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Higher pricing aids Q1; capex execution remains key

SAIL reported a strong operating performance in Q1FY27, aided by higher steel prices despite production disruptions from the advancement of scheduled capital repairs at Bokaro, IISCO and Durgapur. Adjusted NSR increased 10% QoQ to INR 63,833/t, driving EBITDA/t to INR 10,724, the highest since FY22 despite elevated imported coking coal costs. Management maintained FY27 sales volume guidance at 22mt and expects inventory liquidation during H2FY27 to support sales volumes and reduce working capital borrowings. While Q2 NSR are expected to moderate sequentially, with July blended NSR at INR 55,600/t due to monsoon-led weakness, mgmt. expects long steel prices to recover by INR 500-1,000/t over the coming months supported by improving demand momentum and production curtailment by secondary producers. Coking coal costs are also expected to decline by ~INR 1,000/t each in Aug & Sep'26.

SAIL continues to focus on structural cost reduction through operational improvements and higher utilization of captive resources. Mgmt. is targeting INR 2,000-3,000/t cost savings during FY27, while commissioning of IISCO in FY29E is expected to reduce variable costs by INR 3,000-4,000/t, translating into net savings of ~INR2,000/t after accounting for higher fixed costs. SAIL is also targeting to improve its product mix by increasing finished steel production, while monetization of captive iron ore fines is emerging as an incremental earnings driver. Although long product prices have corrected due to seasonal weakness, we expect production normalization, lower coking coal costs and revival in domestic demand in H2FY27 to support profitability. Timely execution of expansion projects remains the key as SAIL remains a pure play on pricing till then; while leverage would also increase as SAIL has stepped up its capex guidance. We tweak our EBITDA estimates for FY27/28E by +3/- 5%, incorporating iron ore sales and lower volumes. At CMP, the stock is trading at an EV of 5.2x FY28E EBITDA. Maintain ‘Accumulate’ with revised TP of INR185 (INR203 earlier) giving same 5.5x Mar’28E EV/EBITDA.

NSR gains mitigate weak volume:

Standalone revenue grew 3% YoY to INR 266bn (PLe INR 277.8bn), adjusting for the Railways' downward revision in prior-period pricing, with the effective revenue impact at Rs3.09bn, despite weak volumes. Adjusted average realizations increased 10.3% QoQ (up 13% YoY) to INR 63,833/t (PLe INR 62,530/t), driven by higher HRC prices and the impact of lower volumes. Sales volumes declined 9% YoY to 4.16mt, as the company advanced certain scheduled repairs and maintenance, which impacted production, with saleable steel production volumes declining 7% YoY to 4.52mt

Healthy margin expansion:

Adjusted EBITDA increased 72% YoY to INR 44.6bn (+1% QoQ; PLe INR 41.11bn), driven by lower raw material costs, primarily due to a higher increase in stocks. Raw material cost per ton declined 4% YoY to INR 26,009/t, while staff costs increased 7% YoY to INR 6,505/t. SAIL recognized INR 1.44bn as an exceptional expense towards voluntary retirement compensation for employees. Other expenses increased 16% YoY to INR 20,039/t due to the advancement of scheduled maintenance during Q1. Consequently, adjusted EBITDA/t grew 88% YoY to INR 10,724/t, ahead of PLe of INR 9,252/t. Reported PAT increased 139% YoY to INR 16.3bn (-3% QoQ; PLe of INR15.9bn), supported by lower taxes.

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