SAIL OFS: An Attractive Option

The President of India, who is the promoter of Steel Authority of India (SAIL), is offering 24,03,96,572 equity shares of the company of face value Rs 10, representing 5.82% of its paid-up equity capital. The floor price for this OFS is Rs 63.

SAIL had submitted a notice of Offer for Sale (OFS) on March 20, 2013. The offer will be exclusively through a separate window provided by the stock exchanges. It will commence at 9.15 am on March 22 and will close on the same day at 3.30 pm. As per the company's shareholding pattern submitted on December 31, 2013, the government currently holds 85.82% stake in the company, which will reduce to 80% after this offering.

Considering the current market price of SAIL, the government would probably be able to raise around Rs 1550 crore through this stake sale. This would be a small amount in the overall disinvestment plan of the government, which has set a target of raising close to Rs 30000 crore by the end of FY13. In the current fiscal, it has been able to raise only around Rs 22000 crore through disinvestment till date as against last year's budgeted Rs 30000 crore. Before the end of FY13, the government has also plans to sell its stake in MMTC.

SAIL is the largest steel manufacturing company in India. The company is a fully integrated iron and steel maker, producing for industries like construction, engineering, power, railway, automotive and defence. It is among the five Maharatnas among the country's Central Public Sector Enterprises. The company also has the distinction of being India’s second largest producer of iron ore and of having the country’s second largest network of mines. With its total number of dealers at over 2000, it has a wide marketing spread, with good availability of its steel and steel products in virtually all the districts of the country.

On the financial front, SAIL has disappointed the street with its subdued December 2012 quarter numbers, reporting flat growth in its sales and a decline in its net profit. For the said quarter, it saw a 0.5% decline in its total income to Rs 10670 crore. Of its 8 main steel plants, only 3 plants (Durgapur, Rourkela and Bokaro) have reported a growth in business, while the rest have reported a decline.

On the margins front at the organisational level, while the company has kept a tight control on major expenditures such as material costs and power and fuel expenses, its EBITDA margins have still declined by 400 bps. SAIL has also reported a sharp decline in its other income, which came in short by 42% at Rs 220 crore. Interest income, which is a major part of its Other Income, declined by 44% to Rs 208 crore.

The stock is currently trading at a price-to-earnings multiple of 8x its TTM EPS of Rs 8. It has plunged since the start of this calendar year, with the government's announcement of disinvestment in the company. Considering its distressed valuation, along with the fact that it is available at a discount to the current market price (Rs 63.90 as of March 21, 2013), this OFS surely provides an attractive opportunity for investors who wish to take a position in the Metal space.