Tata Steel vs SAIL: Which Steel 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's 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 Internal sourcing of power
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.

In the last five years, Tata Steel's revenue has grown at a compound annual growth rate (CAGR) of 14.7% against 12.8% of SAIL's revenue.

Tata Steel vs SAIL Revenue Growth (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue (in m)
Tata Steel	1,233,991	1,687,250	1,507,993	1,573,730	2,447,441
SAIL	565,691	674,681	625,700	699,743	1,034,730
Revenue Growth (%)
Tata Steel		36.7%	-10.6%	4.4%	55.5%
SAIL		19.3%	-7.3%	11.8%	47.9%

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.

Despite the volatility in steel prices in the last fiscal year, both companies capitalised on post-Covid-19 economic recovery, which led to higher growth in revenue.

Volume growth

Tata Steel's volumes are approximately twice that of SAIL and have grown at a CAGR of 3.2 % in the last five years.

SAIL's volumes, on the other hand, have grown at a CAGR of 2.8 % during the same period.

Tata Steel vs SAIL Sales Volume Growth (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Sales Volume (in m tonnes)
Tata Steel	25.3	26.8	26.9	28.5	29.5
SAIL	14.1	14.1	14.2	14.9	16.2
Sales Volume Growth (%)
Tata Steel		6.0%	0%	6.0%	4%
SAIL		0%	0.7%	4.9%	8.4%

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 volume growth has picked up since 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 18.7 % and 15 .5 % for the last five years.

Tata Steel vs SAIL Profit Margins (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Operating Profit Margin (%)
Tata Steel	22.5%	17.6%	8.7%	18.8%	26%
SAIL	8.3%	14%	15.3%	18.5%	21.6%
Net Profit Margin (%)
Tata Steel	13.3%	5.3%	0.7%	5%	16.8%
SAIL	-1%	3.2%	3.1%	5.3%	11.6%

Source: Equitymaster

In terms of net profit margin, Tata Steel is again leading with a five-year average net profit of 8.2 %. On the other hand, SAIL's five-year net profit margin stands at 4.4 %.

Note that the profit margins are rising mainly due to higher realisations.

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 is the 10^th largest steel producer in the world, with three manufacturing facilities in India and three facilities outside India. It has a total capacity of 34 million metric tonnes per annum (MT), running at a capacity utilisation of 93% as of financial year 2022.

In India, Tata Steel has a manufacturing capacity of 20.6 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 plants in Europe and Thailand have a capacity of 7 MT and 1.7 MT, respectively.

SAIL has five integrated steel plants and three special steel plants all in India with a total capacity of 21.4 MT of crude steel and 20.2 MT of saleable steel running at 82% utilisation. It aims to increase its crude steel capacity further to 29.6 MT by 2030.

Currently, SAIL is in its last stage of modernisation and expansion plan of various facilities. This is expected to substantially improve the operating performance of the company. 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, 273 distributors, and 15,566 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 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 and improve operational efficiency and sustainability. In the financial year 2022, it developed 62 new products. It has 121 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 the dividend is.

The higher the ratios, the better.

Tata Steel vs SAIL Dividend Ratios (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Dividend Payout Ratio (%)
Tata Steel	6.9%	17.6%	122.4%	38.3%	15.2%
SAIL	0%	9.7%	0%	31.4%	30.1%
Average Dividend Yield (%)
Tata Steel	1.6%	2.4%	2.5%	4.7%	4.3%
SAIL	0%	0.7%	0%	5.4%	12%

Source: Equitymaster

The five-year average dividend payout ratio for Tata Steel and SAIL stands at 40.1% and 14.2% 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 3.1% and 3.6%, respectively.

Inventory Days

Inventory days measure 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 43 days, respectively.

Tata Steel vs SAIL Inventory Days (2017-2022)

Inventory Days	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Tata Steel	119	72	98	84	64
SAIL	29	29	35	56	69

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 the credit profile of the business.

Tata Steel vs SAIL Debt to Equity Ratio (2017-2022)

Debt to Equity Ratio (x)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Tata Steel	1.2	1.2	1.3	1	0.4
SAIL	0.8	0.8	0.8	0.4	0.3

Source: Equitymaster

Tata Steel and SAIL had a debt-to-equity ratio of 0.4 and 0.3 respectively in the financial year 2022 . Both companies have been actively deleveraging for the past few years to strengthen their credit profile.

In the financial year 2022, Tata Steel has prepaid its long-term debt worth Rs 7.75 bn due to excess cash flows, which was a result of good operational performance.

SAIL, on the other hand, has also repaid its debt to the extent of Rs 8.6 bn and aims to reduce it further in the next fiscal year.

Despite heavy capex investments done by both the companies, positive operating 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 17.7% and 11.9%, respectively.

Tata Steel vs SAIL Return on Capital Employed (2017-2022)

ROCE (%)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Tata Steel	19.6%	15.6%	3.6%	15.1%	34.6%
SAIL	3.0%	9.2%	8.7%	14.7%	24.0%

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 14.5 and 5.2, respectively. The current P/E of Tata Steel is 3.5, and SAIL is 2.5.

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 (2021-2022)

	P/BV Ratio	5 year average P/BV	Average P/E Ratio	5 year average PE
Tata Steel	1.3	1.02	3.5	14.58
SAIL	0.6	0.616	2.5	5.26

Source: Equitymaster

The five-year average P/BV ratio of Tata Steel and SAIL is 1 and 0.6 respectively. The current P/B Tata Steel is 1.3, and SAIL is 0.6.

Again, Tata Steel's shares are slightly priced higher than SAIL's shares in terms of the P/B ratio.

However, both companies are trading much below their five-year average P/E.

In terms of P/BV, SAIL's shares are trading similar to its five-year average, and that of Tata Steel are trading slightly higher than its five year average.

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 (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Tata Steel	56,782	57,189	51,065	70,760	68,489
SAIL	25,455	21,402	20,191	23,292	12,496

Data Source: Ace Equity

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 in utilising renewable resources and minimising waste.

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.

Which is better?

Tata Steel is leading in terms of revenue and volume growth when compared to SAIL.

It also has higher profit margins, pays higher dividends to its shareholders and generates a higher return on capital than SAIL.

Moreover, 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 are undervalued stocks as they trading much below their five-year averages.

While both are fundamentally strong stocks, 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 and help you pick best long term stocks to buy in India.

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!

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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.

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...