SAIL’s volumes, deleveraging give its investors a boost of confidence

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 2 min read . Updated: 04 Apr 2021, 11:57 PM IST Ujjval Jauhari

The company has reduced its gross debt by ₹16,150 crore to an outstanding of ₹35,330 crore, as on 31 March

Steel Authority of India Ltd (SAIL) impressed with strong provisional numbers on production and sales for the March quarter. Crude steel production grew 6% year-on-year and was up 4% sequentially as well. Sales metrics, too, showed a similar performance. It was not surprising that at 4.27 million tonnes, sales grew 14% year-on-year because of a low base. But the sequential 3% growth is a cause for cheer.

The key reason behind the company’s strong performance is the revival in steel demand growth and improvement in realizations. Steel has been one of the biggest beneficiaries in the recent commodity price increases globally.

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Realizations began improving since the easing of lockdowns and continue on that trajectory. Not surprisingly, the street’s confidence on the stock has further improved. With the over 6% gains on Thursday, the share price has grown four folds over the last one year. The stock is currently trading at 7.5 times FY22 earnings estimates.

Catching pace
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Catching pace

SAIL has a higher cost structure compared to peers. Ergo, improving realization benefits the company, according to analysts. The company had reported an operating loss for the June quarter but has seen a quick turnaround since then. It had reported earnings before interest, tax, depreciation and amortization (Ebitda) per tonne of ₹12,241 during the December quarter. Analysts expect this to improve to ₹15,000 for the March quarter. “Given a strong steel cycle, we expect realization to remain high in the medium term, which, coupled with an inefficient cost structure (higher conversion cost), should provide disproportionate margin gains to SAIL," said Motilal Oswal Financial Services Ltd analysts.

Meanwhile, an improvement in cash flows will help the company reduce its debt pile, another positive for valuations. In its release, SAIL said that it has reduced its gross debt by ₹16,150 crore to an outstanding of ₹35,330 crore as on 31 March.

The outlook for FY22 too is robust. Steel realizations are expected to continue its northward journey. A recent Nomura report on weekly trends in steel pointed out that hot rolled coil prices are likely to be increased by steel mills in April following strong domestic demand. These expectations are based on the fact that local steel is cheaper compared to imported steel on a landed cost basis. Trade channels have hiked prices by ₹1,500- 2,000 per tonne in anticipation of such a hike, the report said.

This adds to SAIL’s benefits as every ₹1,000 per tonne of higher steel price improves SAIL’s FY22 Ebitda by 11%, according to analysts. The company also enjoys captive iron-ore supplies that insulate it from raw material cost pressures.

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The only downside is the emergence of a second covid wave, which threatens to disrupt mobility and supply chains. This could weigh on steel demand, too.

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