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Biggest beneficiary of improved pricing

Deleveraging to continue

* SAIL continues to reap the benefits of higher steel prices as it recorded its highest ever quarterly EBITDA of INR65.3b (+7% QoQ), despite volumes declining by 24% QoQ. EBITDA/t was the highest ever at INR19,728/t.

* Net debt declined further to INR311b (v/s INR367b in Mar’21). We expect SAIL to further reduce its debt by INR44b to INR267b at the end of FY22.

* We broadly maintain our FY22E/FY23E estimate. We expect the dividend payout to be strong at INR10/share in FY22E (~7% yield), based on an expected 25% payout ratio. We reiterate our Buy rating.

Higher realization boosts EBITDA by 7% QoQ despite a volume decline

* Sales/EBITDA/adjusted PAT came in line with our estimate (-11%/+7%/+8% QoQ) at INR206.4b/INR65.6b/INR38.5b on higher realization, but was offset by lower volumes. Adjusting for the wage revision settlement of INR2.85b for FY21, adjusted EBITDA stood at INR68.5b, up 1% v/s our estimate.

* Sales volume declined by 24% QoQ to 3.33mt and was 2% below our estimate. The decline was much higher compared to its peers due to the spread of COVID-19 in plants and a maintenance shutdown at one of the plants. Crude steel production was lower by 17% QoQ to 3.77mt.

* Blended realization rose 16% QoQ to INR62,045/t (est. INR58,866/t) on the back of higher steel prices and better product mix.

* The increase in realization was partly offset by lower operating leverage. As a result, EBITDA/t rose 39% QoQ to INR19,728/t (in line). Adjusting for the wage revision provision impact in 1QFY22/4QFY21 (INR2.8b/INR11.9b), EBITDA/t stood at INR20,585, up 23% QoQ.

* Finance cost fell 7% QoQ to INR5b due to debt repayments.

* Gross/net debt fell by INR50.6b/INR57.7b QoQ to INR326.1b/INR311.4b.

Debt reduction key focus, capacity expansion likely from FY24 onwards

* The management lowered its steel sales volumes guidance to 16.5mt from its earlier guidance of 18.3mt. We have factored in sales of 16mt in FY22.

* It expects marginally better steel prices in 2Q over 1QFY22 levels. The sharp rise in coking coal prices is likely to result in higher costs in 1QFY22.

* A wage revision settlement is likely to be finalized in 2QFY22.

* It further reduced gross debt by INR20b in Jul’21 to INR306b. The company guided for net debt of ~INR200b by FY22-end (earlier guided for INR250b).

* The company is working on finalizing the new leg of expansion to increase its total capacity to 50mt. In Phase I, it is looking to expand capacity by 12- 14mt in Bokaro, IISCO, and Rourkela steel plants. Meaningful capex on expansion would likely start from FY24 onwards. The management said it would like to repay most of its long-term debt before embarking on its expansion plans and finance the new phase of expansion at a 1:1 debt-toequity ratio.

Valuation and view

* We expect EBITDA to grow at 21% CAGR over FY21-23E to INR186b, led by 8% volume CAGR to 17.5mt.

* We estimate a net debt reduction of INR157b (INR38/share) over FY21-23E to INR210b (INR50/share) on the back of higher operating cash flows.

* We value the stock at 5x FY23E EV/EBITDA at INR175/share, implying a target P/B of 1.1x (v/s its historical average of 0.7x). At the CMP, the stock is trading at 3.3x FY22E EV/EBITDA. We reiterate our Buy rating.

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