SAIL’s adjusted (for higher DMF provisions) 2QFY16 EBITDA stood at a negative Rs 860 crore, much lower compared to profit of Rs 1,340 crore in 2QFY15. Following low domestic demand, rising exports from China and due to a plant shutdown (Bokaro for 75 days), SAIL’s production as well as shipments contracted by c8% y-y. During the quarter, net realizations fell c14% y-y (c3% sequentially), which, along with c6% y-y increase in cost/t resulted in negative Ebitda. In addition, SAIL carried large inventory at the start of the year, the write-down on which added to the weak quarter. Inventory (as of Sept-15) stood at Rs 18,500 crore, c55% of outstanding net debt and c182 days of sales. Net debt increased to R31,300 crore, an increase of Rs 4,100 crore over the last six months as SAIL continues to invest in capacity expansions (which we consider value destructive).
We now expect SAIL to report EBITDA loss for the full year (FY16e) before returning to positive EBITDA in FY17e (see table on the next page). We were already c75% below consensus EBITDA estimates for FY17e, and believe that consensus will cut estimates after weak 2Q results. In negative EBITDA regime, we now move to valuing SAIL at 0.3x book (6x EV/EBITDA earlier), broadly in line to European peers.