Why good times are coming for SAIL | Economic Times

Despite the recent reduction in import duties of steel products, analysts remain bullish on Steel Authority of India (SAIL). Analysts are of the view that the high international steel prices will cushion the reduction in import duties. Domestic steel demand is also expected to go up in the coming years due to the government’s increased infrastructure thrust in the recent Budget, which in turn is expected to increase steel demand from the construction sector. Similarly, the recently announced vehicle scrappage policy is expected to boost domestic automobile production in the coming years, which will also result in increased demand for steel. In other words, the worst is behind the domestic steel industry.Strong operational performance by SAIL is the main reason why analysts are getting bullish on this counter. The company has achieved the best ever quarterly production during the third quarter of 2020-21, thanks to gradual opening of the economy and increased steel consumption. Due to better realisation, SAIL’s consolidated third quarter revenue has increased by 17% q-o-q and 20% y-o-y. Due to fall in interest cost, performance improvement was better at the bottom line level. The company has reported a consolidated net profit of Rs 1,468 crore, compared to net profit of Rs 437 crore in previous quarter (increase of 236% q-o-q) and net loss of Rs 344 crore during the corresponding period last year.Also Read: Why only few PSU stocks are worth buyingDespite the recent jump in price, SAIL’s valuation is still at reasonable levels compared to its counterparts, attracting analysts to this counter. The company compared to other steel players, is also better placed to improve its profitability in the coming quarters due to operational leverage benefits. Fixed cost component is more for SAIL and therefore, any increased production will result in improved earnings before interest, tax and amortisation (Ebitda) margins. The Ministry of Mines has allowed SAIL to sell 25% of its total iron ore production and this will be another factor that will push up its Ebitda margin in the coming quarters.The improvement in operational performance is getting reflected in its balance sheet also and the company’s debt/equity ratio fell to 0.71 times in December as compared to 1.3 times in September. Reduction in interest cost is one factor that is propelling its net profit growth and this will continue in the coming quarters due to debt reduction. 80745510 Selection MethodologyWe pick up the stock that has shown the maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.