The share price of Sarthak Metals has come down to Rs 195 and is just 5% over its 52-week low. Sarthak’s share price movement contrasts with the overall market, which is at an all-time high.
While there are valid reasons for stock price to have come down, current levels may make the company worth considering for long-term investors.
Let’s look at some of the fundamentals of the stock. What is interesting to note is that in 8 out of the last 10 years, Sarthak Metals has generated free cash flows. Over FY14-24, the company generated Rs 90+ crore of free cash flow. As a result, the company had zero debt on its balance sheet as of 31-Mar-24 and had a cash surplus of Rs 35 crore.
So why is the stock at close to its 52-week low? The reason is that the last few quarters have seen lower realisations and lower volumes, resulting in a drop in revenue and operating margin. EBITA margin dropped sharply for FY24 compared to the previous year. EBITDA margin in the last two quarters has averaged around 3.5%.
A couple of factors drove low EBITDA margins: pressure from Chinese dumping and abnormal price delta in the aluminium scrap market.
Now the call before an investor is this:
- Can the low EBITDA margin situation change? Looking at the past trend, it is a matter of when, not if. Also, the company is building revenue in a new product line – flux cored wires – that is likely to have higher margin. It is also exploring the area of industrial bio enzymes.
- Other than margin pressure, what other vulnerabilities are there? We would say hard to see any other issue. The balance sheet is strong. The project capex required for FY25 is Rs 4 crore at best, and may not exceed Rs 15-20 crore in FY26. The existing net cash should cover this.
- What is the downside? Can the share price go down further? That is an interesting question as well. We reckon the Q1 results could give a direction. Any sign of margin recovery could provide protection from downside.
The company is diversifying from dependence on one market – steel. Flux cored wires go into Welding, it is a new technology that is gaining at the expense of older forms of welding. If Sarthak decides to go into industrial bioenzymes, it could open up a long term growth area.
(Wisdomsmith assists Sarthak Metals on Investor Relations. We will be happy to address queries and arrange interaction with the Sarthak Metals management.