Neutral SAIL Ltd for the Target Rs.130 by Motilal Oswal Financial Services Ltd
Muted volume drags down earnings
* In 1QFY26, SAIL received a one-time revenue gain of INR1.7b related to rail price revisions for FY24. For a like-for-like comparison, we have adjusted its 1QFY26 financials by excluding this one-time gain.
* SAIL reported revenue of INR258b (+7% YoY and -12% QoQ) against our estimate of INR276b, primarily due to muted volumes in 1Q.
* Crude steel production stood at 4.85mt (+4% YoY and -5% QoQ), while sales volume stood at 4.55mt (+14% YoY and -15% QoQ) in 1QFY26 (incl. ~0.3mt of volume from NMDC steel products). ASP for the quarter stood at ~INR56,600/t (-5% YoY and +3% QoQ).
* EBITDA stood at INR26b (+17% YoY and -26% QoQ) against our estimate of INR33.4b, affected by muted volumes.
* EBITDA/t stood at ~INR5,700 (vs. our est. of INR6,967/t), up 3% YoY but down 12% QoQ due to a rise in royalty on iron ore (~INR1.73b) and onetime stock revaluation impact (INR10.5b).
* Adj PAT came in at INR5.7b (vs. our est. INR11.5b), up 76% YoY but down 55% QoQ in 1QFY26.
Highlights from the management commentary
* In 1QFY26, the blended coking coal costs stood at INR16,920/t vs. INR17,650/t in 4QFY25. For 2QFY26, management expects coking coal costs to largely remain stable QoQ.
* Currently, the average realization for long steel stood at INR51,500/t, and flat at INR48,600/t.
* Guided to achieve ~18.5mt volume (excl. NMDC steel volume) in FY26.
* For FY26, SAIL has set a capex target of INR75b, to be spent on ongoing projects across various plants. The IISCO expansion will start contributing to capex from FY27 onward, and similar capacity enhancement plans are being considered for other facilities in the next phase.
Valuation and view
* SAIL’s 1QFY26 performance was affected by soft volumes and one-time costs related to inventory revaluation and a rise in royalty on iron ore. We trim our FY26 EBITDA/PAT estimates by 7%/13% to incorporate the 1Q performance miss; however, we maintain our FY27 estimates.
* SAIL plans to increase its capacity to 35mtpa. This plan is currently in the initial tendering phase and any notable development is expected to be visible after FY27.
* Considering the limited room for production, we estimate a modest volume CAGR of 6% over FY26-27. Any incremental earnings will be driven by healthy pricing and lower costs. We reiterate our Neutral rating on the stock with a TP of INR130 (premised on 6x EV/EBITDA on FY27E).
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