Shyam Metalics and Energy is marching towards being a “multi metal basket” with forays into aluminum and stainless steel. The steel producer with plants in West Bengal and Odisha, which had its IPO in June 2021, is halfway through its current capex phase. It has delivered a strong capacity expansion and is eyeing more value addition in the next three years. While the volume growth has been strong, the declining realisations have partially masked the growth. The trade tariffs have the potential to further impact prospects in the short term.
Overall, considering the strong growth outlook, the impending steel price volatility and reasonable valuations — 12 times one-year forward earnings or 7.5 times FY26 EV/EBITDA, we recommend investors accumulate the stock on opportune corrections. While the stock had more than doubled from its IPO until September 2024, it has since corrected 22 per cent.
Well positioned
The company reported revenue growth of 12 per cent year on year in the last 12 months. This was driven by volume expansion (as shown in the table) and foray into stainless steel in the recent period. This comes at a time when steel prices have been on the decline in the last one year at around 5-9 per cent across categories. JSW Steel and Jindal Steel, for instance, have reported a revenue decline of 3 per cent/1 per cent in the last one year, despite their own expansion taking place.
The company has been on an expansion path since the IPO. The company, with a market capitalisation of around ₹20,000 crore, has investment plans of ₹10,000 crore. Of this, the company invested ₹5,600 crore till December 2024 and ₹4,300 crore has been capitalised. The remaining is expected to be invested in the next three years.
The investments have built capabilities in power and support infrastructure (power, railways, heat capture), intermediate steel production (billets, steel and basic alloys to aluminum) and now eyes downstream capabilities including stainless steel and aluminum foils. The diverse presence should insulate the company from end-market volatilities to an extent and improve its margins from pricing and cost efficiency perspectives.
Next leg of expansion
The next leg of expansion will be focused on value-added downstream products from steel. The company has started production of stainless steel and expects to grow it four fold in the next three years. Similarly, the aluminum facility, which now contributes to 5 per cent, will expand in coils and sheets facilities and plans on more than doubling its capacity. Stainless steel and aluminum segments have margins (EBITDA per tonne) which are 20 per cent higher and seven times the main steel segment, respectively. This should drive the top- and bottom-line expansion when executed. The company is also expanding the steel segment which should support the expansion. Apart from this, the company has invested in railway sidings, ancillary products such as CR coils, colour-coated sheets and cold-rolled capacity, which should also add to the value basket.
It is also investing in backward integration, which should support margin expansion. In the short term, the recently-commissioned blast furnace and oxygen plant should improve margin performance through production and energy efficiency. This is expected to support margins from FY26. The company will also expand its captive power plant from 386 MW to 706 MW in the period along with adding renewable capacity of 100 MW. With 84 per cent of its power requirement met from captive consumption, the cost of which is lower than external power, the scope for cost savings is high.
Financials, valuation
Shyam Metalics reported revenue of ₹14,604 crore in the last 12 months with an EBITDA margin of 12 per cent. This is 200-300 bps lower than JSW Steel, which could be owing to smaller size of operations. But with the margins levers available, the gap can be addressed.
The company has a prudent 70/20/10 policy with regard to its internal cash accruals, wherein it reinvests 70 per cent, retains 20 per cent and distributes 10 per cent. This has allowed the company to drive the high capex momentum and the company now has a solid balance sheet with net cash balance of ₹768 crore in December 2024. The company has invested ₹1,500-1,800-crore capex in the last three years and expects to maintain the same runrate in the next three years. This is a significant 8-10 per cent capex to market capitalisation ratio and should power earnings growth of the company.
But investors should be wary of steel realisations. Despite a year or more of depressed steel prices, the tariff imposition is not positive to the sector. Despite low steel exports to the US, the deflected Chinese and European exports to the US on facing high tariffs could impact domestic prices. While valuations are reasonable, we recommend investors to monitor the situation and accumulate the stock at opportune corrections.
