Hold Steel Authority of India Ltd For Target Rs.133 by Prabhudas Liladhar Capital Ltd
EBITDA hit by higher costs
Quick Pointers:
* Long-term coking coal contracts affected SAIL’s FY25 profitability, while it surprised with an inventory revaluation loss in RM in Q1FY26.
* Blended NSR in July stood at ~Rs50,000, with flats/longs NSR at Rs48,600/ Rs51,500 respectively.
SAIL delivered weak operating performance in Q1FY26 due to inventory revaluation loss in RM and higher other expenses. Volumes grew 4% YoY (incl NSL’s low contribution volumes, total volume growth was 13% YoY). Higher royalties and other expenses negated the benefit of higher steel prices. The average NSR grew 5% QoQ, aided by better flat and long product prices, driven by the implementation of safeguard duty and higher GoI capex. Blended EBITDA/t was weak at Rs5,695/t adjusting for the prior period rail price revision impact of Rs 1.73bn. We expect even weaker Q2 as domestic prices have declined since early June on monsoon led weakness in demand.
SAIL is undertaking largely sustenance and debottlenecking capex in the near term and actual growth capex cash outflow would start from FY27. Tendering process at ISP is in progress and mgmt. expects ordering by Q3. ISP’s 0.5mtpa debottlenecking expansion is expected by FY28E. We expect SAIL to remain a play on steel prices as long-term volume growth would depend upon successful execution of planned capex. We tweak our FY26/27E EBITDA estimates by ~4/- 1% assuming higher NSL contribution. At CMP, the stock is trading at an EV of 6.4x/5.3x FY26/FY27E EBITDA. Maintain ‘Hold’ with revised TP of Rs133 (Rs136 earlier) giving 5.5x Mar’27E EV/EBITDA
Revenue aided by 4% volume growth and better prices: SAIL’s std revenue grew 8% YoY Rs257bn on volume growth aided by NSL volumes and higher steel pricing. Average realisation improved 5.1% QoQ to Rs56,589/t (-5% YoY; Vs PLe Rs55,713/t) while volumes improved 4% YoY to 4.18mt (-16% QoQ; PLe 4.17mt). including NSL’s 0.373mt, volumes grew 13% YoY to 4.55mt. Crude steel production grew 4% YoY at 4.85mt (-5% QoQ). Revenue recognized at provisional prices for railways for Q1 was Rs26bn and Rs1.73bn was of prior period (FY24) in this quarter..
EBITDA affected by higher costs: EBITDA grew 17% YoY to Rs25.9bn (-9% QoQ Vs PLe Rs31.3bn) on higher other expenses and higher RM costs. RM costs was affected by inventory revaluation loss due to sharp decline in the coking coal prices. RM cost per ton declined 10% YoY (-1% QoQ) to Rs27,142/t, while staff costs increased 2% YoY to Rs6,070/t. Other expenses were flat YoY to Rs17,282/t despite higher volumes. Resultant, EBITDA/t improved just 3% YoY to Rs5,695/t (PLe of Rs7,513/t). Reported PAT was Rs6.8bn.
Weakness in spot spreads led by lower steel prices: Domestic steel spreads have softened from an average of Rs25,797/t in Q1FY26 to Rs23,704/t, as domestic steel prices have been on a declining trend since early Jun’25. This weakness is attributed to subdued demand with the onset of the monsoon and sporadic import shipments. Given SAIL is pure-play on steel prices, it is likely to report a weak operating performance in Q2FY26. Additionally, demand is expected to remain muted due to reduced government capex during the monsoon season, further weighing on the company's performance.
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