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* SAIL, one of the largest steel manufacturers in India with an annual capacity of ~21mt is all set to capture the growing steel demand amid expansion in infrastructure and construction.

* SAIL has five integrated steel plants at Bhilai, Durgapur, Rourkela, Bokaro and IISCO (Burnpur) along with three special steel plants at Salem, Durgapur and Bhadravati (Visvesvaraya) and one ferroalloy plant at Chandrapur.

* SAIL offers an entire gamut of steel products across flats, longs and semis with strong focus on value added products (VAP). The share of VAP stands at around 53% of the total volumes. ? SAIL has strong iron ore linkages and the entire iron ore requirement is met by captive mines, which ensure adequate supply of key raw materials.

* SAIL is the largest supplier of rails to Indian Railways. Between Apr ’22 and Mar ’23, SAIL has already produced ~1.4mt of railway materials (~9% of the total volumes).

* Post rollback of export duty in Nov ’22, steel prices have seen an improvement. Due to weaker global offtake and multiple long holidays across key steel consuming economies, the prices have remained range bound over the last few weeks. However, we expect the steel demand to normalize and pick up before the monsoon in May-June ’23 as construction and infrastructure sector picks pace.

* SAIL is currently operating at near capacity and though there is no major capex lined up for the next couple of years, SAIL is undertaking various initiatives which will enhance its product mix and help the company achieve full capacity utilization. The next phase of growth will take the current capacity to 33mt by FY31-32 and SAIL plans to commence this mega project by setting up a flat steel capacity at IISCO followed by Bokaro, Rourkela and Bhilai.

* SAIL is expected to post a crude steel production of 17.5-18mt and sales of 16.5- 17mt in FY24. ? While SAIL is well placed, the stock trades at 4.9x FY24E EV/EBITDA and appears to be fully priced in. We reiterate our Neutral rating on the stock with a target price of INR85 (5x FY24E EV/EBITDA).

* Key downside risks: Some of the iron ore mines are nearing the end of their lifespan and if SAIL is unable to develop new mines, it will face supply constraints and would have to depend on external sources. Additionally, SAIL imports coking coal and any sudden increase in its prices could adversely impact the company’s margins.

Next leg of capex to drive growth

* SAIL is currently ramping up its capacity to full utilization and plans to undertake various initiatives, which will enhance the production and also enrich the product mix, thereby, driving the realizations in the near term.

* SAIL is setting up casters at Bhilai and Rourkela, which will increase the crude steel capacity by 1.2mt in the near term.

* Durgapur has a higher share of semis and SAIL is gradually shifting its focus to finished steel, thereby, enhancing the realizations and margins from the Durgapur facility.

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