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Prudent capital allocation to help RoE

Shyam Metalics and Energy Ltd (SMEL) has announced additional capex of ~Rs9.9bn over and above the existing committed capex of ~Rs30bn to be incurred over 3-4 years. The additional capex would be incurred to i) increase its pellet plant capacity by ~2.4mtpa (~1.2mtpa each at Jamuria and Sambalpur plant), ii) set up a coke oven plant with a capacity of ~0.45mtpa and iii) double captive railway siding capacities. The breakup of the capex is i) Rs3.6bn for pellet plant, ii) Rs4.5bn into coke oven plant and iii) Rs1.8bn for railway sidings. The capex will be funded through internal accruals. Further, the aluminium foil plant of ~40,000tpa capacity has also been commissioned in Mar’22. The pellet plant and coke oven plant are expected to be operational by Sep’23, while the rail sidings are expected to commission by Mar’23. We maintain BUY with a target price of Rs400/share.

* Pellet plant: At present, SMEL has pellet capacity of ~3.6mtpa which shall increase to ~6mtpa post the expansion. Capacity of ~1.2mtpa will be added at both Sambalpur and Jamuria plant with aggregate capex of ~Rs3.6bn (Rs1.8bn at each plant). The capacities are expected to be operational by Sep’23. The expansion is to ensure continuity of merchant pellet sales as existing pellet capacity will be largely consumed by increase in sponge iron capacity under commissioning (from 2.1mtpa to 2.9mtpa).

* Coke oven plant: SMEL is setting up a coke oven plant of ~0.45mtpa capacity with an estimated capex of ~Rs4.5bn. The plant will be set up at the existing land in Jamuria Plant – horizontal design, non-recovery type to help reduce cost of energy and improve BF yield; it would also offer better flexibility in choice of coal. The plant is expected to be commissioned by Sep’23.

* Captive railway sidings: The company will be adding two more railway lines at both Sambalpur and Jamuria plant. The railway lines will be added with a capex of ~Rs1.8bn (~Rs0.9bn for each plant). The proposed capex is expected to be completed by Mar’23. This will increase raw material handling capacity of the company.

* Expects to maintain margin trajectory. Management expects to maintain margins on the back of the significant increase in steel prices observed, which will likely more than offset the rise in raw material prices. Steel demand in the country has offered some resistance to sharp increases in long and flat products. Management is looking at creating adequate inventory (of thermal coal and iron ore) at all price points to navigate this period of inflation. Sharp increase in scrap prices and constrained availability are further expected to help long product prices in India.

* Maintain BUY: We maintain our BUY rating with a target price of Rs400/share based on 1.17x FY24E P/B. Current capital allocation announcement is supportive of a conservative capital structure and also the RoE profile.

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