Steel Authority of India rating – Buy: Q2 performance beat consensus estimates

By: |
November 06, 2021 5:00 AM

While coking coal cost is a headwind, cut in debt lends firm an edge; TP revised to Rs 170; ‘Buy’ maintained

High coking coal cost likely to impact near-term profitability:Going ahead, despite higher coking coal prices in the near term, management expects to be net debt-free by end-Q1FY23e. Besides, FY22 sales volume is likely to be 17mt.

SAIL’s Q2FY22 EBITDA at Rs 70.2 bn (up 6.9% q-o-q) surpassed consensus forecast. Key points: (i) Sales volume rose 28% q-o-q to 4.28mt. (ii) Ebitda/t dropped 17% q-o-q due to higher coking coal cost. (iii) Gross debt reduction of Rs 78 bn q-o-q. (iv) Second interim dividend of Rs 4/share. Going ahead, mgmt expects the company to be net debt-free by end-Q1FY23e and FY22e sales volume at 17mt.

In our view, despite near-term coking coal cost pressure, SAIL is in a sweet spot owing to significant debt reduction already achieved and its ability to return cash to shareholders. Retain ‘Buy’ with a TP of Rs 170 (earlier Rs 180) at 5x Ebitda as we roll over to FY23e earnings.

Debt reduction, dividend and volume growth — all come together: SAIL’s Q2FY22 performance surpassed consensus. Key points: (i) Volume rose 28% q-o-q to 4.28mt owing to demand from infrastructure/construction sectors with exports making up 11% of overall. (ii) Ebitda/t at Rs 16,395 owing to higher coking coal cost (up $50/t q-o-q). (iii) Gross debt down by Rs 78 bn in Q2FY22. (iv) Dividend of Rs 4/share, taking the total interim dividend to Rs 5.8/share so far in FY22. (v) Incremental impact of wage revision likely to be Rs 16 bn. Going ahead, despite higher coking coal prices in the near term, management expects to be net debt-free by end-Q1FY23e. Besides, FY22 sales volume is likely to be 17mt.

High coking coal cost likely to impact near-term profitability:

Coking coal cost increased by $50/t q-o-q. Furthermore, coking coal cost went up to Rs 23,000/t in Oct-21 compared with Rs 15,150/t in Q2FY22. We expect coking coal cost in Q3FY22 to be up Rs 9,000/t q-o-q. While this is partially expected to be offset by price hikes of Rs 3,500/t for longs and Rs 1,700/t for flats already taken in Oct-21, management does not expect price hike to be enough to prevent a compression in margins. That said, management does not expect coking coal price to persist at $400/t either. In our view, the impact of high coking coal price would be temporary while the advantage of debt reduction is likely to be sustainable.

Outlook: Benefitting from lower debt — Despite the near-term cost headwinds, we see SAIL having an edge—having reduced debt significantly over the past four quarters. Maintain ‘BUY/SO’ with a revised TP of Rs 170 at 5x Ebitda as we roll over to FY23e earnings.

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