Shyam Metalics offers substantial value & has target price of Rs. 580 (40% upside): Edelweiss

Shyam Metalics (SMEL) stands out as a rare combination of enhanced capacity and a net cash position in India’s steel market. Its steel/iron making capacity is expected to increase by 2–3x through FY25E and net cash position is likely to sustain profitability in the face of ongoing price volatility. All in all, we estimate SMEL’s EBITDA would expand at a 26% CAGR over FY21–24E. Even so, the company might underperform peers in an upcycle given its low leverage.

In our view, SMEL offers substantial value considering its: i) expected RoE/RoCE of 20%/25% on average; and ii) cumulative free cash flow equivalent to 30% of market cap through FY24E. Initiate with ‘BUY’ at a TP of INR580/share, valuing the stock at 5x Q3FY23E EBITDA.

Capacity expansion complemented by cost efficiency

SMEL is expanding steel/iron making capacity by 2–3x over FY21–25E. We expect EBITDA to expand at a 26% CAGR through FY24E, largely driven by: i) an increasing share of rolled steel products—up to 50% from 40% in FY21; ii) a portfolio of niche products such as low carbon ferrochrome, DI pipes and aluminium foils; and iii) a cost-efficient business model with captive power and railway sidings. Besides, surplus land parcels adjacent to the plant provide ample scope for cost-effective future expansion, resulting in a sustainable competitive advantage over peers.

Sweeteners: Superior cash position and potential returns

SMEL is among the few domestic steel companies with a net cash position (in FY23E). In our view, this is expected to insulate it from any cyclical downturn in prices, at least relative to peers. Hence, despite an estimated cumulative capex of INR20bn, we expect substantial cash accretion equivalent of 30% of market cap through FY24E. We also estimate superior RoE/RoCE of 20%/25% on average through FY24E.

In our view, the company is likely to utilise the surplus for further enriching its product mix or for a prudent, value-accretive acquisition in longs. That said, the low leverage might cause the stock to underperform in a steel price upcycle.

Outlook and valuation: Plenty to cheer; initiate with ‘BUY’

SMEL offers a blend of growth and value. Progressive capacity enhancement is likely to drive up both volumes and value—the latter due to a bigger mix of value-added products. As a result, we see a firm possibility of cash accretion—equivalent to 30% of current market cap through FY24E.
We estimate SMEL would post revenue/EBITDA CAGR of 29%/26% over FY21–24E. We value the stock at 5x Q3FY23E EBITDA – similar to large players – owing to its better leverage and returns potential. Our TP works out to INR580/share, implying 40% upside potential. Initiate with ‘BUY/SO’. The key risks to our thesis remain price volatility, relatively high dependence on local market vis-à-vis flat steel producers, operational risks and legal proceedings against directors. On top of it, SMEL’s low leverage might result in a relative underperformance in an upcycle.