Is it a good time to accumulate SAIL โ€“ Part 2

Here is the second and last part of our analysis of SAIL. You can read the first part here โ€“ 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 PE EPS figures
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 โ€“ 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 donโ€™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. ๐Ÿ™‚ย 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 โ€“ 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 โ€“ 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.


Is it a good time to buy / accumulate shares of SAIL – Part 1

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).
steel authority of india logo sail
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].

sail - stock prices over the years
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.

sail - Net sales profits trends
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!!

SAIL - Price to book value
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.

SAIL - book value per share trends
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.

SAIL Dividend History
SAIL is a consistent dividend payer : Presently available with a yield of 4%ย +
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.ย 

We take up the second and last part of our analysis in our next post.

Disclaimer โ€“ Created positions recently in SAIL.

Disclaimer – Author had a short stint in steel industry.