SAIL reported 2Q EBITDA of R1.1 billion (-52% q-o-q) in line with our estimate. Volume improved q-o-q, but margins declined q-o-q. SAIL may just be able to maintain margins in 3Q, but margin pressure should intensify in 4Q as full pass through of higher coking cost could be tough. Employee costs could rise in 4Q given upcoming wage revision. Net debt to EBITDA should stay above 8x in the next two years. Valuation at 13.5x FY18E EBITDA is rich, in our view.
2Q EBITDA was in-line, but loss after tax was lower at R5.7 billion (JEF estimates R6.5 billion) due to lower tax. Sales volume grew 26% q-o-q to 3.6 million tonne, but EBITDA/tonne declined R510/tonne q-o-q to R310/tonne (in line with JEF estimate). Average realisation was down 5% q-o-q. Most cost heads including employee costs (-10.6 % q-o-q), power costs and overhead costs were lower than our estimate. Operating leverage gains due to stronger volumes also helped. However, this was largely offset by higher raw material/ stock adjustment costs.
Production was stable q-o-q at 3.4 million tonne. SAIL’s new blast furnace at Rourkela (RSP) is operating at 108% utilisation, but ramp-up of IISCO expansion continues to disappoint due to operational issues at its downstream wire rod (45% utilisation) and USM units.