Steel Authority of India Rating: hold: A robust performance by the company

Workers stand near a control room inside the steel tube mill unit at the Steel Authority of India Ltd. (SAIL) Rourkela Steel Plant (RSP) in Rourkela district, Odisha, India, on Friday, June 21, 2019. India’s annual steel consumption is close to 100 million tons and there are prospects for further growth from Prime Minister Narendra Modi's push to build infrastructure. Photographer: Dhiraj Singh/Bloomberg

SAIL’s Q4FY21 performance came in line. Key points: (i) Ebitda/t shot up 3.2x y-o-y to Rs 14,145 due to both higher realisation and volume; (ii) debt reduction of 30% y-o-y in FY21 aided by working capital unlocking of Rs 64 bn; (iii) interest cost plunged 41% y-o-y to Rs 5.4 bn. Management has guided for 18.35mt of sales volume and Rs 100 bn of further debt reduction in FY22e.

Going ahead, we expect earnings to stay firm in H1FY22 owing to the sharp run- up in prices. However, we expect the cost structure to inch up as well due to higher iron ore and manpower costs. All in all, we perceive balanced risk-reward. Maintain Hold with an unchanged TP of Rs 140 on 4.5x Q2FY23e Ebitda.

Robust performance and vigorous balance sheet clean-up
SAIL’s Q4FY21 performance met consensus estimates. Key points: (i) Ebitda/t was up 3.2x y-o-y at Rs 14,145 due to both realisation (up 24% y-o-y) and sales volume (up 16% y-o-y) uptick; (ii) working capital unlocking mainly due to a sharp reduction in inventory (March-21: 0.8mt) facilitated gross debt reduction of ~Rs 180 bn from May-21 peak of Rs 538 bn; iii) interest cost slid 41% y-o-y to Rs 5.4 bn as the company both repaid/refinanced high-cost long-term debt; (iv) the company settled an entry tax dispute of Rs 1.7 bn with West Bengal by availing the amnesty scheme.

Going ahead, the company expects FY22 sales volume at 18.35mt. Taking cognisance of prevailing prices and outlook, we expect significant consensus upgrades. Our FY22e/FY23e Ebitda is 32%/15% ahead of consensus at present.

Fixed and variable costs might inch up
We expect FY22/FY23e Ebitda/t at Rs 16,470/11,460, lower than peers as: (i) FY22e manpower cost is likely to be Rs 105 bn; and (ii) additional premium of 22.5% on iron ore mined from Jharkhand for captive use is likely to inflate SAIL’s raw material costs. Besides, we see limited advantage for the company from robust export prices due to its higher domestic focus.

Outlook: Fairly priced
Despite likely significant consensus upgrades, we see balanced risk-reward for SAIL as the benefit of higher prices is likely to be lower than peers and cost escalation is impending. Maintain ‘HOLD/SN’.