Here is the second and last part of our analysis of SAIL. You can read the first part here – Part 1.
We take up an analysis of P/E & EPS Expansion (& Contraction) of SAIL in this post.
The Blue blocks in graph are Trailing Twelve Month EPS figures for SAIL since April 2004. The Red Worm is a plot of P/E multiples of the stock.
SAIL – EPS (TTM) & P/E figures since April 2004
As of now, stock is trading at a PE multiple of 7.8. Though this in itself looks cheap, it is still not close to its historical lows of around 3. Another thing which we observed, and we may be wrong, is that PE expansions trail Earnings Expansion for this company (or cyclical commodities in general). And since last 2 years, it seems that earnings are neither going up nor going down. They have stabilized in a band of Rs 7 – Rs 9 per share. We believe that this may be the bottoming out of the earnings. The earnings may not go down much from here. And since, there is no immediate trigger for stock to move up, we believe that market expectations (and we take P/E as a proxy for that) are bound to stay stable or go down in near future, i.e., the stock may stay at these levels or go down a little. We don’t know if it will go down to PEs of 3 with current earnings or not. If it does, then that would mean that stock would move lower to levels of 35-40. But that would be the worst case scenario.
What seems more plausible here is that earnings have bottomed out and after a few quarters, they may make an upward move. With expansion in earnings, market sentiments would also catch up with an expansion in PEs. Hence there is a possibility of increase in share prices from current levels of less than 70.
Hence though we do like the stock as the risk reward ratio seems more skewed towards reward, there is also a possibility that stock may go down, even without a fall in earnings, just because of lack of positive news. And if Indian economy does start gaining momentum in quarters to come, that would once again help in raising market sentiments and hence a higher PE assignment to SAIL. On the downside, if things don’t turn out to be as bright was we might like them to be, we always have a decent dividend payout to look forward to. Over the years, SAIL has consistently doled out generous dividends. And we think that same would be continued in future.
So once again, we come back to our original question?
Is it a good time to buy / accumulate shares of SAIL?
Upfront, we would say that one can start accumulating this stock. By this we mean that one can start buying in small quantities. We are still not sure if the stock can go down more or not. But if stock is going down more because of PE contraction rather than earnings contraction, then one can continue accumulating the stock. Atleast this is what we plan to do. 🙂 But if the earnings, which we are assuming have stabilized for the time being, start going down, then one has to relook at the investment.
A lot of indicators (read more in Is it good time to accumulate shares of SAIL – Part 1) are pointing that downside may be limited. Hence, we plan buying this stock in small quantities for capital appreciation as well as dividend income. This should not be taken as an investment recommendation. Do your own research before investing your hard earned money.
Disclaimer – Created long positions recently in SAIL. Author(s) plan to accumulate the stock in future, depending on various factors detailed in this and previous post.
Disclaimer – Author had a short stint in steel industry.
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