SELL Maharatna PSU Steel Stock That Rose By 2,350%, Target Price Reduced To Rs 85; 10% Dividend Ahead

Maharatna iron and steel company, Steel Authority of India's (SAIL) journey on BSE and NSE has been a roller coaster ride. The stock which once traded over Rs 280, is currently performing even below Rs 150 on BSE and NSE. Nonetheless, SAIL shares have still given all-time gains of 2,350%. However, rather than seeing further upside, SAIL stock is expected to correct to a downward trend. Kotak Institutional Equities has recommended SELL!

On June 6, SAIL shares ended at Rs 147 apiece on the NSE up by 1% with a market cap of Rs 60,718.72 crore. Last month, SAIL touched a new 52-week high of Rs 175.35.

Currently, the stock is up by 80% from its 52-week low of Rs 81.80 apiece. YTD, the stock gained by 18%, but in a year, the stock zoomed by 73.5%. SAIL's 5-year gains is about 204%. All-time gains are around 2,350%. SAIL shares were once upon a time at Rs 6 apiece 25 years ago, on January 1, 1999.

Explaining in detail the reason for recommending SELL on SAIL, brokerage Kotak highlighted that the steel stock has been losing market share for the past 15 years to the aggressive private trio (JSW, JSPL and Tata Steel).

As per Kotak's note, SAIL's volume has increaseda mere 2.8% CAGR over 2009-24, as against the industry at a CAGR of 6.6%, resulting in its market share declining to 12% from 22% in 2009-24. On the other hand, the private trio gained from the misery of SAIL and secondary steel sector increasing their market share to 36% in 2024 from 22% in 2009.

Given the lack of any new capacity over the next three years and high exit utilization at 84% in FY2024, SAIL's market share loss should continue, the brokerage said.

However, Kotak also revealed that SAIL's management is evaluating various brownfield and debottlenecking expansions, totalling ~15 mtpa by end-FY2031. The expansion program could sharply increase capex and net debt over the next 3-5 years. During the previous expansion phase over 2010-20, SAIL saw negative FCF in 9/10 years, resulting in net debt rising to Rs534 bn in FY2020 from net cash of Rs60 bn in FY2010.

It added, "As SAIL stands at the cusp of its next expansion phase, we see the risk of an extended period of high capex, negative FCF and rising leverage, apart from execution risks in terms of timely commissioning of capacities."

On the valuation, Kotak's note added, "We value SAIL at 6X EV/EBITDA FY2026E and assign an FV of Rs85/share. The key risk to our investment thesis is a value unlock attempt by the government through privatization. The privatization of SAIL, having a huge workforce of ~56,000 employees, would have always been very challenging to implement. We believe a narrow majority in the national election significantly reduces the probability of such unpopular reforms. Maintain SELL."

Going ahead, SAIL is set to deliver a final dividend of Rs 1 per share having a face value of Rs 10 each for FY24. In percentage terms, the payout is about 10%.

Notably, the interim dividend of Rs 1/- per equity share of Rs.10/- each, was declared in February 2024. The said Final dividend for FY 2023-24 will be paid within 30 days from the date of approval by the Shareholders in the ensuing Annual General Meeting, the date of which will be intimated in due course.

Steel Authority of India Limited (SAIL) is one of the largest steel-making companies in India and one of the Maharatnas of the country's Central Public Sector Enterprises.