Shyam Metalics and Energy Ltd-BUY

Target -533
CMP- 457
Upside-16.63%

Investing in Excellence: SMEL’s Commitment to Quality and Efficiency
Shyam Metalics and Energy Limited (SMEL) is a prominent Indian company operating in the metal and steel industry. The company has established a strong presence in this sector, focusing on long steel products and ferroalloys. SMEL operates three manufacturing plants strategically located in Sambalpur, Odisha, as well as Jamuria and Mangalpur in West Bengal. A key advantage for SMEL is its proximity to raw material sources, which reduces transportation costs and streamlines logistics. With well-connected road, rail, and port infrastructure, SMEL efficiently transports raw materials and finished goods, minimising freight costs and turnaround times. This strategic advantage also enables SMEL to export its products to international markets in a cost-effective manner.

Why should one invest in SMEL?

Value-Accretive Diversification Plans:SMEL has displayed a strong market diversification strategy to enhance its market position and ensure long-term profitability. The company plans to invest Rs. 39.2 billion in expanding its product portfolio, targeting stainless steel, parallel flange beams, and narrow HR strips. This strategic move aims for high double-digit revenue and EBITDA growth by FY25. The focus on expanding finished steel capacity, especially in high-growth areas, aligns with SMEL’s vision to capture emerging market opportunities. The adoption of advanced technologies like the ‘ladle refining furnace’ (LRF) and ‘continuous casting machine’ (CCM) underscores the company’s commitment to product quality and process efficiency, giving it a competitive edge. Furthermore, SMEL’s entry into battery-grade aluminium foil production anticipates rising demand from Indian companies venturing into advanced batteries, further diversifying its product range.

Prudent Capital Allocation:SMEL plans to invest Rs 12.3 billion in increasing its power capacity through conventional and renewable sources, aiming to reduce operational costs and ensure sustainability. This investment is projected to result in a payback period of less than four years, highlighting the company’s commitment to shareholder value creation. The integration of a coal-based captive thermal power plant (220MW) and a 110 MW solar power plant reflects SMEL’s focus on sustainable practices, operational cost optimization, and environmental sustainability. With an estimated IRR of approximately 20% on these projects and a capital allocation policy allocating 70% for growth, 20% for reinvestment, and 10% for dividends, SMEL demonstrates a disciplined approach to generating shareholder value.

Valuation and Outlook

SMEL’s focus on expanding downstream and value-added capacities, along with a comprehensive cost-reduction strategy, positions it well to capitalise on evolving market dynamics. The company’s consistent execution of expansion plans and diversification into niche segments is expected to contribute to sustained revenue and EBITDA growth. Despite potential challenges related to pricing, SMEL’s resilient business model and robust expansion plans are likely to support margins and strengthen its industry position.
Considering its projected trajectory of sustained growth, we recommend a “Buy” for SMEL. Based on the company’s prudent capital allocation, diversified product mix, and low-intensity capex plan, we value the company at a conservative FY25E EV/EBITDA multiple of 4.5x. This valuation suggests a target price of Rs 533, indicating a potential upside of 16.8% from the current market price. This recommendation comes with an investment horizon of 12 months.

Key Takeaways:

•   SMEL is a well-established player in the metal and steel industry with a strategic focus on growth, diversification, and sustainable practices.
•  Its prudent capital allocation and value-accretive diversification plans make it an attractive investment opportunity
• The company plans to invest Rs 39.2 billion in expanding its product portfolio, this strategic move aims for high double-digit revenue and EBITDA growth by FY25.