After the second quarter FY23 results for Sarthak Metals, we wrote to investors reiterating the market was undervaluing the company. Now comes the news that central government has rolled back export duty for some steel intermediates.
A 50% tax on exports of iron-ore lumps will be reversed just a few months after being put into place in May. A tax rise for iron ore concentrates will also be reduced back from 50% to 30%. The government also removed a 15% export tax on some intermediate steel products, such as bars and rods, that it had also imposed in May.
The measures are likely to lift the mood for steel producers, and for the share of the listed companies. This could have a spillover affect on shares of Sarthak Metals.
However, we would like to re-emphasize that Sarthak’s profitability is relatively immune to steel cycles. Note this:
- In FY23Q2 (quarter ending 30 Sep’22), Sarthak Metals reported its best ever EBITDA margin since listing. This, in a quarter where several steel majors reported a sharp dip in EBITDA margins, and many reported loss at the net level.
- In fact, while the steel sector has suffered in FY23 so far – Q1 was tough as well – Sarthak’s net profit for H1 FY23 is up 35% over H1 FY22.
- The cash position has improved sharply in the last 2 quarters. From a net debt of Rs 15 crore as on 31-3-22, the company is now sitting on net cash of Rs 18 crore.
- The company’s core business is in a robust, free cash flow generating phase that is unlikely to change in the medium term. In other words, Sarthak is likely to continue to accumulate cash. The management is likely to deploy this into horizontal diversification into metal consumable businesses with good profitability and strong growth prospects.
In other words, Sarthak Metals merits a good look for any investor seeking an undiscovered wealth creator, with potential for both sustained earnings growth and ratings expansion.
At <6x PE and <4x EV/EBITDA, Sarthak Metals is a re-rating candidate.
(Wisdomsmith assists Sarthak Metals on Investor Relations)