Our new Investor Relations client Sarthak Metals offers great value to investors at the current price.
Firstly, its business: Sarthak Metals is a supplier of couple of important ingredients in the manufacture of steel. While the name may suggest that Sarthak is a manufacturer of metals, it is a supplier to the metal industry; makers of products like refractories are more appropriate peers rather than steel manufacturers.
The company makes two key inputs used in the manufacture of steel:
- Cored Wires: Steel tubes (wires) filled with various alloys that are injected in molten metal for introducing different characteristic in the metal
- Aluminium Flipping Coils: used in steel manufacturing process for de-oxidising of molten steel, and as a alloying element for manufacturing specialized steel
An important point to note is that the company is the market leader in these products, with upwards of 30% market share. Sarthak supplier to all key steel producers in India.
We believe a market leader with healthy financials deserves better discounting. Currently the company quotes around Rs 92 per share, which implies a P/E of 4.6x and EV/EBITDA less than 4x. Its balance sheet is in good shape. Gross Debt / Equity is 0.3x. ROCE based on the FY22 performance was 40%.
Given that most steel majors are expanding, prospects for growth look promising, the near term recession concerns are the only major overhang.
But then why is the stock cheap, one may ask? The market often mis prices, particularly when investors are not aware of the true picture. Sarthak Metals listed on the BSE SME Exchange in 2017, and moved the mainboard only in Nov’21. It is possible it is not on anyone’s radar.
The only other explanation can be the market expects Sarthak’s performance to plummet sharply going ahead; its excellent FY22 performance was a flash-in-the-pan. The Q1 results are the next stop, they may give some direction on this.