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Steel Authority of India (SAIL)’s offer for sale (OFS) comes at a time when the demand and pricing environment for steel is subdued, both in India and globally. Plus, domestic supplies are expected to increase faster than demand over the next 12-18 months.
For instance, five million tonnes per annum (mtpa) of saleable steel capacity (including SAIL’s two mtpa) is expected to come up in FY16. “Given the six-seven per cent increase in industry’s capacities, demand has to grow by eight-nine per cent compared with about one per cent now to meet the increased supplies. So, pressure on local steel prices should remain,” says an analyst with a domestic brokerage. With global environment also subdued, it will be difficult for any company to surprise, unless the Indian government takes measures such as imposing anti-dumping duties, he adds.
Much of this is factored in the stock’s valuations, which is on the higher side with price-to-earnings of 10 times FY16 estimated earnings versus 6.5-8.5 times for its peers. On an enterprise value/Ebitda basis, too, it is quoting at nine time one-year forward earnings. These valuations are higher than Tata Steel’s 5.2 times and JSW Steel’s 4.8 times, according to a December 2 report by Emkay.
The stock has fallen five per cent following Wednesday’s OFS news. The stock is likely to remain under check till Friday, the only day SAIL’s OFS will open for subscription. While a five per cent discount to retail investors sounds good, according to Bloomberg poll (since November 24), half of the 26 analysts have a ‘sell’, eight a ‘hold’ and just five have a ‘buy’ rating on the stock with an average one-year target price of Rs 81.
Long-term investors could, however, consider it on declines or apply around the floor price of Rs 83 (excluding discount) given that SAIL has already completed most of its capex, which will take its saleable steel output from 12.5 mtpa to 19 mtpa in the next four-five years.
