in the past 18 months. “However, we note that the pace of deleveraging would reduce significantly from 3QFY22E led by lower margins and pickup in growth Capex,” Kotak Securities said. SAIL has made plans for expansion which would see it spend Rs 8000 crore each in the next two financial years.
Rakesh Jhunjhunwala’s stake in SAIL
Big Bull Rakesh Jhunjhunwala owned 7.25 crore equity shares of SAIL at the end of the July-September quarter of the financial year. Rakesh Jhunjhunwala’s 1.76% stake in the company is valued at Rs 768.1 crore. Earlier, the billionaire investor held a 1.4% stake in the company during the April-June quarter, and prior to that, his stake was less than 1%.
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