Big Bull Portfolio: Axis Securities bullish on this stock, sees 40% upside

Brokerage house Axis Securities has initiated its coverage on Steel Authority of India Ltd (SAIL), a part of Big Bull Rakesh Jhunjhunwala's portfolio. It has a 'Buy' recommendation on the stock with a target price (TP) of Rs 150 per share, implying an upside of over 40 per cent from the current market price.
 
At 12:50 hours, the shares were trading 0.93 per cent lower at Rs 106.45 on the Bombay Stock Exchange (BSE). The large-cap stock has delivered more than 60 per cent return to its shareholders in the last 12 months. In the past one year, the share price jumped from Rs 66 to Rs 108 mark -- logging around 64 per cent return in this period.
 
The brokerage house highlighted that the optimism is based on the expectation of weak demand in China getting offset by lower production forecasts and China continuing to disincentivise steel exports. It expects steel margins to come under pressure in H2FY22. They are likely to recover post H2FY22 and remain above cycle average.
 
According to its recent report, the high steel price cycle sustaining in CY22 will help the company deleverage further and drive profitability. The stock is currently trading at 3.0x consensus 1-Year forward EV/EBITDA and is much below its 10Y/5Y/3Y average of 8.3x/6.4x/3.7x.
 
"SAIL valuation, in our view, looks attractive (26 and 94 per cent discount to Tata Steel and JSW steel) and presents an attractive entry point for investors to benefit from a prolonged steel upcycle," Axis Securities said.
 
It further added that the EBITDA/tonne is expected to peak in FY22E at Rs13,365/tonne and decline in FY23/24E at Rs 10,511/10,505 per tonne but remain above the reported FY19/21 level of Rs 6,478/6,773 per tonne, driving profitability for SAIL. It estimates an EBITDA CAGR of 13.5 per cent over FY21-24E, it said.

Ace investor Rakesh Jhunjhunwala held 7,25,00,000 shares or 1.76 per cent stake as of September 2021 against 1.39 per cent stake during the April-June period.

Jhunjhunwala added the metal stock to his portfolio in the quarter ended June 2021. He did not hold any stake in the March quarter.

The company reported a net profit of Rs 4,338.75 crore for the July-September quarter, recording an over 10-fold jump on a year-on-year basis. Profit in the year-ago period stood at Rs 436.52 crore. The company's total income grew 58 per cent year-on-year to Rs 27,007 crore.

During the quarter, the company's expenses stood at Rs 21 304.64 crore compared to Rs 16,733.29 crore in the year-ago period. The company's board also approved an interim dividend of Rs 4 per share for the current fiscal year.
 
According to MarketsMojo, the stock is trading at a discount compared to its average historical valuations and has a very attractive valuation. However, the institutional investors have decreased their stake by 2.74 per cent over the previous quarter and collectively hold 17.91 per cent of the company.