India's Government Initiatives Will Boost Future Steel Demand

Key Takeaways

• Strategic domestic demand growth and government initiatives are expected to boost Steel Authority of India's revenues and earnings.
  
• Focus on cost reduction, sustainability, and efficiency improvements could enhance profit margins and strengthen SAIL's bottom line.
  
• Declining exports and turnover, coupled with rising costs and high borrowing, could pressure SAIL's revenue growth and limit financial flexibility.

Catalysts

A steel-making company, manufactures and sells iron and steel products in India and internationally.

• The Indian steel industry is expected to experience significant growth driven by robust domestic demand and strategic investments, translating into a potential increase in revenue for Steel Authority of India (SAIL).
  
• Various government initiatives, such as infrastructure outlay and urban development funds, are expected to boost steel demand in India, positively impacting SAIL's future revenues and earnings.
  
• SAIL is focusing on reducing costs through operational efficiency and technological advancements, such as automation and artificial intelligence, which could lead to improved net margins.
  
• The company's ongoing efforts in sustainability and decarbonization, including reducing CO2 emissions, position it to potentially gain from policy incentives and operational savings, ultimately benefiting its bottom line.
  
• The expected decrease in coal costs coupled with ongoing efficiency improvements can lead to enhanced profit margins and stronger earnings for SAIL.

Steel Authority of India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Steel Authority of India's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 5.0% in 3 years time.
• Analysts expect earnings to reach ₹55.5 billion (and earnings per share of ₹12.46) by about May 2028, up from ₹22.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹32.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, down from 20.9x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.4%, as per the Simply Wall St company report.

Steel Authority of India Future Earnings Per Share Growth

Risks

• The global steel market is expected to face challenges due to uneven growth across regions, potential trade tensions stemming from new tariffs, and a forecasted decline in global steel demand for 2024. This could affect SAIL's revenue and profits if global market conditions impact domestic prices and demand.
  
• SAIL's export volume has decreased significantly, by 73.7%, which could limit revenue growth opportunities abroad if domestic markets do not compensate sufficiently.
  
• The company's turnover has fallen by 5.5% due to declining net sales realizations, which could impact overall revenue growth and profitability if this trend continues.
  
• Rising costs and potential duties related to raw materials, such as cascading royalties on minerals, could increase the cost of production, adversely affecting SAIL's net margins.
  
• The high level of borrowing, although slightly reduced, remains substantial at ₹32,600 crores, which could impact net earnings due to interest obligations and limit financial flexibility for future investments or expansions.

Valuation

• The analysts have a consensus price target of ₹109.654 for Steel Authority of India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹151.0, and the most bearish reporting a price target of just ₹60.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹1117.3 billion, earnings will come to ₹55.5 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 17.4%.
• Given the current share price of ₹113.71, the analyst price target of ₹109.65 is 3.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.