On the back of an impressive capacity expansion plan and robust earnings growth expectations, public sector steel major Steel Authority of India Ltd (SAIL) is poised to outpace its metal sector rivals, including private players giants like Tata Steel and Hindustan Zinc, on the stock market radar going forward, analysts believe.
According to a latest equity research report from Australian investment banking major Macquarie Bank, Indian steel companies are among the most attractively valued scrips with SAIL enjoying the best of the pack status.
The bank said SAIL is ranked fifth among the 145 Indian stocks under its coverage and is the top steel stock in the country.
The investment bank said its Macquarie Alpha model, which combines a range of valuation, analyst sentiments and price movement factors, continues to be overweight on the basic industries and in particular on the steel stocks.
Macquarie Research said SAIL, the country's largest integrated steel company, leads the league of all key steel stocks covered in its model with an Alpha value of 11.9 per cent, as against 6 per cent for Tata Steel and 7.6 per cent for Jindal Steel and Power.
Hindustan Zinc, the third biggest domestic metal company in terms of market capitalisation after SAIL and Tata Steel, has been given an Alpha value of 7 per cent.
According to the data available with Thomson Financial, which tracks worldwide analyst ratings for stocks, the PSU steel major enjoys an average analyst recommendation between 'buy' and 'strong buy'.
The analysts anticipate robust earnings growth momentum for SAIL going forward on the back of sustained strength in steel prices, robust volume growth and significant cost savings.
Meanwhile, the company plans to nearly double its capacity to 22.5 million tonnes over the next five years and has pegged an investment of Rs 35,000 crore to this effect.
However, any potential slump in steel prices and the risk of losing Chiria iron ore deposits are likely to offset any potential surge in SAIL's share price, Macquarie Research said.
Macquarie Research said that SAIL is sitting on 40 years of iron ore requirement, while it is also actively looking for coking coal mines abroad.
The bank expects SAIL, which has a strong balance sheet, to comfortably complete its huge capital expenditure plan of $8 billion over the next five years through internal accruals only and without distorting its current debt-equity ratio.
SAIL has recently announced a corporate plan up to 2012, while setting out its goal for retaining its 'numero uno' position in the country. It plans to hike its crude steel capacity by 70 per cent from 13.5 million tonnes to 22.5 million tonnes in the next five years.
Besides, it also plans to upgrade its technology, increase its exposure to fast-growing product segments, focus on value additions and ensure 100 per cent capacity utilisation.