Steel traditionally found use in heavy industries like construction, railways, shipping and many others where scope for value addition was limited. Thus, it attracted competition and kept pressure on the margins. But over the years, Indian companies, particularly, private sector players have been hugely successful in creating product categories that are slightly premium. Some of these premium products include stainless steel used in consumer appliances, auto grade steel, food packaging.
However, one company that has been behind the curve is SAIL, which is largely catering to heavy industries like railways, construction and many others. To put it in perspective, SAIL currently makes realisations in the region of about Rs 35000 a tonne as against Rs 38,000 per tonne made by JSW Steel and Rs 46,000 per tonne for Tata Steel.
Despite a huge run-up in steel prices this year, SAIL still continues to incur losses compared with companies like JSW Steel and Tata Steel that generated handsome profits. While explaining the situation at SAIL, in one of the interviews published in Business Standard, Steel Secretary said: "As for Steel Authority of India (SAIL), it will be completing its massive modernisation and expansion next year and after that it will start getting good returns. SAIL’s investment will be directed at value addition. That will give its EBITDA a leg-up. Tata Steel and JSW Steel have been innovative in using the services of fabricators".
SAIL is making a structural shift (See table) and its JV with the ArcelorMittal for making 1.5 million of auto-grade steel could be a step in the right direction. "In the prevailing stiff market competition, value addition to our products and processes along with tailoring the product quality and attributes in line with market demands rather than producing only volumes can be a game-changer for us," PK Singh Chairman, SAIL said in its recent press release.
While the auto-grade steel would be around 10 percent of its current capacity of 14.3 million tonnes, it would be hugely value accretive in terms of improving profitability. On an average, steel prices for the various categories come to around Rs 36000-38000 a tonne. Auto-grade steel earns realisations in the region of 55000-60000 a tonne. JV would help the company to improve profitability.
Short-term exuberance
In the near term, considering that many of these are long-drawn plans market seems to be counting too much on a JV whose actual production might take 3-4 years after the signing of the agreement by both the companies. Moreover, investors should not be confused between a JV and acquisition as speculators might point to an acquisition on the cards.
Nevertheless the stock has given almost 50 percent return since October this year and currently trades at Rs 81 a share or 12 times enterprise value to operating profits (EBITDA) and 39 times consensus estimated earnings of FY19, which is slightly on the higher side.
Source: moneycontrol