SAIL Q2 Results Review - Strong Production Performance: Yes Securities

Yes Securities Report

Steel Authority of India Ltd.’s Q2 FY24 earnings were above the consensus estimates, majorly on the back of better than expected realizations and higher sales volumes. The company benefitted from the falling coking coal prices during the previous quarter and stable domestic steel prices. On the volumes front, after a drop in Q1 FY24, the company had sales of 4.77 million tonne for Q2 FY24, a 23% rise QoQ. We see the second half of the current financial year to cause some dent to the company’s earnings, majorly on the back of rising coking coal prices and the steel prices still being under pressure.

On the capex front, the management has provided a guidance of incurring Rs 5,500 crores of capex for this year which includes Rs 2,000 – 2,500 crores of maintenance capex and the remaining for expansion projects and debottlenecking at the current capacities. In addition to that, the company’s debt stands at Rs 25,490 crores, which is a big relief from Rs 29,414 crores during Q1 FY24.

However, we believe with the firm’s upcoming capex phase of brownfield expansions can again elevate its debt levels on the back of unfavourable macro-environment for the industry.

In terms of the operational performance, the company reported a crude steel production of 4.80 million tonne and sales of 4.77 million tonne. On the cost front, the company is expected to see a cost inflation on the coking coal prices which have been northwards of $ 310/ tonne. over the past few weeks, the impact of which will be seen in the upcoming quarters and majorly in Q4 FY24.

We maintain our rating on SAIL as a 'Reduce' as we believe that the debt levels, no additional capacity in the near future and the elevated coking coal prices are a cause of concern for the near future. We value SAIL at 5 times FY25E enterprise value/Ebitda to arrive at our target price of Rs 85/share.

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