Tata Steel vs SAIL: Which Stock is Better?

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Tata Steel vs SAIL: Which Stock is Better?

Jan 13, 2022

Tata Steel vs SAIL: Which Stock is Better?

As India aims to become a manufacturing hub through campaigns such as 'Make in India' and 'Atmanirbhar Bharat', one sector that stands to benefit is the steel sector.

Steel is one metal that is used in almost every sector including automobile, engineering, construction, and infrastructure. The sector accounts for nearly 2% of the country's GDP.

India is home to two big players in the steel industry namely Tata Steel and Steel Authority of India Limited (SAIL).

In this article, we compare how these two companies stack up against each other.

Business Overview

Tata Steel is India's first private steel company.

The company business activities range from mining iron ore and coal and manufacturing steel to distributing finished and value-added products.

It has a diversified geographical presence with operations in 26 countries and distribution in over 50 countries.

Tata Steel's product portfolio caters to diverse customer segments such as agriculture, automotive, construction, and industrial and general engineering.

SAIL is one of the largest public sector companies manufacturing iron and steel in India.

Though the Government of India owns 65% of the company's equity, this 'Maharatna' enjoys operational and financial autonomy.

It exports its products to over 30 countries and has been strengthening its presence in the international markets.

SAIL has the most diversified product range offered by any domestic steel company. It caters to a large number of industries including power, road and rail infrastructure, oil and gas, irrigation, and airport and port infrastructure.

Tata Steel vs SAIL Business Overview

  Tata Steel SAIL
Competitive Advantage Captive iron ore and coking coal mines
Low cost of manufacturing
Diversified global presence
Expanding to adjacent businesses beyond steel
Diversified product portfolio
Well established manufacturing, marketing and distribution network
Holds captive iron ore mines
Key Risks Raw material pricing risks Dependence on external sources for coking coal
Ageing employee mix and high manpower costs
Data Source: Annual Reports

Tata steel has a significant global presence and low cost of manufacturing due to captive iron ore and coking coal mines.

SAIL is concentrating on improving its international presence with its diversified product portfolio and also has captive iron ore mines.

Revenue growth

Though Tata Steel's revenue is 2.5 times that of SAIL's, its revenue in the last five years (2017-2021) has grown at a CAGR of 7.2% against 12% of SAIL's revenue.

Tata Steel vs SAIL Revenue Growth (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Revenue (in m)          
Tata Steel 1,108,981 1,343,095 1,687,250 1,507,993 1,571,898
SAIL 396,241 565,691 674,681 625,700 699,743
Revenue Growth (%)          
Tata Steel   21.1% 25.6% -10.6% 4.2%
SAIL   42.8% 19.3% -7.3% 11.8%
Source: Equitymaster

The revenue growth of both Tata Steel and SAIL has been driven by volume growth in the initial years and rise in steel prices in the later years.

Volume growth

Tata Steel's volumes are approximately twice that of SAIL and they have grown at a CAGR of 3.6% in the last five years.

SAIL's volumes, on the other hand, have grown at a CAGR of 2.6% during the same period.

Tata Steel vs SAIL Sales Volume Growth (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Sales Volume (in m tonnes)          
Tata Steel 23.9 25.3 26.8 26.9 28.5
SAIL 13.1 14.1 14.1 14.2 14.9
Sales Volume Growth (%)          
Tata Steel   5.8% 6.0% 0.3% 6.0%
SAIL   7.6% 0.0% 0.7% 4.9%
Data Source: Annual Reports

Low volume growth of both the companies is a result of change in economic activity over the years.

Though the volume growth was high in 2017-18, low economic activity led to lower growth in volumes in the next two years. However, the volumes picked up in the financial year 2021 due to government initiatives to boost manufacturing in India.

Profit margins

Operating profit margin indicates what percentage of the operating revenue is the profits after paying for all operating expenses.

The operating profit margin of Tata Steel and SAIL has averaged at 15.1% and 11.1% for the last five years.

Tata Steel vs SAIL Profit Margins (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Operating Profit Margin (%)          
Tata Steel 8.0% 22.5% 17.6% 8.7% 18.8%
SAIL -0.4% 8.3% 14.0% 15.3% 18.5%
Net Profit Margin (%)          
Tata Steel -3.8% 13.3% 5.3% 0.7% 5.0%
SAIL -7.5% -1.0% 3.2% 3.1% 5.3%
Source: Equitymaster

In terms of net profit margin Tata Steel is again leading with a five-year average net profit of 4.1%. On the other hand, SAIL's five-year net profit margin stands at 0.6%.

Note that the profit margins are rising mainly due to rising steel prices driven by an increase in raw material prices.

Despite an increase in raw material costs, both companies have seen margin growth due to internal sourcing of iron ore and cost-cutting initiatives.

State-of-the-art manufacturing facilities

Tata Steel has three manufacturing facilities in India and two facilities out of India with a total capacity of 33 million metric tonnes per annum (MT) running at a capacity utilisation of 77%.

In India, Tata Steel has a manufacturing capacity of 19.6 MT. It aims to double this capacity to 40 MT by 2030 by investing in greenfield and brownfield expansions.

The UK plant has a capacity of 5.1 MT, and the plant in Europe has a capacity of 7.3 MT.

SAIL has five integrated steel plants and three special steel plants all in India with a total capacity of 21.4 MT running at 82% utilisation. It aims to increase its capacity further to 29.6 MT by 2030.

Currently, SAIL is under its last stage of modernisation and expansion plan of various facilities. It has invested Rs 662.8 bn since 2010.

Strong distribution network

Tata Steel has a strong distribution network of 27 sales offices with 18 stockyards, 262 distributors, and 14,688 dealers for its business-to-customer (B2C) division.

SAIL, on the other hand, has a network of 4 regional offices, 37 branch offices, 43 departmental warehouses, and 2,122 dealers across 591 districts in the country.

It's working towards expanding its two-tier and one-tier distribution to strengthen its B2C network. The company also launched 'SAIL Suraksha' an online e-portal to cater to the smallest of the demand through its two-tier distribution network.

Research and development (R&D) initiatives

Tata Steel has been actively investing in R&D to develop new products, improve operational efficiency and sustainability. In the financial year 2021, it developed 79 new products. It has 109 patents under its name.

SAIL, on the other hand, developed 17 new products that will benefit industries such as automotive, railway, construction, infrastructure, and shipbuilding among others.

Dividends

A company shares profits with its shareholders in the form of dividends. Dividends can be in the form of cash or stock.

Dividend ratios such as dividend payout ratio and dividend yield can be used to compare the dividends of both companies.

The dividend payout ratio determines how much dividend is paid from the earnings, while the dividend yield tells us what percentage of the share price is the dividend.

The higher the ratios, the better.

Tata Steel vs SAIL Dividend Ratios (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Dividend Payout Ratio (%)          
Tata Steel -23.2% 6.9% 17.6% 122.4% 38.3%
SAIL 0% 0% 9.7% 0% 31.4%
Average Dividend Yield (%)          
Tata Steel 2.5% 1.6% 2.4% 2.5% 4.7%
SAIL 0% 0% 0.7% 0% 5.4%
Source: Equitymaster

The five-year average dividend payout ratio for Tata Steel and SAIL stands at 32.4% and 8.2% respectively. Tata Steel has paid higher dividends than SAIL to its shareholders in the past five years mainly due to higher profitability.

The five-year average dividend yield for both companies is 2.7% and 1.2% respectively.

Inventory Days

Inventory days measures the time taken by the company to convert its inventory into sales. The 5-year average inventory days for Tata Steel and SAIL is 87 and 38 days respectively.

Tata Steel vs SAIL Inventory Days (2016-2021)

Inventory Days 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Tata Steel 64 119 72 98 84
SAIL 42 29 29 35 56
Source: Equitymaster

SAIL is more efficient in managing its inventory and has a better sales performance than Tata Steel.

Strong credit profile

Debt-to-equity ratio measures the extent of leverage a company is using to run its business. The lower the leverage, the stronger is the credit profile of the business.

Tata Steel vs SAIL Debt to Equity Ratio (2016-2021)

Debt to Equity Ratio (x) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Tata Steel 1.7 1.2 1.2 1.3 1
SAIL 0.5 0.8 0.8 0.8 0.4
Source: Equitymaster

Tata Steel and SAIL had a debt-to-equity ratio of 1 and 0.4 respectively in financial year 2021. Both the companies have been actively deleveraging for the past few years to strengthen their credit profile.

In the financial year 2021, SAIL reduced its debt to an extent of Rs 160 bn, whereas Tata Steel reduced its debt to an extent of Rs 293.9 bn.

Despite heavy capex investments done by both the companies, positive free cashflows have helped reduce their debt.

Return on capital employed (ROCE)

Return on capital employed measures how much profits the company is generating through its capital. Again, the higher the ratio, the better.

The five-year average ROCE of Tata Steel and SAIL is 11.4% and 6.3% respectively.

Tata Steel vs SAIL Return on Capital Employed (2016-2021)

ROCE (%) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Tata Steel 3.7% 19.8% 15.6% 3.6% 14.4%
SAIL -4.2% 3.0% 9.2% 8.7% 14.7%
Source: Equitymaster

Tata Steel is generating higher returns for shareholders with respect to the capital employed than SAIL.

Low Valuations

Price to Earnings ratio (P/E) and Price to Book Value (P/BV) are valuation ratios that analysts use to determine whether the stock is undervalued or overvalued.

These ratios can be used to compare two different companies in the same industry or different industries.

The P/E ratio indicates how much an investor is willing to pay for one rupee of earnings. A high P/E ratio indicates the shares are trading at a premium.

The P/BV ratio measures the market valuation of a company to its book value. A high P/BV ratio indicates the share is overvalued.

Tata Steel and SAIL's five-year average P/E ratio stands at 12 and 7.3 respectively. The current P/E of Tata Steel is 8.2 and SAIL is 5.8.

In terms of P/E, Tata Steel's shares are slightly more expensive when compared to SAIL's shares.

Tata Steel vs SAIL Valuation Ratios (2020-2021)

  P/BV Ratio 5-year average P/BV Average P/E Ratio 5-year average PE
Tata Steel 0.9 1 8.2 12
SAIL 0.5 0.6 5.8 7.3
Source: Equitymaster

The five-year average P/B ratio of Tata Steel and SAIL is 1 and 0.6 respectively. The current P/B Tata Steel is 0.9 and SAIL is 0.5.

Again, Tata Steel's shares are slightly priced higher than SAIL's shares in terms of the P/B ratio. However, both the companies are trading below their five-year average P/E and P/B.

Another valuation tool that is unique to capital intensive industries is EV/tonne. It shows how much capital is required to produce one tonne of steel.

The lower the number, the cheaper it is, making it a better choice for a takeover.

Tata Steel vs SAIL Enterprise Value/Tonne (2020-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Tata Steel 46,263.9 56,781.7 57,189.2 51,065.4 70,760.1
SAIL 23,374.0 25,455.2 21,402.0 20,191.3 23,291.9
Source: Equitymaster

Sustainability efforts

Steel plays a key role in building infrastructure and economic development. However, the process of steelmaking impacts the environment.

Hence it's important that steel manufacturing companies take all measures to minimize the impact on the environment.

Tata Steel is leveraging technology to reduce CO2 emissions and freshwater consumption. It's also upgrading its air pollution control equipment to control dust emission intensity.

The company has been investing in using more renewable resources and has been increasing the capacity of its steel recycling business. It's also utilising 100% of its solid waste.

SAIL, on the other hand, is trying to restore and rehabilitate the degraded ecosystem by restoring mined areas and planting trees. In the financial year 2021, more than 1.72 lakh saplings were planted by the company taking the cumulative plantation to 21.2 m.

It has also been investing towards utilising renewable resources and minimising waste.

Impact of Covid-19

The lockdown due to the pandemic impacted the entire steel industry.

As a result, production fell in the first half of the financial year 2021. However, as the unlocking began, the demand resurged due to favourable government policies.

Despite a challenging year, Tata Steel managed to increase its volumes, revenue and also expanded its value-added products portfolio.

SAIL, on the other hand, took advantage of exports during the lockdown and as the Indian economy opened up for business, it captured domestic demand.

During the year, SAIL saw the highest ever quarterly volumes in the March 2021 quarter and the highest-ever annual sales. This was mainly due to growth in volumes and an increase in steel prices.

Future prospects look bright

The global steel demand is expected to be strong in the post-pandemic era mainly due to fiscal stimulus packages given by various governments all over the world to boost infrastructure.

India, the world's second-largest manufacturer of steel, will also see strong demand for steel due to a rebound in manufacturing and infrastructure activities.

A few of the demand drivers for the Indian steel industry are as follows:

  • Government initiatives like 'Atmanirbhar Bharat' and 'Product Linked Incentive Scheme' will boost manufacturing in industries such as automobile, consumer durables, and renewable energy which, in turn, will increase steel consumption.
  • The government's investment of Rs 1 tr in infrastructure over the next five years will drive growth in the steel industry.
  • Recent emerging trends like digitisation, automation, and energy transformation will drive the growth of the steel industry.
  • Post pandemic need for personal mobility will boost demand for steel from the automobile industry.

Tata Steel is investing close to Rs 8 bn in capex to increase its steel manufacturing capacity and capture the rising demand.

Additionally, it's investing in increasing its scope in adjacent businesses like new materials and services and solutions.

SAIL, on the other hand, is concentrating on becoming a market leader by increasing its crude steel capacity to 29.6 MT from the current 21.4 MT. It's also working on reducing its cost of producing steel.

Equitymaster's view

We reached out to Tanushree Banerjee, Co-head of Research at Equitymaster for her view on both companies. Here's what she had to say...

  • The government has introduced the Production-Linked Incentive (PLI) scheme in specialty steel to enhance India's manufacturing capabilities and exports. Many investment projects announced globally, particularly infrastructure projects, which significantly consume steel, will fuel the global demand for Indian steel.

    The next decade is therefore extremely conducive for the largest steel makers in India that have increased capacities and lowered their debt levels in the past few years.

Which is better?

Though, Tata Steel's revenue is almost twice that of SAIL, its revenue growth is lower.

However, Tata Steel is leading in terms of cumulate volume growth, and profit margins. It also pays a higher dividend and generates higher returns to its shareholders than SAIL.

Tata Steel has a more diversified geographical presence and enjoys cost leadership with respect to steel production.

SAIL, on the other hand, has a more diversified product portfolio and has higher operational efficiency than Tata Steel.

SAIL also has a strong credit profile and has lower leverage than Tata Steel. Its shares are also slightly less expensive than Tata Steel due to low valuations.

Despite the differences, both the shares are trading below their five-year averages with only a small gap in their valuations.

Before you take the leap and invest in one stock, go through the fundamentals and valuations of both companies. It will aid in your decision-making process.

Still confused which is better?

Use our feature-rich comparison tool which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!

Tata Steel vs SAIL

You can also compare both the companies with their peers.

Tata Steel vs JSW Steel

SAIL vs Jindal Saw

Tata Steel vs Kalyani Steel

SAIL vs Maharashtra Seamless

For a detailed analysis, check out Tata Steel factsheet and SAIL factsheet.

You can also check out the latest quarterly results for Tata Steel and SAIL.

Since stocks from the steel sector interest you, check out Equitymaster's powerful Indian stock screener tool to find the top steel companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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