Analysts Corner: Maintaining the ‘grip’ on SAIL with a price target of Rs 99

Rising commodity prices affected profitability, with the impact of coking coal alone being around 4 billion in Q3FY22. In addition, management has forecast capital expenditure of approximately 8,000 crore for FY23 on an execution basis.

Steel Authority of India (SAIL) management has now indicated that the company will be net debt free by the end of FY23 (vs. previous forecast of being net debt free by the end of FY23). first quarter of fiscal year 23). Rising commodity prices affected profitability, with the impact of coking coal alone being around 4 billion in Q3FY22. In addition, management guided capital expenditures of ~8,000 crore in FY23 based on execution. Employee costs increased significantly during 9MFY22 and are expected to be maintained at ~1,150 crore-1,200 crore from FY23E. Significant deleveraging can happen if steel prices sustain, yet headwinds are seen to be building up – prices, costs, expansion capex. Higher coking coal prices will severely impair the EBITDA performance in Q4FY22. We see risks of a further EBITDA decline over next 4-5 quarters. We maintain HOLD. Employee wage provisions have sprung up a negative surprise. With the approval of wage revision by the board in Q2FY22, management now expects ~16 billion additional impact in fiscal year 22E. 4.25bn of actuarial valuation impact on account of the same has affected the Q3FY22 print. FY23 wage costs are expected to be ~115 billion to 120 billion, helped by the retirement of around 4,000 people.

The best production of all time; additional possibility to increase utilization: hot metal production amounted to 4.886 mnt (compared to 4.798 mnt year-on-year), crude steel production to 4.531 mnt (compared to 4.368 mnt year-on-year) and the production of marketable steel at 4.365 mnte (against 4.153 mnte in 1 year). In addition, in FY9MFY22, pig iron, crude steel and salable steel production increased by approximately 19%, approximately 19.8% and approximately 22.3% respectively in year-on-year.

Rising coking coal prices will impact margins. The average price of coking coal was ~25,000/te in Q3FY22 vs ~15,150/te in the previous quarter. Coking coal prices are expected to rise further in Q4FY22, which should impact profitability. Based on peer feedback, T4FY22 may see a further increase of US$40-50/te.

Management has guided SAIL to be a net-debt-free entity by FY23E; we see clear risks for updating guidance. Management has expected SAIL to be net debt free by FY23E, based on the market scenario. Net debt performance in Q3FY22 was commendable (30bn QoQ decline accompanying a muted operational performance). SAIL was able to manage working capital efficiently in 9MFY22 as the cash flow from operations was ~Rs224bn (meaningful release from decline in debtors). We expect additional deployment of working capital going forward given increased coking coal prices. Expansion capex is about to pick up, given announced management plans of650 billion spread over three factories. To add to this, margin pressures are imminent given rising coking coal prices, and SAIL’s ability to generate additional cash flow given iron ore sales is also limited, as the showed exercise 22E.

Valuations and main risks: We maintain HOLD with a price target of `99/share (unchanged). We value the company at 0.65x P/B based on FY23E. Main upside and downside risks: The main downside risks are i) the cycle corrects itself and ii) the announcement of an increase in organic investments. The main upside risks are i) higher iron ore sales to continue to generate incremental EBITDA and ii) better than expected deleveraging in FY21-23E.

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