When I look at Steel Authority of India Limited (SAIL) stock with 2 to 3 years investment horizon, it appears to be very attractive at current price (CMP as on 25th Sep 2015: Rs.68). Just consider the following points.
1. SAIL steel capacity is expected to reach around 21.5 million tonnes by March 2017 from capacity of around 13.3 million tonnes as on March 2012. As on March 2014, it had crude steel production capacity of approx. 16 million tonnes.
2. Considering the modest replacement cost of 65000 per tonne, the replacement cost for entire company comes to around Rs. 1.4 lakh crores (1,40,000 crores) against the current market value of around Rs. 29,000 crores.
3. Considering the net debt level of Rs. 45000 crores by March 2017, if one purchase the stock today at roughly 70 bucks, he will be paying an enterprise value of 74000 crores (almost half of SAIL's March 2017 replacement cost).
4. SAIL's book value for March 2014 was Rs.105 and is expected to reach Rs.120 by March 2017.
5. At 75% replacement cost, the company should command an enterprise value of at least Rs. 1,05,000 crores and assuming net debt level of around Rs. 45,000 crores, the company should command a market value of at least Rs.70,000 crores by March 2017.
6. At 70,000 crores market value, each stock should be valued at Rs.148. Taking a margin of safety of around 20% to this calculation, the stock should be trading at no less than Rs.120 which will also be the approximate book value of the company by FY-17.
7. Also the company is expected to distribute around Rs.7 as cumulative dividend by March FY-17. Taking this into account there is an expected appreciation of more than 70% in next 2.5 years from the current level of Rs.70.
8. The stock hit a high of Rs.113 in June 2014 and is down around 38% since then. The stock has been mainly under pressure due to govt's 5% divestment target in the company which was recently deferred due to low stock price.
9. In the recent supreme court judgement, the coal block of SAIL was spared which is also very positive as the company is backward integrated with captive iron ore and coal mines.
10. Considering all the above factors, there seems to be very limited downside to the company stock and descent upside for a 2-3 years investment horizon.