PL Stock Report: Steel Authority of India (SAIL IN) - Q2FY24 Result Update – Weak performance continues - Accumulate

Steel Authority of India (SAIL IN) - Tushar Chaudhari - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: ACCUMULATE | CMP: Rs88 | TP: Rs95

Q2FY24 Result Update – Weak performance continues

Quick Pointers:

- EBITDA of Rs 4,416/t (improvement of just Rs200 QoQ Vs PLe of Rs1,500/t) despite prior period inventory of coking coal

- Strong 14% YoY volume growth in seasonally weak quarter

Steel Authority (SAIL) reported weak operating performance in 2Q despite strong 14% YoY volume growth. Reported EBITDA of Rs38.7bn was much higher than PLe of Rs 25.5bn as 2Q revenue had Rs17.5bn recognized during the quarter towards rail price revision for FY22. Adjusted EBITDA of Rs 21.2bn was below our estimates. EBITDA per ton of Rs4,416 was lower than PLe of Rs5,757 despite lower cost inventory of coking coal (Rs23k/t). Going forward higher cost of imported coking coal prices would impact in 4Q EBITDA. SAIL has planned to increase its capacity from 20.2mtpa to 35mtpa by FY32 in phases however delays cannot be ruled out with its current pace of execution, debt on balance sheet and overall inefficiencies. Detailed project report of IISCO plant which was supposed to get finalized by September is still under preparation & finalization. In near term, SAIL expects incremental volumes from debottlenecking initiatives at its multiple units such as ~1mt volumes in FY26E & FY27E from Bhilai & Rourkela as it is adding caster capacities. Bhilai would start delivering from FY25 onwards.

We cut FY24/25E EBITDA estimates by 5%/2% on weaker 1H performance. We expect SAIL to remain a play on steel prices in medium term as a) its volume growth would depend upon successful execution of its planned capex in phases and significant capacity addition would only come post FY28E; b) near term volume growth would remain 8-10% but margins can get affected by higher coking coal costs; c) however hardening Iron ore prices will keep SAIL’s strategic advantage intact vis a vis peers.

Weak operating performance: SAIL’s 2Q EBITDA grew 29% QoQ to Rs 21.2bn (PLe Rs25bn) on weak realizations which declined sharp 7% (to Rs 58,259/t Vs PLe Rs 60k/t) on weak steel pricing scenario during monsoon. Long product prices had declined sharply however since September there was sharp reversal too. Sales volumes grew strong 24% QoQ to 4.8mt on weak 1Q. With 1mt inventory and strong domestic demand 2H volume growth is expected to remain in double digits.

Concall highlights: (1) NSR for 2QFY24 was Rs53,400/t. Flat steel and long steel prices were Rs55,190/t and Rs51,300/t respectively. (2) Domestic sales stood at 4.7mt while export sales stood a 0.07mt in 2Q. (3) The employee expense for FY24 is expected to be Rs120bn. (4) Capex for FY24 is expected to be Rs55bn and SAIL spent Rs21bn in 1H. (5) Production in FY24 is estimated to be 19mt. (6) Debt in Mar’24 is expected to be Rs220bn. (7) SAIL targets a debt/equity ratio of 1:1. (8) Opex was higher in 2QFY24 on account of higher staff costs, stores and spares and higher maintenance cost. (9) Imported coking coal prices were ~Rs23,000/t in 2Q vs Rs27,800 in 1Q. (10) 1mtpa Caster in Bhilai is expected to be commissioned soon and is expected to benefit from FY25 with 60% capacity utilization and another 1mtpa caster at Rourkela will be commissioned in FY26. (11) The finalized price by railway for FY22 is Rs85,300/t and the provisional pricing for FY23 and FY24 is Rs67.500/t. The volumes sold for FY22 to the railways was 0.92mt. (12) The share of semis in saleable steel is less than 8% after conversion services. (13) SAIL sources 15% of the coal requirements indigenously (3-4% from own coal washeries and the balance from BCCL). (14) There is pressure from imports in flat steel. (15) The plan to setup TMT bars mill at Durgapur steel plant will be finalized in a few months.

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