SAIL’s Q1FY21 numbers surpassed estimates. Key highlights, Rs 4.8bn Ebitda (adjusted) loss due to lower shipments and realisation. Gross debt rose to Rs 544bn. Rs 5.9bn paid to Damodar Valley Corporation against its FY11-16 disputed claims. We see better days ahead due to, Uptick in sales volume/realisation in Q2FY21.
Reduction in inventory and debt to below Q4FY20 levels. Lower coking coal cost. In our view, SAIL is better placed compared to peers to improve its profitability owing to operating leverage benefits and iron ore integration. Maintain ‘BUY’ with TP of Rs 52 on 0.5x FY22E BV.
SAIL’s Q1FY21 performance was ahead of consensus. Key highlights, Blended realisation fell by Rs 3,500/t QoQ due to price dip and higher proportion of semis in the product mix. Sales volume dipped 30% YoY to 2.3mt owing to Covid-19 related demand woes. Loss of Rs 4.8bn at Ebitda level adjusted for inventory valuation benefits of Rs 803m. Net debt peaked out at Rs 544bn owing to payment of Rs 5.9bn to Damodar Valley Corporation. Going ahead, we expect performance to improve owing to the uptick in sales volume and realisation, SAIL estimates FY21 sales volume at 16mt (our estimate: 15mt). Realisation uptick of Rs 3,000-3,500/t in Q2FY21. Besides, lower coking coal price and improvement in coke rate (due to production ramp up) are likely to cut cost of production going ahead by ~Rs 2,000/t.
We expect SAIL to gain more from volume uptick compared to peers owing to its fixed cost heavy structure. As a result, we peg Ebitda/t at Rs 5,000 on average over balance FY21.
We expect SAIL’s performance to improve due to volume uptick and higher realisation. Besides, lower inventory and net debt reduction lend additional comfort. While there are certain risks with payout and receivables, we remain optimistic overall. Maintain ‘BUY/SP’ with TP of Rs 52. The stock is trading at 0.4x FY22E P/BV.