In one of our previous posts, we mentioned that we avoid highly cyclical stocks. The reason being that we are not good at evaluating cyclical businesses and because these businesses have unpredictable earnings and cashflows. Instead we prefer sticking with known great businesses & simple companies.
But, just a few days back, a highly cyclical business caught our attention. The business was Steel. And the company was Steel Authority of India Ltd. (SAIL).
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| Steel Authority of India Ltd. |
We found SAIL available at Rs 68 apiece (March 15, 2013). This seemed a little too cheap at first. We then checked the historical price movements and found that it was indeed available close to its multi year lows [see graph below].
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| SAIL – Trading close to its Multi-Year Lows |
Now, a price close to multi-year lows can mean few things: Entire economy is in midst of a once-in-a-generation-recession OR Company has everything going against it OR Company is nearing bankruptcy (or similar financial outcomes). But as far as we could make out, neither is India facing a really big crisis, nor is SAIL nearing bankruptcy.
And the graph below clearly shows that though slow, the sales are increasing. Also, the operating and net profits are falling in last few years. That is a red flag. But considering that entire economy is struggling to gain momentum, a cyclical business like steel is bound to pay the price with declining profits.
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| Increasing Sales & Decreasing Profits |
Once we had it confirmed that SAIL is not about to close down, we decided to check simple parameters like Book Value, Price to Book Value Ratio & Dividend Yields. And what we saw only confirmed our initial thoughts. The stock is trading not only close to its multi-year lows, it is also trading at valuations (P/BV) which have almost never been seen before for this company!!
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| SAIL is available at its lowest P/BV ever!! |
We also found that in past, book value per share had almost always acted as a very strong support for the stock price. But same has changed recently. The stock has consistently traded below its book value for last 18-20 months. It may be due to negative sentiments attached to commodities and economy in general, but we are not sure.
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| Consistently increasing Book Value (2002 – 2013) |
We analyzed the stock on another parameter which we love a lot – dividends. And once again, we were not surprised. Being a PSU, it has been quite generous with its dividend payouts. As of now it is available at mouth watering 4.2% Dividend Yield. Historically, it has had an average dividend (%) of 28%, which seems sustainable in the long term.
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| SAIL is a consistent dividend payer : Presently available with a yield of 4% + |
So we come back to our original question?
Is it a good time to buy / accumulate shares of SAIL?
We feel that though a lot of indicators point that it may be a good time to start accumulating this stock, a little further analysis might be needed before deciding to start accumulating this stock.
We take up the second and last part of our analysis in our next post.
Disclaimer – Created positions recently in SAIL.
Disclaimer – Author had a short stint in steel industry.
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http://www.moneycontrol.com/news/business/sail-ofs-to-hit-marketmarch-22-sources_840694.html Will buy after March
@eac333d99ca7a5c5a26699d46104de41:disqus
Alright. 🙂 The OFS opens on 22nd March 2013. Pricing would be the key. And most probably it would be around or less than 65.
Hi.
I am a small investor & usually have trouble finding if a company has unsustainable debt…
to me it seems SAIL is making less profit than the debt obligations – these obligations are only my guesstimates & that exactly is my problem 🙂
in your post you mention that “…Once we had it confirmed that SAIL is not about to close down…” how do you figure that??
… like, what would you say about the debt of TISCO??
Net Profit a company is arrived after interest and other components have been deducted from the operating profit. A glance at latest financial results (FY13 – http://www.sail.co.in/pdf/advmay2013.html) tells that SAIL generated around Rs 60,900 Million from ordinary operating activities. And interest burden was close to Rs 6777 Million. This seems to be a big number. But when looked at in conjunction with operating profits etc, it may not be unsustainable for SAIL.But high debts are tough to manage for companies. Its altogether a different issue that this one is a govt. managed entity.
PS – We liked SAIL as a short term cyclical bet. We liked it at prices close to what OFS was priced at. And since then, it has actually gone down to 47. In our part 2 of SAIL's analysis (http://stableinvestor.com/2013/03/buy-steel-authority-of-india-part-2.html), we had mentioned that there was a possibility that it might go down to 35-40 levels! Seems it is heading there. 🙂
That is the beauty of stock markets. No matter how much you analyse, markets have the knack of laughing at you in the short term. But as a long term investors, such falls provide great entry points.
We hope we were able to clarify your doubts.
Haven't looked at the company.