Buy Steel Authority of India Ltd for the Target Rs 195 by Motilal Oswal Financial Services Ltd
Strong earnings in 1Q supported by strong NSR; outlook bright
* In 1QFY27, SAIL’s reported revenue included a one-time downward revision of INR3.1b in rail prices for FY25. For a like-for-like comparison, we have adjusted 1QFY27 financials by adding back this one-time downward revision.
* Adj. revenue stood at INR266b (+3% YoY; against our est. INR258b), declining 14% QoQ. This was mainly driven by muted volumes, partially offset by healthy NSR.
* Crude steel production stood at 4.8mt, declining 2% YoY and 6% QoQ, as the company advanced certain scheduled repairs and maintenance in 1QFY27. Sales volume stood at 4.2mt, declining 9% YoY and 22% QoQ, aligned with muted production volume during the quarter. Of the total sales volume in 1QFY27, third-party contribution from RINL stood at 95kt.
* ASP for the quarter stood at INR63,800/t, rising 13% YoY and 10% QoQ, driven by an increase in steel prices during the quarter.
* Iron ore sales increased to 1.1mt in 1QFY27 (vs 0.31mt YoY), with mining revenue rising to INR5.74b (vs INR1.57b in 1QFY26) and generating ~INR1.5b of incremental EBITDA.
* Adj. EBITDA stood at INR44.6b (+72% YoY and +1% QoQ), higher than our estimate of INR40b during the quarter. This translated into Adj. EBITDA/t of INR10,725/t (vs. our est. of INR9,600/t), rising 88% YoY and 29% QoQ over strong NSR improvement.
* APAT stood at INR19.8b in 1QFY27 (vs. our est. of INR17.3b), compared to INR20.7b in 4QFY26 and INR5.7b in 1QFY26. This was mainly driven by strong operating performance.
Highlights from the management commentary
* Management targets to achieve FY27 volume guidance of ~22.5mt despite weak volumes in 1QFY27. It expects volumes to recover over the coming quarters.
* Management targets iron ore external sales of ~8mt in FY27, compared to ~3.5mt in FY26, driven by higher dispatches from Odisha mines and commencement of sales from Chhattisgarh and Jharkhand mines.
* Management expects 2QFY27 blended NSR to decline ~INR1,000-2,000/t QoQ due to seasonal monsoon weakness. The long prices have corrected by ~INR2,000-3,000/t during Jun-Jul’26, while flat prices fell INR1,000/t over the same period.
* Imported coking coal procurement costs increased ~INR3,200/t to ~INR21,300/t in 1QFY27. Management expects costs to soften, with procurement prices likely to start moderating by ~INR1,000-2,000/t progressively over Aug-Sept’26, driven by lower international prices and seasonally weak demand.
* Management targets cost reduction of ~INR2,000-3,000/t during FY27 through operational improvements following the completion of planned shutdowns, better productivity, and ongoing efficiency initiatives.
Valuation and view
* SAIL reported strong earnings during the quarter despite muted volumes, as they were offset by elevated NSR.
* This earnings trend is expected to moderate over the coming quarters, led by moderation in long steel prices and escalation of input costs. However, higher/incremental volumes from captive/third-party, along with inventory liquidation, could limit earnings moderation.
* We increased our FY27/28 estimates marginally to reflect healthy steel prices and recent moderation in international coal costs. We believe any meaningful earnings upside and re-rating opportunity lies in volume growth, supported by third-party agreements or captive expansion. We reiterate our BUY rating on the stock with a TP of INR195 (premised on 7.5x EV/EBITDA on FY28 estimate).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
