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Diverse value chain, growth capex to drive earnings

Shyam Metalics and Energy Limited (SMEL) announced a fresh capex plan aggregating INR9.9bn in addition to the ongoing capex of ~INR30bn to further improve backward integration at its steel plants. The company plans to add a) pellet capacity of 1.2 mtpa each at Jamuria and Sambalpur – INR3.6bn b) 450ktpa coke oven plant to improve yield of blast furnace – INR4.5bn and c) doubling of captive railway lines at both Jamuria and Sambalpur plants along with tippler at each plant – INR1.8bn. SMEL’s current capex plan is designed to plug potential gaps in the value chain and will enhance cost efficiencies. Besides, these projects are being funded through internal accruals and are unlikely to stress the balance sheet.

SMEL offers a unique play in the Indian metals space, with a combination of a) more than doubling of capacity in medium term and b) a strong net cash balance sheet. The name also offers the opportunity to look beyond the front run, highly consolidated steel space in India. Presence in longs value chain benefits the company as rebar prices have risen ~16.3k/t CYTD, bridging gap with HRC prices. The recent surge in coking coal prices, up ~US$313/t CYTD is also beneficial for the company, given reliance on relatively low cost domestic thermal coal. We estimate an EBITDA CAGR of 22% over FY21-24E on improving mix and higher scale of operations. Net cash position of ~INR9.3bn as of Dec’21 is likely to insulate the company from cyclical downturns. Maintain BUY with TP of INR480.

Fresh capex to improve backward integration at steel plants:Shyam Metalics and Energy Limited (SMEL) announced a fresh capex plan aggregating INR9.9bn in addition to the ongoing capex of ~ INR30bn to improve backward integration at its steel plants. The company plans to add a) pellet capacity of 1.2 mtpa each at Jamuria and Sambalpur b) 450ktpa coke oven plant to improve yield of blast furnace and c) doubling of captive railway lines at both Jamuria and Sambalpur plants along with tippler at each plant. SMEL is setting up coke oven with VDO technology which will help in reducing cost of coke and feed consistent quality coke to the blast furnace. SMEL expects to utilise 60-65% of CFO towards capex and expects IRR of 17-18% on a steady state basis.

Better placed due to dependence on thermal coal: SMEL being a DRI player depends on thermal coal instead of coking coal. The company benefits from higher coking coal prices as they result in higher realisations for end products. Thermal coal currently trades at steep discount to coking coal; this arbitrage aids the company in improving its profitability.

Proximity to raw-mat, captive power drives cost efficiency: SMEL’s manufacturing plants are located within 250km of the mineral belt in eastern India. Close proximity and linkages with mines ensures raw material security for the company. Besides, bigger companies going captive for raw material requirements are likely to improve raw material availability for smaller players. Further, company derives cost efficiencies aided by captive power plant (sufficient to meet ~80% of requirements) given cost of in-house power at ~INR2.1 per unit in 9MFY22 is significantly less than grid power which costs INR5-7 per unit.

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