SAIL - 2QFY23 Result Update - Near-Term Challenges but Healthy Recovery ahead

Mr. Mitul Shah - Head of Research at Reliance Securities.

SAIL reported a highly subdued 2QFY23 performance with EBITDA margin coming in at 2.8%, vs. our estimate of 5.8%. Revenue de-grew by 2% YoY (up 9% QoQ) to Rs262bn, in line with our estimate of Rs262bn. Sales volume declined 1.6% YoY to 4.21MnT, while average realization/ton declined 0.5% YoY and 18% QoQ to Rs62,343 (3% below our estimates), impacting QoQ performance. EBITDA de-grew by 90% YoY and 68% QoQ to Rs7.3bn, 51.5% below our estimate of Rs15.1bn due to higher input cost, while margins stood at 2.8%, 297bps below our estimate of 5.8%. Its RM/Sales rose to 62.6% vs 34.2% YoY and 47.8% QoQ, impacting operating performance significantly. SAIL reported a Net Loss of Rs3.9bn (vs. PAT of Rs43bn in 2QFY22 and PAT of Rs7.8bn in 1QFY23) , as against our estimated PAT of Rs1.6bn. Going forward, the sharp fall in coking coal prices in last 2 months is expected to have a positive impact on margins, albeit with a lag and hence we expect near-term challenges for all steel companies in 3QFY23 and margins are expected to be under pressure. However, the recent announcement by the government on rolling back most of the duties imposed on steel, steel pellets and steel products would support overall steel industry and exports to some extent. We expect healthy recovery in volumes and margins in FY24 with normalised situation. Considering higher share of long products in the overall product portfolio and lower valuation, we maintain our BUY rating on SAIL, with a revised Target Price of Rs95 (from Rs90 earlier).

Volumes Falter

SAIL reported sales volume of 4.21mn tonnes, down 2% YoY and 34% QoQ vs. our estimate of 4.10mn tonnes, due to lower exports and weaker than expected domestic demand. Going forward, with the roll back of export duty, we expect domestic availability of steel to decrease to some extent, which would support pricing. We expect post monsoon pick up in infrastructure activities, supported by lower steel and cement prices and government’s push for the same. Overall volume would remain largely flat YoY in FY23, due to demand weakness and slow pick so far. Hence, we have cut our volume estimates by 4%/6% for FY23E/FY24E to 16.1mn tonnes and 16.4mn tonnes, respectively. We expect the company to report a 1% CAGR in volumes over FY22-FY24E.

Outlook & Valuation

SAIL reported a highly subdued performance during the quarter under review. Going forward, while we expect realization to remain stable and EBITDA to expand from the current levels, they are expected to remain above the cycle average in FY23E/FY24E. The company is expanding its downstream capacity, which will help to reduce the sale of low-margin semi-steel products. Currently, 15% of steel sales is in the form of semis, which is expected to reduce to ~8%, post expansion. Further, the sale of long products, currently at ~31%, is expected to rise to 41%, post expansion. We expect SAIL to report a 1% CAGR in volumes over FY22-FY24E. Also, at 4.5x FY24E EV/EBITDA, the stock is trading at a discount to its last decade average multiple of ~5.1x thus offering comfort. Keeping our target multiple unchanged at 5x FY24E EBITDA, we maintain our BUY rating on the stock, with a revised Target Price of Rs95 (Rs90 earlier).

Shares of Steel Authority of India Limited was last trading in BSE at Rs. 82.25 as compared to the previous close of Rs. 81.70. The total number of shares traded during the day was 836344 in over 5090 trades.

The stock hit an intraday high of Rs. 82.45 and intraday low of 80.85. The net turnover during the day was Rs. 68439838.00.

Source : Equity Bulls

Keywords

SteelAuthorityofIndia INE114A01011 SAIL RelianceSecurities Q2FY23 ResultUpdate