Steel Authority of India (SAIL) reported lower-than-expected EBITDA at Rs 34bn on the back of lower-than-expected volumes. Sales volume was down by ~10.3% QoQ. Significant increase in employee costs further impacted the EBITDA performance. While Q3FY22 net debt reduction is impressive, we see clear risks to the existing management guidance of SAIL being a net debt free entity by Q1FY23. Higher coking coal prices will likely severely impair the EBITDA performance going forward. Q3FY22 EBITDA/te declined by Rs 7,575/te QoQ. We see risks of a further EBITDA decline over next 4-5 quarters. Given the steep share price correction, we upgrade to HOLD from SELL with an unchanged target price of Rs 99/share.
Employee wage provisions have sprung up a negative surprise. With the approval of wage revision by the board, management now expects ~Rs 16bn of additional incidence in FY22E. Rs 4.25bn of actuarial valuation impact on account of the same has affected the Q3FY22 print. Management expects FY23 wage provision to be not more than Rs 105bn. This will be helped by retirement of ~4,000 personnel. Coking coal price increases to impact margins. Average price of coking coal in Q1FY22 was at Rs 11,480/te which increased to Rs 15,150/te during Q2FY22.
Q3FY22 coking coal prices were meaningfully higher at ~Rs 23,000-25,000/te. As per peer commentary Q4FY22 can see further increase of US$40-50/te. Management has previously guided for SAIL to be a net debt free entity by Q1FY23E; we see clear risks to actualisation of the guidance. While the Q3FY22 net debt performance has been commendable (Rs 30bn QoQ decline accompanying a muted operational performance), we look for incremental clarity on the same in the management call – there doesn’t seem to be much cash inflow from provisional pricing contracts as well. Expansion capex is about to pick up, given announced management plans of Rs 650bn across three plants. While SAIL has been able to manage working capital efficiently in 9MFY22, we expect the same to see additional deployment going forward given increased coking coal prices. To add to that, margin pressures are imminent given higher coking coal prices and SAIL’s ability to get additional cashflows given iron ore sales are also limited amid the recent correction in iron ore prices.
Upgrade to HOLD with a target of Rs 99/share (unchanged): Notwithstanding the present earnings scenario, we continue to ascribe ~0.65x P/B to FY23E. SAIL Board has declared an interim dividend of Rs 4/share. Valuations and key risks: We upgrade to HOLD from SELL with a price target of Rs 99/share (unchanged). We value the company at 0.65x P/B based on FY23E.
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