SAIL’s relative performance is likely to remain subdued with expected Ebitda/t likely to remain at Rs 5,600 through to FY21e.
Steel Authority of India’s (SAIL’s) Q1FY20 Ebitda of Rs 16 bn surpassed consensus on lower-than-expected cost. Key highlights: (i) Ebitda/t at Rs 4,869 plunged 38% y-o-y due to lower realisation; (ii) sales volume stayed flat y-o-y at 3.25mt (down 21% q-o-q); and (iii) borrowing rose to the highest ever of `485 bn. Going ahead, we expect stock performance to be subdued owing to: (i) Ebitda/t constrained at Rs 5,600 on average owing to subdued price; (ii) and high capex and debt. Maintain Reduce with target price of `33 (exit multiple of 6.3x December 2020e Ebitda).
Good Q1FY20 showing on lower cost
SAIL’s Q1FY20 Ebitda of Rs 16 bn surpassed consensus. Key highlights:
(i) blended realisation fell 6% y-o-y to Rs 45,614; (ii) sales volume was flat y-o-y (down 21% q-o-q) at 3.25mt; and
(iii) interest cost rose 4% y-o-y to `7.8 bn. Going ahead, we expect Ebitda/t to be constrained at `5,600 on an average owing to (i) further weakening of realisation; (ii) and sustained high proportion of semis until SMS-3 at Durgapur plant ramps up. Furthermore, we expect muted volume ramp-up and the ~16-mt saleable steel production in FY20 to be challenging amidst inventory build-up and curtailing production.
High cash commitments amidst operating headwinds
Despite management guiding for debt to stay below Rs 440 bn, as of Q1FY20 end it stands at Rs 485 bn—the highest-ever level for SAIL. Besides, we are concerned on cash commitments, capex of Rs 40 bn in FY20e; and Rs 32-bn debt repayment obligation. These are expected to account for bulk of Ebitda amidst a challenging operating environment besieged by weak prices.
Outlook and valuation: Best behind; maintain ‘REDUCE’
SAIL’s relative performance is likely to remain subdued with expected Ebitda/t likely to remain at Rs 5,600 through to FY21e. Additionally, cash commitment may not aid further deleveraging. We maintain ‘REDUCE/SU’ with a target price of Rs 33.