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Play on deleveraging, high dividend yield

The sharp deleveraging (debt down by Rs78.8bn QoQ) and announcement of Rs4/share interim dividend were the key highlights of SAIL’s Q2FY22 results. Reported EBITDA, which grew 7% QoQ to Rs70.2bn (CentrumE: Rs78.6bn), included additional provision of ~Rs5.65bn related to employee cost post finalization of wage agreement with labor union in October 2021. Adjusted for that, core EBITDA was Rs75.8bn, with EBITDA/t of Rs17,715, down Rs2,000/t QoQ.

Management’s intention to make SAIL net debt-free by Q1FY23 looks ambitious, but could be achieved in FY24E. We remain upbeat on the steel cycle and expect steel prices to remain elevated in FY22, but margins to reduce due to higher coking coal cost. We estimate EBITDA/t at ~Rs14,945 in FY22E and at Rs10,789/t in FY23E. With continuous deleveraging and high dividend yield (FY22E DPS of Rs10.4; ~9% yield), we expect SAIL to perform well. We roll over our valuation to mid-FY24 and value SAIL at 5.5x average of FY23E/FY24E EV/EBITDA to arrive at a TP of Rs241 (earlier Rs215). Reiterate BUY.

Higher volume, prices offset higher RM and employee cost

Higher volume (up 29% QoQ to 4.28mt) and higher net steel realization (up Rs1,619/t QoQ to Rs55,540/t) offset higher RM cost and higher employee cost (up Rs5.6bn QoQ to Rs33.3bn). Imported coking coal cost/t increased by Rs3,907 QoQ to Rs15,150/t in Q2FY22. As a result, EBITDA stood at Rs70.2bn, up 7% QoQ, with EBITDA/t of Rs16,395, down Rs3,334/t QoQ.

However, this included additional provision of ~Rs5.65bn related to employee cost post finalization of wage agreement with labor union in October 2021. Adjusted for that, core EBITDA was Rs75.8bn, with EBITDA/t at Rs17,715, down Rs2,000/t QoQ. Employee cost is expected to be ~Rs110bn (Rs105bn on account of wage revision and ~Rs5bn one-time effect of actuarial valuation on revised wages) in FY22 and could be ~Rs105bn in FY23, with net retrials of ~3,000 employees. We had earlier factored in employee cost of Rs115bn in FY22 and Rs119bn in FY23.

Debt reduced by Rs78.8bn QoQ to Rs247bn; further expansion to be in phases

During the quarter, SAIL reduced debt further by ~Rs78.8bn to Rs247bn from operating profits and release of working capital (Rs129.75bn debt reduction in H1FY22). Interest cost reduced by 13% QoQ to Rs4.39bn. In the absence of major capex in FY22E (Rs60bn) and no cash outflow on taxes for the next few years, we expect net debt to reduce to ~Rs183bn by FY22E-end and further to ~R55.5bn by FY23E-end. We expect SAIL to be net debt-free in FY24, though management targets to achieve this by Q1FY23.

SAIL has clarified that further brownfield expansion (13-15mtpa) will be conducted in phases, with expansion (~5mtpa) in one plant at a time and a gap of 12-18 months before the next expansion in other plant. The tender for the first plant could start being issued from H2FY23. We believe this capex will not lead to any 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).

Reiterate BUY with increased TP of Rs241

We expect SAIL to become a net cash company in FY24 (FY10 was the last year when it was a net cash company). We believe that management will keep in mind the previous experience and the next round of expansion will be done in phases, with most of the capex met by internal cash flows. In Q3FY22, though, SAIL’s EBITDA/t is expected to fall to ~Rs11,000/t owing to higher coking coal. Our FY22E/FY23E EBITDA largely remain unchanged. It could pay dividend of Rs10.4/share (including interim dividend of Rs4/share), a yield of ~8%. We roll over our valuation to mid-FY24 and value SAIL at 5.5x average of FY23E/FY24E EV/EBITDA to arrive at a TP of Rs241 (earlier Rs215). Reiterate BUY. At our TP, it trades at 1.4x FY23E P/B.

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