Stock corner: ‘Neutral’ on SAIL, weak prices to offset benefit of volume

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Published: November 19, 2019 2:38:45 AM

Sales volumes declined 3% QoQ to 3.1mt due to subdued market conditions. We expect volumes to recover in 2HFY20 as demand improves. Product spreads were flat QoQ at INR24,712.

SAIL share, SAIL india, SAIL, SAIL share price, market news, Revenue was down 5% QoQ at Rs 14,100 crore (our estimate: Rs 13,600 crore) due to slightly lower volumes and realisations.

Operational miss on lower realisation, higher cost: EBITDA was down 27% QoQ at Rs 1,160 crore (our estimate: Rs 600 crore) in 2QFY20 due to a 2% QoQ decline in realisation to Rs 44,883/t (our estimate: Rs 42,652). As a result, EBITDA/tonne declined 24% QoQ to Rs 3,684. Sales volumes were also down 3% QoQ to 3.1mt (our estimate: 3.2mt). SAIL reported a loss of Rs 520 crore at the PBT level and Rs 340 crore at the PAT level (our estimate: loss of Rs 1,000 crore).

Revenue was down 5% QoQ at Rs 14,100 crore (our estimate: Rs 13,600 crore) due to slightly lower volumes and realisations. Reported EBITDA declined 27% QoQ to Rs 1,160 crore, which included Rs 430 crore of revenue booked on higher price finalised for prior-period sales of rails to the Indian Railways. Excluding this benefit, EBITDA was down 54% QoQ to Rs 730 crore (our estimate: Rs 600 crore).

Sales volumes declined 3% QoQ to 3.1mt due to subdued market conditions. We expect volumes to recover in 2HFY20 as demand improves. Product spreads were flat QoQ at INR24,712.

For 2QFY20, we estimate revenue/EBITDA to decline 4%/39% YoY to Rs 330/Rs 29b. In 1HFY20, cash flow from operations was – Rs 2,110 crore due to an increase in working capital (higher inventories due to weak demand). FCF was at – Rs 4,200 crore. Reported debt stood at Rs 51,600 crore.

Weak steel prices to offset benefit of volume ramp-up. We expect sales volumes CAGR of ~8% to 16mt over FY19-21 as demand improves and the company ramps up capacity. SAIL’s average realisation in Oct’19 was down by ~Rs 2,000/t from its 2Q average, which will impact margins. We cut our FY20/21 EBITDA estimate by 28%/10% due to lower realisation. We value the stock at 6.5x FY21E EV/EBITDA at Rs 34/sh. Maintain ‘neutral’.

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