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Profitability improves; deleveraging on

Steel Authority of India (SAIL) reported in-line EBITDA at Rs65.6bn (CentrumE: Rs66.7bn), down 7% QoQ, with EBITDA/t of Rs19,728, up Rs3,584/t QoQ. SAIL reduced debt by ~Rs51bn QoQ to Rs325.9bn. We remain upbeat on the steel cycle and expect steel prices to remain elevated in FY22,with firming up of domestic demand and higher global prices.

We increase average steel prices by 14% in FY22E and by 5% in FY23E, partly offset by higher coking coal and employee cost. We estimate EBITDA/t of ~Rs17,493 in FY22E and Rs10,811/t in FY23E. With continuous deleveraging and high dividend yield (FY22E DPS of Rs10.2, ~7% yield), we expect SAIL to perform well. We value SAIL at 5.5x FY23E EV/EBITDA and increase our TP to Rs218 (earlier Rs177). BUY.

Higher steel prices, lower employee cost provisioning offset volume decline and additional iron ore premium

Higher blended netsteel realization (up Rs8,922/t QoQ to Rs55,451) and lower employee cost (down Rs13bn QoQ to Rs27.7bn, as Q4FY21 included ~Rs8.7bn arrears of wage revision) offset lower volume (down ~24% QoQ to 3.33mt) to a certain extent. Q1FY22 earnings were also hit by additional premium of ~Rs2.7bn (Rs812/t of steel) on iron ore due to change in MMDR Act in March 2021. As a result, EBITDA stood at Rs65.6bn, down 7% QoQ with EBITDA/t of Rs19,728, up Rs3,584/t QoQ.

Debt reduced by Rs51bn QoQ to Rs325.9bn; announced next phase of expansion

During the quarter, debt further reduced by ~Rs51bn to Rs325.9bn. It further paid ~Rs20bn in July. As a result, interest cost reduced by 7% QoQ to Rs5bn. In the absence of major capex in FY22E (Rs55bn), we expect net debt to reduce to Rs193bn by FY22Eend and further to Rs145bn by FY23E-end. Management announced next phase of brownfield expansion (~13mtpa), tender for which could start being issued from H2FY23. We believe this capex will not lead to any major leveraging of balance sheet, as the maximum capex/year could be ~Rs100bn and SAIL has the ability to generate such cash flows (assuming EBITDA/t of Rs9,000 and volume of 18mt).

Upgrade FY22E EBITDA by 27%, FY23E EBITDA by 8% to factor in higher steel prices

We increase average steel prices by 14% in FY22E to Rs60,500/t and by 5% in FY23E to Rs51,000/t, partly offset by higher coking coal (Rs14,900/t in FY22E and Rs13,875/t in FY23E) and employee cost. Though wage negotiations are on, we increase our employee cost to Rs115.5bn (earlier Rs105bn) in FY22E and Rs119bn in FY23E (earlier Rs106.6bn). As a result, we expect SAIL to record EBITDA/t of ~Rs17,493 in FY22E and Rs10,811/t in FY23E, leading to increase in EBITDA by 27% to Rs280bn for FY22E and by 8% to Rs195bn for FY23E.

Reiterate BUY with increased TP of Rs218

SAIL’s deleveraging is expected to continue till FY23 as major capex on next phase of expansion will start occurring from FY24 onwards, majority of which can be met by internal cashflows. In near term, though SAIL’s EBITDA/t is expected to fall marginally from Q1FY22 owing to higher coking coal and employee cost but due to firm steel prices (flat QoQ in Q2FY22E) and increase in volume, EBITDA can inch up higher QoQ. It can provide FY22 DPS of Rs10.2, a dividend yield of ~7%. With increase in earnings, we increase our TP to Rs218, based on 5.5x FY23E EV/EBITDA. At our TP, it trades at 1.3x FY23E P/B.

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