Steel Authority of India Ltd. is most vulnerable to rising coking coal prices among integrated steel producers, given its low-margin structure and higher use of coking coal, according to Kotak Institutional Equities.
The brokerage has maintained a 'sell' rating on the stock with a target price of Rs 50, compared to the Friday's closing price of Rs 93.85.
Financial markets in India were shut Monday on the occasion of Gandhi Jayanti.
Spot coking coal prices are 36% higher versus the Q1 FY24 average, and SAIL’s earnings face significant downside risks in second half of the current fiscal, according to Kotak.
The brokerage noted that 1% higher coking coal prices impact the company's Ebitda by around 3%, implying the highest sensitivity among peers.
With SAIL on the cusp of the next expansion phase, the brokerage estimated risk of an extended period of high capex, negative free cash flow and rising leverage.
Kotak finds SAIL's valuation expensive, considering the company's declining market share and weak growth prospects, a depressed margin profile due to inflated fixed costs, and the risk of rising leverage in case it starts growth capex.
Shares of the company fell 2.24% to Rs 91.75 apiece, compared with 0.65% decline in the benchmark Nifty 50.
Of the 26 analysts tracking the company, 11 maintain a 'buy', 6 recommend a 'hold,' and nine suggest a 'sell', according to Bloomberg data. The average 12-month consensus price target implies an upside of 1.50%.
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