Global brokerage firm UBS has initiated coverage on Shyam Metalics and Energy Ltd (SMEL) and it sees a solid upside in the stock on the back of strong earnings visibility and improvement in efficiency at every level. The stock reacted to the maiden report by UBS and surged nearly 11 per cent for the day.
Management's approach to move up the value chain, diversifying products/metals and backward integration to capture efficiencies make it stand out. SMEL is transforming from a producer of commoditised to value-added products like from sponge iron to battery-grade aluminium foil. Shifts like these should lead to better margins, lower susceptibility and better return ratio, said UBS.
"We estimate value-added products' revenue and ebitda contribution could increase 68 per cent and 69 per cent, respectively by FY27. SMEL 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 to improve to 28 per cent in FY27," it said.
SMEL 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.
"Our analysis indicates capex is both margin and ROIC-accretive. Of the planned capex, Rs 5,000 crore has been incurred but only Rs 2,600 crore is capitalised and the balance is in CWIP," said the overseas brokerage in its IC report. "We expect all new projects to come on line by FY27 with Rs 2,500 crore to be capitalised in FY25 and the balance Rs 4,900 crore in FY26 and FY27."
The brokerage believes that this capex could generate an additional ebitda of Rs 2,600 crore in three years resulting in ebitda and PBT CAGRs of 39 per cent and 50 per cent in FY24-27, respectively. We value SMEL on 8 times EV/Ebitda on the FY26-27E average, in line with peers' multiples," it added with a target price of Rs 1,200 and a buy rating, suggesting an upside of 50 per cent.
Shyam Metalics and Energy surged 10.6 per cent during the trading session on Thursday at Rs 844.85, hitting its new record highs, with a total market capitalization of more than 23,500 crore. The scrip had settled at Rs 763.80 during the previous trading session on Wednesday.
Shyam Metalics and Energy reported consolidated revenue of Rs. 3,612 crore, rising 8.37 per cent on a year-on-year (YoY) basis, while consolidated operating EBITDA came in at Rs 488 crores, an 18 per cent jump YoY. Net profit climbed 37 per cent YoY to Rs 276 crore for the quarter.
SMEL's Q1FY25 Ebitda was ahead of estimates as its performance was aided by better prices QoQ; ramp-up of stainless steel (SS) and Aluminum (Al) capacities aided earnings; net cash at end-Q1FY25 stood at Rs 13,900 crore; CRM and blast furnace capacities likely to come on board in next six months; Plans to focus on SS, Al and power capacities in the near term, said ICICI Securities.
"Going ahead, we believe that SMEL’s Ebitda is likely to grow 45 per cent YoY through to FY26E, based solely on capacity ramp-up, while it maintains a healthy net cash position," it added with a 'buy' rating on the stock with a target price of Rs 825 post Q1 results.
SMEL offers a unique play in the metals space, with a combination of increasing contribution from finished steel and valued added segments and diversified business across the steel value chain. The company has executed capacity expansion plans with precision over the past few years. Capital allocation towards niche business segments augur well, said JM Financial with a 'buy' tag.