Shyam Metalics: Strong execution of well-directed capex

30 Aug 2023 , 11:04 AM

Recommendation: Buy; Target Price: Rs 592

Over the past decade and after its IPO in FY21, Shyam Metalics (SMEL) delivered well on capacity expansion (up 94%-150% across product lines), quick ramp-up and improving product mix. The new Rs39bn capex plan is directed towards improving product mix along with associated intermediaries and higher backward integration. This should help deliver 36% Ebitda Cagr over FY23-26 at the current commodity prices. Leverage should remain comfortable with ND/Ebitda of 0.17x at its peak in FY25, as per IIFLe. Analysts of IIFL Capital Services value SMEL at 4.5x Sep’25 Ebitda for their TP of Rs592. BUY.

Strong track record on expansion and ramp-up: 

SMEL has delivered well on capacity expansion across products, with capacities up 94-150% vs FY21 (IPO) levels across product lines. Quick ramp-up of capacities post CoD has ensured that volumes have grown steadily and share of VAP (long steel) has inched up from 20% in FY21 to 34% in FY23. Importantly, expansion has been funded through internal cash generation with end FY23 net debt/Ebitda of -0.24x. 

Fresh Rs39bn capex to drive meaningful improvement in mix: 

In May’23, SMEL management announced a fresh capex plan of Rs39.15bn directed primarily towards downstream carbon and stainless steel products, associated intermediaries and towards higher backward integration. This will further improve share of VAP products as well as enhance cost control, aiding margin sustainability. Ramp-up of volumes from the recently commissioned capacities of these new projects should support 36% Ebitda Cagr over FY23-26 at current commodity prices. 

Lean balance sheet a key comfort: 

SMEL management has historically eschewed leverage and has relied on pacing expansion based in internal cash generation. Hence, FY23 saw net cash of Rs3.53bn (ND/Ebitda of -0.24x), despite ongoing capex and two acquisitions. Incrementally, analysts of IIFL Capital Services expect the Rs53bn planned capex over FY24-26 to be funded from internal cash-flow as well, with peak ND/Ebitda of 0.17x in FY25. Management remains flexible to pace capex in case cycle weakens well.