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Earnings to bounce back in Q2; Capex mode on

Steel Authority of India (SAIL) reported better-than-expected Adj EBITDA of Rs16.5bn (CentrumE: Rs15bn),though down 43% QoQ. The realisation increased sequentially by Rs800/t (up 1%) offset by lower volumes (down 17% QoQ). CoP was up 5% QoQ due to higher coking coal consumption cost, resulting in fall in EBITDA/t by Rs1955/t (32%) QoQ to Rs4245/t. For Q2FY24, realisation/t is expected to be flattish to fall of Rs1000/t while fall in coking coal price to benefit by Rs4000/t in cost savings resulting in margin expansion. Further, slew of capex projects are under evaluation with setting up of overall 10mt capacity by FY30-31 and also pellet plants at various locations to reduce cost and utilise iron ore inventory. For FY24, SAIL has set capex of Rs68bn of which Rs9.2bn was spent in Q1FY24. We factor in higher capex spend and revise net debt estimate to Rs293bn (vs earlier: Rs173bn) in FY25. Also, Our EBITDA estimate for FY24 and FY25 is revised down by 7% and 3% respectively. As a result, we downgrade to Reduce (Earlier: BUY) with target price of Rs80 (Earlier: Rs94), valuing at 5.0x FY25E EV/EBITDA.

Lower volume and higher cost led to decline in earnings

Net salesstood at Rs248bn, down ~16% QoQ due to lower volume & higher cost partially offset by increase in steel realisation during the quarter. Blended realisation/t was up by Rs800/t (1% QoQ) to Rs62,777/t, while sales volume recorded at 3.88mt, down 17% QoQ. CoP ex-employee cost/t stood at Rs51,200, up 1% QoQ. The coal cost stood marginally up at Rs25800/t. The fall in coal prices will reflect in Q2FY24 by Rs4000/t. The other expenses were up by 13% QoQ largely due to higher royalty cost. Employee cost declined by 17% QoQ due to one off adjustment in previous quarter. Overall CoP was up 5% QoQ Rs2,752/t at Rs58532/t. As a result, EBITDA/t decrease to Rs4245/t down Rs1955/t (32%) QoQ.

Debt increased by ~Rs37.5bn QoQ to Rs294bn; Major capex announced In Q1FY24, net debt has rose from Rs257bn to Rs294bn up Rs37.5bn (15% QoQ) due to rise in WC. With coking coal price seen falling, we observed WC release for rest of the year. The capex spent during the quarter stood at Rs9.2bn and guided Rs68bn for FY24. SAIL has approved expansion projects – IISCO by 4.5mt, Bokaro by 3mt and other debottlenecking in other plants in tune to addition of 3-3.5mt. So overall, SAIL targets to add 10-11mt by FY30-31. The detailed project report is under process and expect stage 1 approval by end of FY24. Further, also plans to setup 1mtpa pellet plant at Bhillai for which orders has been placed. Additionally, other locations like Rourkela, Gua mines and Burnpur is also under consideration.

Downgrade to Reduce with TP of Rs80 The Q2FY24 EBITDA/t likely to improve sequentially on account of benefit of decline in coal prices. SAIL is again embarking on long capex journey to increase its capacity by 50% in next 6-7 years. During last capex cycle from FY10-20, company peaked net debt at Rs534bn and Net Debt/EBITDA of 10x. Hence, due to pressure of high capex spend, we see a challenge in maintaining lean balancesheet and FCF positive business. We recommend Reduce rating and value SAIL at 5.0x FY25E EV/EBITDA for target price of Rs80.

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