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Quick Pointers:

* Strong 5% QoQ improvement in average realization led by jump in long product prices at start of 3Q.

* EBITDA/t improved 26% QoQ on efficient blending of CDI coal and 20% QoQ decline in sales volumes to 3.81mt; Volumes recovered in Jan’24 at 1.5mt.

We downgrade Steel Authority (SAIL) to ‘Hold’ rating from Accumulate with revised TP of Rs 108 (Rs95 earlier) as the stock has run up much ahead of fundamentals in recent PSU rally and we do not expect proportionate earnings growth. SAIL reported weak operating performance in 3Q despite strong 5% QoQ improvement in average realization. EBITDA per ton of Rs5,617 was tad better than PLe of Rs5,428 due to efficient blending of CDI coal and lower sales volumes. Going forward, there is expectation of increase in cost of coking coal in 4Q however sales volumes are expected to improve significantly QoQ to ~4.5mt as demand has improved. Steel prices however have declined sharply which may play spoilsport for 4Q EBITDA. SAIL has planned to increase its capacity from ~20.2mtpa to 35mtpa by FY32 in phases, yet, in the near term no significant capacity addition is envisaged till FY26. With recent restructuring post Lokpal report, we expect governance issues to improve significantly and hopefully result in better pace of execution. SAIL has 1.8mt of finished goods inventory and enough capacity to cater to strong demand till FY26E.

We expect SAIL to remain a play on steel prices in medium term as a) its volume growth would depend upon successful execution of planned capex in phases and significant capacity addition would only come post FY28E; b) near term volume growth would remain 7-9% but margins can get affected by higher coking coal costs; c) hardening iron ore prices will keep SAIL’s strategic advantage intact vis a vis peers. We tweak our FY25/26E EBITDA estimates by -3%/+8% on expectation of muted steel pricing till 1HFY25. Downgrade to ‘Hold’.

Volume declined sharply QoQ: SAIL’s 3Q EBITDA grew 1% QoQ to Rs 21.4bn (lower than PLe Rs24.3bn) on weak volumes, which declined sharp 20% QoQ to 3.81mt in weak domestic demand scenario in 3Q. Jump in long product prices aided realization which improved 5% QoQ to Rs61,274/t (PLe Rs60k). With 1.8mt inventory and improving demand scenario, 4Q volume expected to grow in higher double digits.

Concall highlights: (1) NSR for 3QFY24 was Rs55,361/t. Flat and Long product prices were Rs 53,938/t and Rs 56,600/t respectively. (2) In Jan’24, Long steel prices were Rs 51,900/t and Flat steel was ~Rs 53,000/t. (3) The import parity prices are at par with domestic prices. (4) Capex for FY25 is expected to be Rs 64bn. (5) (6) Total debt as of Dec’23 was Rs 280bn and increased to Rs 290bn in Jan’24. (7) Two states had excess sub grade iron ore fines inventory, out of which Odisha is getting liquidated, while for Jharkhand SAIL has got permission to only use within own plants. (8) Finished steel inventory stood at 1.795mt as of 3Q. (9) Coal consumption costs for 3Q stood at Rs 23,693 including CDI Coal vs Rs 23,271 QoQ. (10) Coal consumption cost for Jan’24 stood at Rs 26,633 which is expected to remain at similar levels for Feb and Mar’24. (11) Sales volume for Jan’24 stood at ~1.5mt. (12) SAIL is operating at ~95% utilization. (13) Commissioning of caster at Bhilai is going on. (14) Employee costs quarterly run rate is ~ Rs30bn; and is expected to reduce. (15) SAIL received Stage-1 board approval for expansion project of 4.08mt at IISCO Steel plant. (16) Tasra coal mine is expected to start production by end FY25 to produce 1.5mt on full capacity and shall replace imported coal. (17) Total captive iron ore production of SAIL is ~36mt. 

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