Shyam Metalics offers a unique business model. Buy for target price of Rs 570 (48% upside)

Capex is what capex does

We see Shyam Metalics and Energy (SMEL) effectively evolving on its 3C principle: Comprehensive products, Capex focus and Cost efficiencies. The recently announced capex plan of INR 39bn illustrates the company’s sharp focus on both scope and scale. In our view, the payback period of this capex is likely to be less than 4 years, even with our estimate of declining commodity prices and EBITDA margin persisting in the range of 12-13%. Considering the headroom in balance sheet, we believe the company has enough on the table to pursue further growth opportunities. Taking cognisance of prevailing commodity prices, we trim our FY24E/FY25E EBITDA by 6% and 8% respectively. However, based on the growth potential beyond FY25E, we raise our EV/EBITDA multiple to 6x (earlier: 4.5x). Our revised target price works out to INR 690 (earlier: INR 570). Maintain BUY.

Capex directed in niche, value-added and adjacent areas

SMEL’s recently announced capex of INR 39bn through to FY26 dovetails into the existing product range and increases the company’s exposure into value added products such as parallel flange beams, cold-rolled products and DI pipes. Besides, backward integration into iron ore beneficiation and aluminium mill with caster will likely lead to cost efficiencies. Company is also augmenting its power capacity to meet the increased internal requirement for power. We believe the capex of INR39bn could potentially lead to an additional EBITDA of INR 10.6bn p.a. (at current price levels), implying payback period of less than 4 years. As a result, EBITDA and EBITDA margin are likely to reach INR 40bn and 12.3% respectively by FY28E.

Aspirations of a conglomerate, execution of a monolith

SMEL offers a unique business model comprising longs, value-added flats, stainless steel – both flats and longs – and downstream aluminium products. Now the company is focusing on going further down the value chain, filling in the gaps left by the major players. The diversification is also an effective hedge for earnings. On the execution front, SMEL has put up its capacities in less time and less capex than peers. Besides, the management has met the capacity expansion plans detailed during the IPO and is on course to meet the capacity expansion plan it committed to in Mar’22. We believe there is sufficient headroom in the balance sheet and enough land bank to embark on further capacity expansion post FY25E.