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Weak volumes and low realization drag down earnings

* In 2QFY25, SAIL received a one-time revenue and EBITDA gain of INR16.4b related to rail price revisions for FY23. For a like-to-like comparison, we have adjusted its 2QFY25 financials by excluding this one-time gain.

* SAIL reported a revenue of INR230b (-18% YoY and -4% QoQ), which was 12% below our estimate of INR262b. This decline was primarily attributed to weak sales volume and lower realization during the quarter.

* EBITDA dipped 40% YoY/43% QoQ to INR13b, against our estimate of INR15b. EBITDA/t stood at INR3,111/t (vs. our est. of INR3,271) in 2QFY25.

* Adjusted net loss came in at INR4b vs. our loss estimate of INR0.4b.

* Crude steel production stood at 4.76mt (flat YoY/+2% QoQ). Sales volume stood at 4.1mt (-15% YoY/+2% QoQ).

* ASP for the quarter stood at INR56,191/t (-4% YoY/-6% QoQ).

Highlights from the management commentary

* Currently, the share of indigenous coking coal stands at 15%, which SAIL aims to increase to 20-25% with its own Tasra captive coal mine.

* In 2QFY25, avg. landed coking coal costs stood at INR21,681/t (imported INR20,000/t and indigenous INR13,500/t) vs. INR23,000/t in 1QFY25. For 3QFY25, the management expects coking coal costs to decline further by INR2,000/t QoQ.

* The sequential decline in NSR was driven by weak pricing due to monsoon and higher cheap imports. 2Q NSR stood at INR50,500/t (long: INR52,000/t and flat: INR49,000) and for 3QFY35, the company expects a decline of INR1,000-1500/t QoQ as spot prices remain muted. Flat and longs both have seen marginal improvements in Nov’24.

* High imports dragged down flat prices in domestic markets and prices will remain under pressure in the near term due to elevated imports. Long steel prices would rebound as construction activities and government Infra spending pick up.

* The rail price revision for FY23 has been completely accounted. It expects FY24 price revisions to be accounted in the coming quarters.

Valuation and view

* SAIL plans to undertake multiple expansions to increase its installed capacity to 35mt by FY30-31. As the capex intensity is likely to pick up after FY25/FY26, it would limit the deleveraging efforts going forward. 1H remained weak for the company, mainly due to muted steel prices. Hence, we cut our revenue/EBITDA/PAT estimates by 8%/3%/19% for FY25. Moderated coal costs will continue to offset the impact partly.

* At CMP, SAIL trades at 5.2x EV/EBITDA on FY27E. We believe the stock is fully priced at current levels. We reiterate our Neutral rating on the stock with a revised TP of INR130 (premised on 6x EV/EBITDA on Sep’26 est.).

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