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Revenue largely in line; EBITDA beat driven by marginal beat on ASP

* SAIL reported a weak but in-line quarter; while its revenue and EBITDA were above our estimates driven by higher ASP. As expected, SAIL posted a net loss for the quarter due to higher costs.

* Crude steel production fell 12% YoY and 1% QoQ to 4.3mt (in line). Sales grew 33% QoQ to 4.2mt (in line) during the quarter

* Revenue declined 2% YoY (+9% QoQ) to INR262b (in line). The 6% beat on our revenue estimate of INR249b was fueled by ~5.4% ASP beat in 2QFY23.

* ASP for 2QFY23 stood at INR62,343/t (-1% YoY/-18% QoQ), 5.4% ahead of our estimate of INR 59,166/t. The ASP improvement led to a sharp rise in EBITDA/t, significantly higher than our estimate

* Adjusting for the inventory mark up of INR0.8b, adjusted EBITDA decreased 91% YoY and 64% QoQ to INR 6.5b. The company posted a loss of INR3.9b in 2QFY23 (v/s profit of INR43b YoY and INR7.8b QoQ)..

* For 1HFY23, SAIL’s sales/EBITDA/PAT stood at INR510b/INR30b/INR4b, respectively. While sales grew 7% YoY, EBITDA/PAT plunged 78%/95%.

* Net debt has risen substantially by over 2x to INR272b in 2QFY23 (v/s INR 127b in Mar’22).

Highlights from the management commentary

* Management expects FY23 production of 17-17.5mt and sales of 16-16.5mt

* The benefit of lower coking coal procured in Aug/Sep’22 will accrue in 3QFY23E. However, coal prices could rise in 4Q as the current spot prices have moved up

* Management expects debt to remain stable in 3Q and reduce marginally to INR260-270b at the end of 4QFY23.

Valuation and view

* SAIL trades at an inexpensive P/B of 0.6x on our FY23 and FY24 estimates. However, on EV/EBITDA, the stock trades at an expensive valuation of 6.3x/4.3x on our FY23/24 revised estimates, respectively.

* While its net debt has surged 2x in the last quarter, we note that the leverage remains comfortable at 2.5x compared to the peak of 8.6x in the previous downcycle.

* We cut our FY23 EBTIDA/PAT estimates by 4%/13% led by higher-thanexpected coking coal costs. We downgrade the stock to Neutral with a revised TP of INR80 (v/s INR88 earlier) mainly due to rising debt, valuing the stock at 6xFY23E EV/EBITDA. While mounting debt and coking coal prices are our key concerns that led to the downgrade, we note that the valuation at 0.6x on FY23E P/B with net debt/EBITDA at 2.5x will provide support to the stock and subsequently our Neutral rating.

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