Sarda Energy: on its way to predictable profits

Disc: the blog is purely with the intent to educate, have no positions in the company discussed.

Today we will be analysing the company Sarda Energy, where a recent acquisition coupled with continious efforts have transformed the company into a very interesting business that is definitely worth studying. Let's begin!

Business history

Sarda Energy & Minerals Limited (SEML) was originally incorporated in 1973 and became the flagship of the Sarda Group after the takeover of Raipur Alloys & Steel Limited in 1979​. Over the decades, the company evolved from a regional steel producer into a diversified player in steel, ferro alloys, mining, and power. It is now recognized as one of India’s lowest-cost steel producers and a leading exporter of manganese-based ferro-alloys​ . A significant milestone in SEML’s evolution was the 2007 merger with Chhattisgarh Electricity Company Ltd (CECL), which marked its strategic expansion into the energy sector​. Headquartered in Raipur (Chhattisgarh), SEML today has a global presence, supplying products to over 60 countries, and is listed on India’s BSE and NSE stock exchanges​. This journey of over 50 years showcases SEML’s growth from a small regional mill to a multi-vertical natural resources company.

Business verticals

Minerals (Iron Ore and Coal)

SEML’s mineral assets ensure long-term stability of raw material supply for its manufacturing operations. The company owns a captive iron ore mine in Rajnandgaon, Chhattisgarh (rated capacity 1.5 MTPA), and coal mines including the Gare Palma IV/7 mine in Chhattisgarh (rated capacity recently expanded from 1.44 to 1.68 MTPA)​ . These mines are located close to SEML’s primary steel plant (within ~140–200 km), which minimizes transport costs and improves operational efficiency​. Crucially, SEML’s mines meet a significant portion of its raw material needs – approximately 40% of its iron ore requirement and effectively 100% of its coal requirement are met through captive production​ . This captive supply insulates the company from volatility in raw material prices and ensures uninterrupted operations. The captive coal is used in SEML’s sponge iron kilns and captive power plants, while the iron ore (after beneficiation) feeds its pellet plant. Any surplus output from the mines is available for commercial sale, providing an extra revenue stream​ . For instance, after fulfilling internal demand, SEML has the option to sell extra coal or iron ore/pellets in the open market when prices are favorable​ . Overall, the Minerals vertical’s backward integration secures essential inputs at low cost, forming the bedrock of SEML’s cost advantage.

Metals (Steel and Ferro Alloys)

SEML has a 50+ year legacy in steel manufacturing, primarily focused on long steel products and ferro alloys​ . Its steel operations are centered at its integrated steel plant in Siltara (Raipur, Chhattisgarh), where the company has apelletization, direct-reduced iron (sponge iron), and steel melting capacityunder one roof. Key products includeiron pellets, sponge iron, steel billets, wire rods, and hard-bright (H.B.) wires, which form a complete manufacturing chain from iron ore to finished steel wire​ . SEML’s production capacities in the steel value chain are substantial: for example, it can produce about 0.9 million tonnes of pellets, 0.36 MTPA of sponge iron, 0.3 MTPA of billets, 0.25 MTPA of wire rods, and 0.045 MTPA of H.B. wires annually​ . This enables the company to convert its raw materials into value-added steel products internally. In addition to steel, SEML is a leading manufacturer and exporter of manganese-based ferro alloys, such as silico-manganese and ferro-manganese​. It operates ferro alloy plants both at Raipur and at Vishakhapatnam (Vizag). The Vizag plant (run by subsidiary Sarda Metals & Alloys Ltd) has ~102 MVA of furnace capacity and benefits from proximity to a port (for export) and its own 80 MW captive thermal power​. Ferro alloy production is power-intensive, and SEML’s access to low-cost captive power (described below) gives it a cost edge in this segment. The Metals vertical is thus characterized by high integration: captive iron ore and coal feed the pellet and sponge iron units, captive power (thermal and waste-heat) drives the electric arc furnaces for ferro alloys, and the steel plant outputs are converted to finished products in-house​ . This integration ensures consistent quality control and cost efficiency across SEML’s metal product portfolio.

Energy

Energy is a critical and fast-growing vertical for SEML, encompassing both captive power for internal use and commercial power generation for sale. Over the last 15+ years, SEML has aggressively invested in power to achieve backward integration and de-risk its metals business from energy price fluctuations​. The company’s energy assets can be categorized into:

• Captive Thermal & Waste-Heat Power: At its Raipur steel complex, SEML operates a 60 MW coal-fired power plant and a 21.5 MW waste heat recovery (WHR) plant (utilizing waste gases from the sponge iron kilns)​. Together ~81.5 MW feeds its steel and ferro alloy operations. Additionally, the Vizag ferro alloy facility has an 80 MW captive power plant to ensure low-cost electricity for alloy production​ . Thanks to these facilities, 100% of SEML’s in-house power requirement is met via captive generation​, eliminating reliance on expensive grid power. Indeed, SEML is further strengthening this self-sufficiency by developing a 50 MW solar power plant at Siltara, which is on track to be operational by end of FY25​ . The solar project will replace any marginal grid power usage and reduce overall energy costs while advancing the company’s renewable energy footprint.

  
  

  

  
  

• Renewable Power (Hydro): To build stable, high-margin income streams, SEML ventured into hydropower as early as 2008​ . It now owns operational small hydel plants totaling ~142 MW capacity: 4.8 MW in Uttarakhand, 24 MW in Chhattisgarh (Gullu), and 113 MW in Sikkim (Rongnichu)​ . All these hydro plants supply electricity under long-term Power Purchase Agreements (PPAs) with state discoms or other buyers, yielding annuity-like revenues with steady cash flows​ . For example, the Sikkim 113 MW plant and others are contracted, ensuring consistent cash generation regardless of metals market volatility. An additional 24.9 MW hydro plant at Rehar, Chhattisgarh was recently completed and is ready for operation (expected commission by March 2025)​. This new plant will further augment SEML’s “green” power portfolio and benefit from favorable renewable energy incentives announced by the state government​ . Another 24.9 MW hydro project (Kotarivera) is in the clearance stage, representing future upside in renewables.

  
  

  

  
  

• Commercial Thermal Power (SKS Power): Most notably, in FY2024 SEML made a strategic leap by acquiring SKS Power Generation (Chhattisgarh) Ltd, which owns a 600 MW (2×300 MW) coal-based power plant in Raigarh, Chhattisgarh​ . This plant, acquired through an insolvency resolution process in August 2024, marks SEML’s entry into large-scale commercial power generation. The SKS plant is located adjacent to SEML’s own Gare Palma coal mine, offering immediate synergies through captive coal supply​ . (The SKS acquisition is discussed in detail in the next section.) With SKS, SEML’s energy vertical now not only secures internal needs but also positions the company as an independent power producer selling electricity on the market or via PPAs.

  
  

Backward Integration Impact: Over the last three years, SEML’s heavy focus on the Energy vertical – from ramping up its captive coal mine (operational since late 2021)​ to expanding captive power and renewables – has had a profound effect on its cost structure. The company’s strategy of backward integration in energy and minerals was aimed at improving EBITDA margins and reducing volatility, and it has largely succeeded. By sourcing its critical inputs (coal, power, iron ore) internally, SEML has mitigated the impact of commodity inflation that many peers faced. For instance, when coal prices spiked globally, SEML’s own mine provided low-cost fuel for its plants, helping preserve margins. Similarly, its hydropower earnings provided a cushion during steel market downturns​. As a result, SEML has maintained healthy operating profitability even amid cyclical swings. EBITDA margins have been sustained in the 20–25% range in recent years​ , which is robust for the steel industry, and significantly higher during upcycles . In short, the Energy vertical’s growth – particularly captive generation – has improved SEML’s cost competitiveness and stability of earnings, validating the backward integration approach. Management continues to reinforce this vertical (e.g. adding solar capacity) to further drive down costs and secure energy self-reliance.

SKS Power Acquisition & Impact

One of the most transformative moves by SEML has been the acquisition of SKS Power Generation in 2024.

SKS Power Plant Overview: SKS Power’s asset is a 600 MW (2×300 MW) coal-fired thermal power plant located in Raigarh, Chhattisgarh. Notably, the plant’s site is strategically located just ~70 km from SEML’s Gare Palma IV/7 coal mine, providing a natural synergy for fuel supply​ . The plant was built with an infrastructure envisaged for 1200 MW (4×300 MW) but only two units (600 MW) were commissioned by 2018. It fell into financial distress due to lack of long-term PPAs and was running below capacity, ultimately entering insolvency proceedings in 2022​. SEML’s bid of ₹1,950 crore for SKS was approved by NCLT on 13-Aug-2024, and the company completed the acquisition by making the full payment on 21-Aug-2024​ . By 1-Sep-2024, SKS Power was amalgamated into SEML as a wholly-owned subsidiary​. (Competing bidders’ appeals were dismissed by the appellate tribunal, though they have since approached the Supreme Court, as discussed later​.) SEML’s management viewed this as a major milestone:“The acquisition of SKS Power marks a major step in our growth journey… offering a seamless integration that will optimize our operations and enhance efficiency.”​ . In other words, SKS turns SEML into an integrated“pit-head power producer,”where captive coal from its mine can fuel the power plant to generate inexpensive electricity.

Interim Operations and PPA with NTPC: During the insolvency process (2022–2024), SKS Power did not sit idle. An interim arrangement was made to keep the plant running: NTPC, India’s largest power utility, was contracted to operate the SKS plant under an O&M contract​. Under NTPC’s management, generation was restarted – one 300 MW unit was running by mid-2022 and the second unit came online shortly thereafter​. In July 2022, it was reported that“as part of the agreement with NTPC, 300 MW generation has already started and another 300 MW will start in a month.”​. NTPC’s involvement helped stabilize operations and ensured the plant had coal and buyer agreements during this interim phase. Because SKS previously lacked long-term power purchase agreements, it secured a patchwork of short and medium-term PPAs to offtake its electricity. Notably, SKS had a 25-year fuel supply agreement with Coal India (SECL) but could not use it fully without firm PPAs​. By 2022, the plant managed to tie up approximately 200 MW in medium-term PPAs with state utilities in Rajasthan, Bihar, and Chhattisgarh, and planned to sell the remaining output on the open market​. It also had a small obligation to supply 5% of power to the Chhattisgarh state trader under a prior agreement​. These stopgap PPAs, along with NTPC’s operational support and a ₹125 crore working capital line from Bank of Baroda, allowed SKS to achieve around 50–60% Plant Load Factor (PLF) in FY2023-24​. In fact, SKS generated ~₹1,367 crore revenue in FY2024 at ~56% PLF (provisional)​, indicating that even under constrained conditions the plant was operationally viable. Going forward, SEML aims to replace these short-term arrangements with more stable, long-term PPAs to ensure high utilization and steady cash flows from SKS​. The presence of NTPC and the interim PPAs de-risks the immediate integration – the plant is already running, and SEML can gradually take over operations from NTPC’s team and negotiate its own power sales contracts.

Captive Coal Integration and Cost Synergy: The crown jewel of this acquisition is the integration of SEML’s captive coal to fuel the SKS power plant. Previously, SKS struggled because it had to source coal via e-auctions and open market purchases at high cost (since it lacked a long-term linkage due to no long-term PPA)​. This led to cost escalation and made the plant’s power uncompetitive, contributing to its financial troubles​. SEML’s entry completely changes this dynamic: the Gare Palma IV/7 coal mine will serve as a dedicated fuel source for the plant. Captive coal cost is substantially lower than e-auction coal, immediately improving the fuel cost per unit of power. SEML has already received consent to expand the mine’s output to 1.68 MTPA​, and acknowledging the increased coal requirement for SKS, the company is seeking approvals to ramp up mining capacity to as much as 5.2 MTPA in phases​. This would be more than sufficient to feed a 600 MW plant at high PLF. SEML is also installing a coal washery and railway siding at the mine to efficiently supply coal to the plant​. Essentially, SKS will become a vertically integrated pit-head power station, with coal dug out of SEML’s mine and burned a few kilometers away in its boilers. This integration is expected to yield a dramatic improvement in operating margin for the power plant – fuel which was once procured at market prices will now be available at cost, with any mining royalties staying within the group. The Company has indicated that SKS could generate very high EBITDA margins (on the order of 30–50%) once running on captive coal​, compared to thin margins (or losses) earlier. This is because coal can account for 60–70% of the cost of generation; by slashing this cost, a large portion of the tariff becomes profit. In summary, the use of captive coal will turn SKS into a low-cost power producer, capable of undercutting many peers in tariff bids or enjoying hefty spreads if selling at prevailing market prices.

Expected Financial Impact: The addition of the SKS 600 MW plant significantly scales up SEML’s energy segment and is poised to boost the company’s financial performance in coming years. A simple estimation illustrates the upside: At full capacity (assuming ~80–85% PLF), the SKS plant can generate ~4,000–4,500 million units of electricity per year. Even at a modest realization of ₹4 per kWh, this equates to annual revenue of ~₹1,600–1,800 crore. If the plant achieves an EBITDA margin in the range management expects (30–50% due to cheap coal)​, it could contribute roughly ₹500–900 crore to EBITDA. For perspective, SEML’s total consolidated EBITDA in FY2024 (pre-SKS) was about ₹982 crore​. So SKS alone could potentially nearly double SEML’s EBITDA once fully integrated. Even if we take a more conservative view (lower PLF or tariffs), the plant is likely to add several hundred crores to annual operating profit. CRISIL’s credit review post-acquisition notes that SKS Power had ₹1,367 Cr revenue at 56% PLF in FY24 and that performance has improved in the current fiscal, implying meaningful EBITDA already coming through​. As SEML secures long-term PPAs for SKS and ramps it up with captive coal, the incremental profit will flow to SEML’s bottom line. This will strengthen consolidated net profit and cash flows from FY25 onward. It’s also worth noting the financial structure of the deal: SEML funded the ₹1,950 Cr acquisition via ₹1,375 Cr of long-term debt and the rest from internal cash (the company had over ₹1,000 Cr cash on its books as of March 2024)​ . Even with this debt, SEML’s balance sheet remains comfortable (pro-forma net gearing ~0.3x). The interest cost will be easily serviced by SKS’s cash generation; in fact, at expected PLFs the plant should produce far more EBITDA than the annual interest+repayment on the acquisition loan. CRISIL notes that SKS’s operational cash accruals, supported by new PPAs and healthy power demand, will be a key factor to watch, but they do not foresee material strain on SEML’s finances​. In conclusion, the SKS acquisition is set to transform SEML’s Energy vertical from a supporting role into a major profit center. By leveraging its mining resources and operational expertise, SEML has turned around a distressed asset into a potential cash cow. If executed well, this backward-integrated power business could significantly elevate SEML’s consolidated ROE and earnings stability in the years ahead.

Growth Upsides

Beyond the core operations and the SKS power integration, SEML has several growth optionalities – potential upsides that could unlock further value. These include expansions of mining capacity, improvements in power generation, and other project pipelines. Below are key optionalities and their current status:

• Increasing Coal Production (Doubling and Beyond): SEML is aggressively expanding its coal mining capacity to feed both its steel operations and the newly acquired power plant. In September 2024, the company secured the Chhattisgarh Environment Board’s nod to increase production at its Gare Palma IV/7 coal mine from 1.44 MTPA to 1.68 MTPA​. This incremental capacity comes just as SKS Power is being integrated, ensuring more captive coal availability. Further, SEML has applied for major capacity upgrades in phases – aiming to ramp the mine up to ~5.2 MTPA over time​. If achieved, that would be more than a 3× increase (effectively “doubling” and then some) from current levels, fully covering the 600 MW plant’s fuel needs and leaving room for commercial coal sales. In addition, SEML is broadening its coal assets portfolio: it has a new high-grade coal block (Shahpur West in Madhya Pradesh)under development (stage-1 forest clearance obtained)​, which is expected to commence production within 4 years. Once Shahpur West comes online, 100% of SEML’s requirement for high-grade (non-coking) coal will also be met captively , insulating it from imported coal price swings. The company has also entered a revenue-share agreement to mine the Kalyani underground coal mine (a Coal India asset) and has a JV that won the bid to reopen the Bartunga Hill coal mine​. These initiatives could substantially boost SEML’s coal output (potentially several-fold) and establish it as a commercial coal supplier. Current status: Gare Palma expansion to 1.68 MTPA is approved and being executed​; further capacity increase and new mines are in permitting stages (with regulatory processes underway). If all go as planned, SEML could be mining well over 3–4 MTPA of coal from domestic sources in a few years, lowering costs and adding revenue from surplus coal.

  
  

• Upside in Iron Ore Mining: On the iron ore front, SEML currently fulfills ~40% of its needs internally, but this could improve with new mining assets. The company emerged as the preferred bidder for the Surjagarh (Iron Ore) Block-1 in Maharashtra, and is now awaiting the Letter of Intent and mining lease for this deposit​. Once the LOI is received, SEML will commence prospecting and eventually mining. The Surjagarh mine is expected to be a significant deposit; while exact capacity is not confirmed, winning this block suggests a potential to substantially raise SEML’s iron ore self-sufficiency. Coupled with optimization at its existing Rajnandgaon mine (which can do 1.5 MTPA at full tilt), SEML could possibly meet a majority of its iron ore requirement internally in the future. Current status: Surjagarh composite license is in process (prospecting to begin after LOI)​. This is an upside optionality – timelines depend on state approvals and mine development progress. If successful, it will further reduce SEML’s dependence on market iron ore/pellets and support margin stability.

  
  

• Higher Thermal Power Generation (SKS Plant Optimization): While the SKS Power acquisition already doubles SEML’s power capacity, there is further upside in optimizing and potentially expanding it:

  • Improved PLF and Efficiency: As noted, SKS ran at 56% PLF in FY24 due to various constraints​. With SEML at the helm, the plant can be pushed to higher utilization (70–80%+ PLF) by securing long-term PPAs and ensuring reliable coal supply. Every 10% increase in PLF adds roughly 500 million units of generation (₹200 Cr revenue at ₹4/unit). Thus, merely running the existing 600 MW units at optimal levels is a big earnings lever. Moreover, SEML’s operational expertise might improve the plant’s heat rate and reduce auxiliary power consumption, raising net output. Status: The plant is already operating both units; focus is on locking in PPAs. PLF is expected to improve in FY25 as more power is sold under contracts or in exchanges.

  • Expansion to 1200 MW: The SKS site was originally designed for four units (1200 MW). While the two additional 300 MW units (Phase II) were never built (and the environmental clearance for them expired)​, SEML now holds the asset and could consider completing the project in the long term. The infrastructure (land, water intake, switchyard) for the full 1200 MW is largely in place​. If power demand and policy environment are favorable, SEML has the option to install the remaining 600 MW capacity, effectively doubling SKS’s output. This would, of course, require fresh capex (and likely new environmental approvals), so it’s a longer-term optionality (industry reports suggest a revival by 2030-31 is possible)​. Even without new construction, SEML might increase output by debottlenecking – for instance, operating the 300 MW units above their nominal rating if possible, or improving uptime. Current status: No immediate plans announced for building new units; priority is to stabilize the existing ones. But management has hinted that with the acquisition, they have an asset with “infrastructure of 1200 MW” and uninstalled capacity that could be realized in the future​.

    
    

• Renewable Energy Expansion: SEML’s ongoing projects in solar and hydro also represent optional upsides:

  • The 50 MW solar plant at the steel facility will not only save cost but also reduce SEML’s carbon footprint. It’s slated to come online by end of FY25​. Once operational, it could cut grid purchases by ~70–80 million units/year, translating to cost savings (or equivalently, additional EBITDA) and possibly generate renewable energy credits.

  • The new 24.9 MW Rehar hydro plant is expected to be commissioned by Q4 FY25​. This plant will operate under long-term PPA and benefit from state incentives, contributing a steady ~₹30–40 Cr EBITDA annually once fully onstream (assuming ~50% PLF and ₹4–5/unit tariff). The planned KotaiVeera 24.9 MW hydro, if approved, would similarly add to green capacity.

  • These renewable projects, while smaller in scale, enhance SEML’s sustainability profile and could slightly improve blended EBITDA margins (since hydro has high margins). Additionally, SEML could monetize carbon credits or renewable energy certificates (RECs) from these plants, an optional benefit.

    
    

• Other Mineral Assets & Projects: SEML also has interests in other mineral ventures such as an Indonesian coal mining JV (which produced 0.25 MTPA in late 2023 and targets 1 MTPA in FY25)​. While not core to operations, this provides international diversification and could yield profits if coal prices are high. The company’s exploration rights in other iron ore areas or potential expansion of its steel capacity (e.g., adding downstream products) are additional long-term options.

  
  

In summary, SEML’s growth optionalities are significant. The most tangible near-term upsides are higher captive output of coal and iron ore (subject to permits) and fuller utilization of the new power capacity – these could directly boost revenues and profits. Meanwhile, the renewable additions and any future capacity expansions provide a pathway for sustained growth beyond the current footprint. The company has a clear strategy of reinvesting cash flows into these expansions to drive the next leg of growth. Execution of these optional projects over the next few years could see SEML’s volumes and earnings step up markedly, over and above the organic performance of existing assets.

Risks and Challenges

Despite its strong position, SEML faces several risks and challenges that could impact its performance. Investors and stakeholders should be mindful of the following key risk factors:

• Commodity Cyclicality: SEML’s fortunes are tied to cyclical industries – steel and ferro-alloys. Downturns in the commodity cycle can lead to lower product prices and squeezed margins. For instance, after the peak of FY2022, a global dip in steel demand and prices led to a significant drop in SEML’s EBITDA and profit in FY23-FY24​. The company is exposed to fluctuations in domestic and international demand (e.g., slowdown in China or global recession impacting steel prices) and to oversupply situations. Ferro-alloy prices, too, can be volatile based on steel industry demand and raw material (manganese ore) costs. While SEML’s integration and cost efficiency help it better weather downturns, a severe or prolonged slump in steel/alloy prices would still hurt profitability. This inherent cyclicality of commodities is an ever-present risk in SEML’s business model.

  
  

• Regulatory and Policy Risks: SEML operates in heavily regulated sectors – mining and power – and any adverse policy changes or regulatory actions could impact it. Some specific regulatory risks include:

  • Mining Licenses and Environmental Approvals: Expansion of coal and iron ore mines requires government clearances and adherence to environmental norms. Delays in obtaining forestry or environmental clearances (for projects like Surjagarh iron ore or Shahpur coal) could defer planned growth​. There’s also the risk of stricter environmental regulations on mining operations, which could increase compliance costs or limit production.

  • Changes in Mineral Policy or Levies: In the past, India has seen changes like export taxes on iron ore or pellets, or auctioning regimes for mining licenses. Any increase in royalties, taxes, or an adverse mining policy shift can affect SEML’s raw material economics. Similarly, policies on coal allocation (for example, if commercial coal mining becomes more competitive) could influence SEML.

  • Power Sector Regulations: The power business faces tariff regulation and market risks. If SEML signs long-term PPAs, the tariffs will be regulated by electricity regulators. Changes in regulations (like imposition of price caps in power exchanges, or unexpected changes in coal booking policies by Indian Railways) could affect profitability. Additionally, as a merchant power producer, SKS will be exposed to power price volatility on exchanges and to scheduling/pricing rules set by regulators. Any unfavorable policy (like priority dispatch for renewables that curtails coal plants, etc.) could impact plant load factors.

  • Environmental and Climate Policy: With growing focus on climate change, there’s a risk of carbon pricing or stricter emissions norms. SEML’s core operations involve coal and thermal power (significant CO₂ emitters). Future carbon taxes or mandatory emission reduction targets could impose additional costs or cap production. The company is mitigating this by adding renewables and more efficient tech, but the long-term trend toward decarbonization is a risk to traditional coal-based operations.

• Execution and Integration Risks: SEML has multiple projects and an acquisition in play, which pose execution challenges:

  • SKS Power Integration: The success of the SKS acquisition depends on smoothly transitioning operations, maintaining plant availability, and securing profitable PPAs. There’s a risk that long-term PPAs may take time to finalize or may be at lower tariffs than expected, which could affect the projected margins. Additionally, SKS was under financial stress for years; unforeseen maintenance issues or capital expenditure might crop up as SEML takes over (e.g., needing to replace parts or upgrade systems). Integration also involves cultural and managerial challenges – aligning NTPC’s O&M team or replacing them with SEML’s own, and ensuring no disruption during handover. If the Supreme Court were to entertain the appeals of losing bidders (Torrent Power, etc.), it could introduce uncertainty or delays (though NCLAT has dismissed their claims)​. SEML must also service the debt taken for SKS; if plant cash flows disappoint, it could strain finances (this is not expected in base case, but a risk in a downside scenario).

  • New Projects Execution: The expansion of mines (coal and iron ore) and setting up of power/renewable projects require timely execution. Any project delays or cost overruns would defer the anticipated benefits and could lock up capital. For example, if the Gare Palma mine’s ramp-up to 5 MTPA is slower or costs more (perhaps due to logistical hurdles or land acquisition for the rail siding), the full fuel synergy for SKS gets delayed. The 50 MW solar plant and Rehar hydro project also need to be delivered on schedule to yield expected savings​. Execution risk is mitigated by SEML’s experience (they have executed similar projects before), but external factors like contractor performance, weather, or legal challenges can intervene.

  • Integration of New Mines: Bringing Shahpur West coal mine into production involves getting stage-2 forest clearance, land acquisition, and developing a mine & washery infrastructure. These steps are complex and time-consuming. Until it’s producing, SEML still must procure some high-grade coal from outside, so delays keep that dependency. Similarly, the Surjagarh iron ore project, if delayed, means SEML continues to buy 60% of ore from market, which is a cost risk if prices rise. Execution risk in these mining projects could thus impact future cost assumptions.

• Market and Financial Risks:

  • Market Competition: In steel long products, SEML faces competition from other secondary steelmakers and large primary producers. Any new capacity coming up in the region or aggressive pricing by competitors can pressure SEML’s market share or margins. In ferro alloys, global competition (e.g., from Chinese or Malaysian producers with access to cheap power) can affect export volumes and prices for SEML. The power market, too, is becoming competitive with the surge in renewable energy; a coal-based plant might face challenges in dispatch if cheaper solar/wind is available during off-peak hours, etc.

  • Price/Cost Mismatch: There could be periods when raw material prices rise faster than product prices. For example, if iron ore or coal prices spike (due to external factors like war or export curbs) but steel prices don’t commensurately increase, even an integrated player like SEML could feel margin pressure (because it does buy some portion of raw materials externally and coal mine output is capped by approval). Commodity price mismatches are a risk despite integration.

  • Foreign Exchange and Interest Rates: SEML does have some exposure to foreign currency – primarily through export of ferro alloys (earning USD) and import of certain inputs/equipment. Large fluctuations in INR vs USD could impact the realizations of exports or cost of imports, though SEML often enjoys a natural hedge (its export earnings can cover import needs)​. Interest rate risk is modest since the company’s debt is mostly long-term and some of it could be at fixed rates; however, if interest rates rise sharply, the cost of the ₹1,375 Cr SKS acquisition loan may increase (unless hedged).

    
    

  • Legal and Compliance Risks: The mining and power operations entail numerous compliance requirements (environment, forest, safety, corporate governance). Any lapse could result in penalties or operational stoppages. The pending Supreme Court appeal regarding SKS acquisition is a legal risk – while SEML’s plan was approved by NCLT and upheld by NCLAT, an adverse Supreme Court decision (though unlikely based on current information) could theoretically alter the outcome or impose conditions​. Additionally, there was a historical fraud case related to SKS’s former promoters​– SEML as new owner might have to deal with any legacy legal issues, although liabilities would mostly be extinguished in insolvency resolution.

  • Macroeconomic and Pandemic Risk: Broader economic slowdowns or events like the COVID-19 pandemic can affect SEML’s operations (through demand drops, supply chain disruptions, workforce availability, etc.). While not specific to SEML, these are overarching risks for any industrial enterprise.

Valuations and technicals

The company has been standing tall during the correction and that is very impressive. It shows the thesis is strong and cant be waivered off that easily. The stock has been consolidating in a range of 400-520ish but it has broken out and looks like it is retracing. It will be interesting where it will be headed but a new ATH might be the probably scenario

On valuations, the management expects 400 crores from the plant. So if we were to assume a 15% PAT margins for the year for the current year and add 400 crores, we get a PAT of 1030 crores. This gives the forward valuations as about 17. However, there are multiple optionalities at play and that too can boost the earnings going forward and hence, I would assume this PAT to be the base case for the company.

Citations

• CRISIL Ratings. Credit Rating Rationale – Sarda Energy and Minerals Ltd (Post-SKS Acquisition). CRISIL, March 2025.

• India Ratings & Research. Credit Update – SEML and Subsidiaries. Fitch Group, 2024.

• “NTPC Starts Operating SKS Power Plant.” Business Standard, 25 July 2022.

• “Torrent, Vantage File Supreme Court Appeal against SEML’s SKS Bid.” Economic Times, 19 August 2024.

• “Chhattisgarh Approves SEML’s Coal Mining Expansion.” Financial Express, 30 September 2024.

• “Godawari Power’s Q4FY24 Margins Improve on Captive Iron Ore.” Moneycontrol, 12 May 2024.

• Ministry of Coal, Government of India. Coal Production Data 2022–2024. Ministry Reports.

• Central Electricity Authority. Monthly Power Generation Reports. Government of India, 2022–2025.

• Company filings such as earnings call, Annual reports, investor presentation

• The wrap recordings