“With the steel spreads bottoming out, we foresee the risk-reward turning lucrative for SAIL. SAIL is currently trading at 0.72x 12MF P/B, higher than its LT average of 0.6x but still much lower than the recent peak of 1.24x in May’24. We upgrade SAIL from HOLD to BUY with a revised target price of Rs 130/share from Rs 115/share,” Axis Securities said in its report.
The target price on the stock implies a 19% upside potential from its closing price on Tuesday.
The brokerage firm believes that SAIL has higher sensitivity to steel and coking coal prices. Every Rs 1,000/t increase in Hot Rolled Coils (HRC) prices increases SAIL’s EBITDA by 15% (4% for Tata Steel) and every $10/t decline in coking coal prices increases EBITDA by 10%.
“With the softness in the coking coal prices, we reduce our FY27 coking coal prices assumption by 4% ($9/t). We marginally increase our HRC prices for FY26/27 by 0.4%/0.2%, resulting in a 4% and 13% increase in EBITDA for FY26/27E,” Axis Securities said.
Commenting on SAIL’s expansion and profitability, the report noted that SAIL is planning a major expansion, increasing its steel production capacity from 20 million tonnes (MT) to 35 MT in multiple phases, with a total capital expenditure (capex) of Rs 1.1-1.2 lakh crore.In the first phase, it aims to add 7.5 MT by FY31, with approvals in place for projects at IISCO, Bokaro, and Durgapur. The second phase, which includes expansions at Rourkela and Durgapur, is still awaiting approval and will add another 7.5 MT.Also read: What’s behind the fiasco at IndusInd Bank?
However, concerns remain about high debt levels and past delays, as SAIL previously faced significant delays and cost overruns when expanding its hot metal capacity from 14.6 MT to 25 MT.
Additionally, the next round of capex, expected to start from H2FY26/FY27 and peak in FY28/29, is keeping investors cautious. In the near term, steel price spreads will play a crucial role in determining SAIL’s stock movement.
Despite these concerns, Axis Securities believes that the recent dip in valuation multiples makes the stock’s risk-reward balance more favorable.
Lastly, SAIL’s total borrowings have decreased quarter-on-quarter (QoQ) to Rs 32,600 crore, down from Rs 35,596 crore at the end of Q2FY25. The company aims to further reduce its debt to Rs 30,500 crore, bringing it in line with levels seen at the end of FY24.
However, there is a risk of rising leverage as the company enters its next phase of expansion from FY27 onwards. SAIL has set a debt-to-equity target of 1:1 during this expansion, but there are concerns about execution risks, including potential delays or cost overruns, which could impact its financial stability.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
