Regular deleveraging keeps SAIL’s growth prospects firm
PremiumWith the regular rise in operating performance, interest costs are on the decline, accruing further benefits for SAIL
Steel Authority of India Ltd (SAIL) continues to witness regular improvement in its performance. The steel cycle remains favourable and the rise in steel realizations is not only driving revenue but is also taking care of higher fixed costs.
The company reported record margins and its highest-ever earnings before interest, tax, depreciation and amortization (Ebitda) in the June quarter (Q1FY22).
Notably, it was the fourth consecutive quarter of profit at the operating level despite the impact of the lockdowns on sales. The sales volume at 3.3 million tonnes (mt) though declined by about one-fourth from 4.4 mt in Q4, realizations per tonne at ₹62,045 were much better than the ₹53,531 a tonne seen in Q4. This helped SAIL report Ebitda of ₹6,560 crore, up 7% sequentially despite standalone net revenues declining 11% sequentially.
What’s more, with the regular rise in operating performance, interest costs are on the decline, accruing further benefits. This meant that adjusted net profit growth of 8% sequentially surpassed Ebitda growth. The finance costs during Q1 at ₹503 crore were significantly lower than ₹540 crore in Q4 and ₹886 crore in the year-ago quarter.
Regular deleveraging is helping forward earnings growth prospects, too. In Q1, debt was further reduced by ₹5,100 crore to ₹32,590 crore. The company has further paid ₹2,000 crore in July, said Centrum Broking Ltd analysts, adding that in the absence of a major capex in FY22, they expect net debt to reduce to ₹19,300 crore by FY22-end and to ₹14,500 crore by FY23-end.
The Street, however, will be watchful on rising coking coal and employee expenses. JM Financial Institutional Securities analysts, however, said the structural weaknesses of high staff costs and relatively lower spreads than peers remain less pronounced in the current strong steel cycle.
The impact of the monsoon in the September quarter may also see some softness in realizations that nevertheless will pick up by the end of the quarter. Operating performance thereby may remain strong.
Meanwhile, the company is also looking at the next phase of capacity expansion. It may expand capacities by 12-14 mt at its steel plants at Bokaro and Rourkela. Though meaningful investments on capex may start from FY24, analysts remain cautious due to its “poor execution track record".
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