Why UBS thinks Shyam Metalics needs better valuation; Initiate with 'Buy'

UBS reckons the market is not fully appreciating Shyam Metalics' integrated operations

UBS has initiated coverage on Shyam Metalics and Energy with a 'Buy' rating and it reckons the company deserves valuation multiples in line with peers. This is because Shyam Metalics, UBS said, has shifted to value-added products, has strong earnings visibility, with lower cyclical risk because of diversified metal products.

"Shyam Metalics and Energy is a diversified metals company with a varied product range, and is able to better navigate commodity cycles than peers. We believe its strength lies in efficient operations through vertical and horizontal integration; hence its best-in-class cash flow generation and return ratio. We value Shyam Metalics at 8x EV/Ebitda on the FY26-27E average, in-line with peers," UBS said in its report dated August 21.

 

UBS has assigned a target price of Rs 1,200 per share for 12 months to Shyam Metalics, which indicates an upside of 57.6 per cent from Wednesday's closing price on the BSE.

Value added products

Shyam Metalics, according to UBS, is upping its game by diversifying products/metals and backward integration to capture efficiencies. Its successful foray into new businesses such as aluminum and stainless steel products showcases its execution capabilities.

UBS believes the market is not fully appreciating Shyam Metalics' integrated operations such as internal sourcing (75 per cent of raw material), captive power (80 per cent of requirement), and the ability to venture into new businesses.

"Shyam Metalics is transforming from a producer of commoditised to value-added products, including shifting from sponge iron to battery-grade aluminum foil. Shifts like these should lead to better margins, lower susceptibility to commodity price movement, and a better return ratio.," UBS report read.

The brokerage estimates value-added products' revenue/Ebitda (Earnings before interest, tax, depreciation, and amortisation) contribution could increase from 57 per cent/61 per cent to 68 per cent/69 per cent by FY27.

UBS reckons that the company is smaller but more nimble, efficient through backward integration, and prudent than its large peers.

"With the increasing share of value-added products, we expect ROCE (ex-CWIP) to improve from 22 per cent in FY24 to 28 per cent in FY27. We think it is on track for high profit growth and forecast an Ebitda CAGR of 39 per cent over FY24-27," the report said.

Strong earning visibility

Shyam Metalics has outlined a Rs 10,000 crore capex plan for FY22-27, to be funded through internal accruals and existing cash. This capex is for multiple projects, products, and efficiency improvement and therefore low risk to earnings in case of any project delays.

UBS expects all new projects to come on line by FY27 with Rs 2,500 crore to be capitalised in FY25 and the balance of Rs 4,900 rore in FY26 and FY27.

The brokerage anticipates the capex could generate additional Ebitda of Rs 2,600 crore in three years resulting in Ebitda/ PBT CAGRs of 39 per cent/50 per cent in FY24-27.

"Shyam Metalics is trading largely in line with peers. However, we believe the market is not fully pricing in the benefits of product diversification and the increasing share of value-added products," UBS said.

Shares of Shyam Metalics clocked an all time high gaining 10 per cent at Rs 844.85 per share on BSE in the morning deals. At around 1:26 PM, the stock was up 5.05 per cent or Rs 38.55 at Rs 802.35 per share.