UBS Coverage Report on Shyam Metalics and Energy Limited with a Target Price of Rs. 1200

Shyam Metalics and Energy Limited On a high growth and transformation journey

Shyam Metalics and Energy (SMEL) management’s pragmatic approach to move up the value chain, diversifying products/metals and backward integration to capture efficiencies make it stand out. The successful foray into new businesses (aluminium and stainless steel products) showcases its execution capabilities, multiple new projects commencing operations in FY25/26 provide strong earnings visibility, while it mitigates profitability risk through diversification. We believe the market is not fully appreciating its integrated operations such as internal sourcing (75% of raw materials), captive power (80% of requirement), and the ability to venture into new businesses. We initiate coverage at Buy with a price target Rs 1,200, c60% above the current share price.

SMEL is transforming from a producer of commoditised to value-added products; eg, from sponge iron to battery-grade aluminium foil. Shifts like these should lead to better margins, lower susceptibility to commodity price movement, and a better return ratio. We estimate value-added products’ (eg, aluminium foil, SS products) revenue/EBITDA contribution could increase from 57%/61% to 68%/69% by FY27. SMEL is smaller but more nimble, efficient through backward integration and prudent than its large peers. With the increasing share of value-added products, we expect ROCE (ex-CWIP) to improve from 22% in FY24 to 28% in FY27. We think it is on track for high profit growth and forecast an EBITDA CAGR of 39% over FY24-27.

SMEL has outlined a Rs100bn capex plan for FY22-27, to be funded through internal accruals and existing cash. This capex is for multiple projects, products and efficiency improvement and therefore low risk to earnings in case of any project delays. More importantly, our analysis indicates capex is both margin and ROIC-accretive (Figure 24Potenial ROIConupcmig aexplns byFY27-8E atfulpoential). Of the planned capex, Rs50bn has been incurred but only Rs26bn is capitalised and the balance is in CWIP. We expect all new projects to come on line by FY27 with Rs25bn to be capitalised in FY25 and the balance Rs49bn in FY26 and FY27. We estimate this capex could generate additional EBITDA of Rs26bn in three years resulting in EBITDA/ PBT CAGRs of 39%/50% in FY24-27.

We value SMEL on 8x EV/EBITDA on the FY26-27E average, in line with peers’ multiples. We believe SMEL deserves the this multiple given its shift to value-added products, strong earnings visibility, and lower cyclical risk because of diversified metal products.