Accumulate Steel Authority of India Ltd for the Target Rs 180 by Prabhudas Liladhar Ltd
Steel pricing to aid H2; execution under watch
SAIL reported largely in-line performance, despite higher-than-expected sales volumes (+10% YoY to 5.16mt) on inventory liquidation driving 67% YoY EBITDA growth to INR42.2bn (PLe INR42.3bn). Higher coking coal costs and weaker long product steel prices, resulted in EBITDA/t of INR8,178 which also includes profit from sale of excess iron ore worth INR2.65bn. Monetization of captive iron ore fines is emerging as an incremental earnings driver, with ~2.5mt sold in H1FY27 generating INR3.88bn in profit and FY27E volumes targeted at 7-8mt. Looking ahead, a sharp recovery in long steel prices over the last two months, coupled with expectations of strong demand, would support H2 margins. The expected commissioning of the Tasra coking coal mine in Jan’27 would help partially reduce dependence on imported coal over time. While the recent moderation in coking coal prices could support margins in Q4, steel prices can follow the suit as recent HRC hike was RM led.
SAIL is targeting employee rationalization, with total headcount expected to decline from 48k at Q2-end to 46k by end FY27 and effectively ~26k by FY31E on ageing and VRS. SAIL is planning to expand crude steel capacity from c. 20mt to 35mt by FY31E, with ordering of PPE is underway at IISCO. SAIL aims to intensify capex intensity from H2FY27 with planned INR95bn (spent INR55bn in H1) and INR200/250bn in FY28/29E respectively. Timely execution remains critical to SAIL’s funding plan of majority via internal accruals. In the event of timely execution, SAIL’s net debt still could rise to over INR800bn by FY30E assuming stronger steel prices to stay. Considering SAIL’s pedigree of capex execution, we expect delays in this ambitious INR1.2tn capex program which is planned till FY31E. Until successful commissioning of IISCO’s 4mtpa expansion, SAIL would remain a play on domestic steel pricing. Key monitorable to watch: a) coking coal and steel pricing, b) timely capex execution, c) employee rationalisation plan. We incorporate higher capex, higher IO sales and tweak steel/CC pricing and cut our FY29E EBITDA by ~5%. At CMP, the stock is trading at an EV of 5x/5.3x FY28/29E EBITDA. Maintain ‘Accumulate’ with revised TP of INR180 (INR193 earlier) giving same 5.5x Sep’28E EV/EBITDA.
Strong volume growth drives revenue; NSR remain soft:
Standalone revenue grew 20% YoY to INR 320bn (PLe INR 311.4bn). Revenues include sale from iron ore of ~1.5mt in Q2FY27. Steel volumes grew 5% YoY to 5.16mt (PLe 4.99mt). Excluding NSL’s volumes last year, SAIL has delivered 10% volume growth in Q2 on inventory liquidation. Saleable steel production volumes increased 4% YoY to 4.85mt. Average blended realization declined 3% QoQ (up 14% YoY) to INR 62,011/t (PLe INR 61,918/t) mainly on weak rebar pricing negated by revenue from sale of iron ore during Q2
Sharp YoY margin recovery; partly offset by higher input costs:
EBITDA increased 67% YoY to INR 42.2bn (-5% QoQ; PLe INR 42.3bn) on higher HRC pricing negated by rising coking coal costs. RM cost per ton increased 19% YoY to INR 32,491/t, while staff costs declined 7% YoY at INR 5,900/t. SAIL has taken INR 0.73bn to exceptional expenses, pertaining to VRS of employees. Other expenses declined 1% YoY to INR 15,796/t. Resultant, EBITDA/t grew 59% YoY to INR 8,178/t (PLe INR8,488/t); adjusting for rail price adjustment of + INR 2.95bn, it works out at INR 7,606/t. Reported PAT surged ~4x YoY at INR 17.73bn (8% QoQ vs PLe of INR18.68bn) on low base, higher revenues and improved cost efficiencies.
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SEBI Registration number is INH000000933
