IGI Logo

At crossroads

Steel authority (SAIL) management announced a higher capex run rate with the onset of a new volume expansion program. Disparity in long product prices and government contracts vis-à-vis flat product prices is starting to show in muted quarterly realisation performance for SAIL and will only accentuate going forward. Employee costs are expected to be maintained YoY for FY21E. Capex has been guided up to Rs80bn provided execution happens. Significant deleveraging can happen if the steel prices sustain, yet headwinds seen to be building up on portfolio, costs, expansion capex. Maintain SELL.

* Disparity between increase in long and flat product prices is leading to muted increase in realisation. Muted realisation growth seen in long product and low exports have possibly led SAIL to underperform on realisations vis-à-vis peers. While railways and government contracts will not see proportionate increase in realisations. Q4FY21 average vs spot is also seeing substantial divergence in long (50% of portfolio) vs flats. Flat product prices have increased from ~ Rs 48,700/te to Rs 63,700/te while long product prices have increased from Rs45,000/te to Rs50,000/te in the same period.

* Targeted capex is Rs 80bn, management is not sure whether the same can be executed in FY22E. Nevertheless, the capex plan will pick up pace in the coming years and FY22E capex will definitely be more than Rs40bn. Management expects Net Debt to be ~ Rs 250bn by end FY22E.

* Issues in Jharkhand may impede iron ore sales target of 13-14mnte in FY22E. SAIL has an ambitious target of selling 13-14mnte of iron ore in FY22E. The same can be easily achieved if the company is being able to sell iron ore inventory in Jharkhand. The company has been able to sell ~ 3,2mnte in FY21 and realized a revenue of Rs12bn. April and May, ’21 sales have been 0.43mnte. Royalty on iron ore has increased by 150% (mirroring increase for NMDC) for ore mined in Jharkhand.

* Entry tax and sales tax dispute has been settled with the State of West Bengal during the current year by paying Rs1.67bn. The demand of entry states from various states amounting to Rs17bn has not been provided for and has been treated as contingent liabilities.

* Employee costs can be maintained YoY, as increase in on account of statutory allowances can be offset by reduction in employee numbers. However, the extent of estimated increase, whether it’s sufficient remains to be seen.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer