New Color-Coated Roofing Sheets And Food-Grade Foils Will Open Markets

Key Takeaways

• Expansion into B2C markets with new aluminum products and value-added portfolio could boost revenue growth and margins significantly.
  
• Strategic CapEx and backward integration are poised to enhance operational efficiency, reduce costs, and improve earnings growth.
  
• Increasing operational costs, acquisition challenges, and market entry risks threaten revenue growth, while changes in trade policy could worsen profit margins.

Catalysts

An integrated metal company, manufactures and sells long steel products and ferro alloys in India and internationally.

• The launch of a new range of color-coated roofing sheets and expansion of the value-added product portfolio, particularly in the construction and industrial sectors, is expected to drive revenue growth by tapping into rising demand in these sectors.
  
• The venture into the B2C market with the launch of food-grade aluminum foil products projected a CAGR of 8% to 10% by 2030, which could positively impact future revenues and margins due to increased demand in the food sector.
  
• The commissioning of the blast furnace facility at Jamuria, which achieved full capacity utilization and is expected to exceed 100% capacity, indicates potential for increased pig iron sales, which will enhance revenue and operational efficiency, impacting overall earnings.
  
• Backward integration efforts, including enhanced production capacity and technology upgrades, are expected to boost operational efficiency, reducing costs and thus potentially increasing net margins.
  
• Strategically planned CapEx in carbon steel, stainless steel, and aluminum, scheduled for completion by FY '27, aims to enhance operational efficiency and sustainability, potentially leading to significant revenue and earnings growth and an improvement in return on capital employed.

Shyam Metalics and Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shyam Metalics and Energy's revenue will grow by 18.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 8.0% in 3 years time.
• Analysts expect earnings to reach ₹20.1 billion (and earnings per share of ₹72.2) by about May 2028, up from ₹9.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.1x on those 2028 earnings, down from 27.8x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 22.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.61%, as per the Simply Wall St company report.

Shyam Metalics and Energy Future Earnings Per Share Growth

Risks

• The company's revenue realization for steel products has decreased by 3% to 5% in the financial year '24-'25 compared to the previous year, which could impact overall revenue growth if the trend persists.
  
• There has been a significant increase in working capital days from 12 to 22 due to new projects, such as the introduction of blast furnace and color-coated sheets, which could negatively impact net margins due to higher operational costs.
  
• The recent acquisition of Mittal Corp led to a net profit degrowth of 11.6%, primarily due to tax adjustments related to carry-forward losses. Continued accounting adjustments or operational integration challenges could impact future earnings.
  
• The entry into new markets, such as B2C with aluminum foils, carries the risk of acceptance and competition, which may not result in the anticipated revenue increase if market penetration is slower than expected.
  
• The safeguard duty imposed on aluminum foil imports from China is currently favorable, but any regulatory changes or trade policy shifts could affect revenues and profit margins adversely.

Valuation

• The analysts have a consensus price target of ₹992.143 for Shyam Metalics and Energy 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 ₹1175.0, and the most bearish reporting a price target of just ₹701.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹252.5 billion, earnings will come to ₹20.1 billion, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 13.6%.
• Given the current share price of ₹906.95, the analyst price target of ₹992.14 is 8.6% higher. 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.