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Volumes to gain traction, going forward…..

SAIL is one of leading steel producers in India, which has 5 large integrated steel plants (Bhillai steel plant, Rourkela steel plant, Durgapur steel plant, Bokaro steel plant and IISCO) spread across 4 states in eastern India (Chattisgarh, Odisha, West Bengal and Jharkhand). In addition, SAIL also has 3 special steel plants (Salem Steel plant, Alloy Steel plant and Visvesvaraya iron and steel plant) and a Ferro Alloy plant at Chandrapur. In FY20, SAIL reported saleable steel production of 15.1 Million Tonnes (MT), while saleable steel sales volume for the period under review stood at 14.2 MT (For 9MFY21, SAIL’s saleable steel production volume stood at 10.2 MT, while saleable steel sales volume stood at 10.6 MT). SAIL also has iron ore mines in the states of Chattisgarh, Jharkhand and Odisha, which aids in meeting 100% of its iron ore requirements captively.

Sales volume to grow at a CAGR of 10% during FY20-23E…

Over the last decade, SAIL has witnessed notable delays in completing its expansion and modernisation plan. As a result, SAIL’s sales volume grew by a mere 1.6% CAGR during the period FY10-20. Currently, SAIL is currently in final stages in completing its expansion and modernisation plan, which would expand SAIL’s saleable steel capacity to 20.2 MT. This would aid the company to register healthy volume growth, going forward. We expect SAIL’s sales volume to grow at a CAGR of 10% during FY20-23E. We have modelled sales volume of 15 MT in FY21E, 17 MT in FY22E and 19 MT in FY23E.

Access to captive iron augurs well…

SAIL has iron ore mines in the states of Chattisgarh, Jharkhand and Odisha, which aids in meeting 100% of its iron ore requirements captively. In FY20, SAIL produced 29.3 MT of iron ore from its captive mines, which ensured that it met its total requirement of iron ore from captive resources. Even on the expanded capacity, SAIL would be self-sufficient in meeting its iron ore requirements. Captive supply of iron ore aids in keeping SAIL’s overall raw material costs under check. Furthermore, currently, the relatively firm trend in steel prices also augurs well for SAIL. We have modelled EBITDA/tonne of |8250 in FY21E & |6750/tonne each for FY22E and |7000/tonne for FY23E.

Valuation & Outlook

On the back of capacity expansion, we expect SAIL to register a volume CAGR of 10% during FY20-23E. Going forward, we expect SAIL to report EBITDA/tonne of |8250/tonne in FY21E and |6750/tonne in FY22E and |7000/tonne in FY23E. Healthy growth in sales volume coupled with relatively firm steel prices augur well for SAIL. We value the stock at 5.5x FY23E EV/EBITDA and arrive at a target price of |90, assigning BUY recommendation on the stock.

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