Steel Authority of India’s (SAIL) management has now guided for the company to be net debt free by end-FY23 (vs previous guidance to be net debt free by Q1FY23). Higher raw material prices affected profitability, as the impact of coking coal alone was ~4bn during Q3FY22. Further, management has guided for capex 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 ~16bn of additional incidence in FY22E. 4.25bn of actuarial valuation impact on account of the same has affected the Q3FY22 print. FY23 wage costs are expected to be ~115bn-120bn, helped by retirement of ~4,000 personnel.
Best-ever production; further scope to increase utilisation: Hot metal production was at 4.886 mnte (vs 4.798mnte YoY), crude steel production at 4.531mnte (vs 4.368mnte YoY) and saleable steel production at 4.365mnte (vs 4.153mnte YoY). Furthermore, during 9MFY22, production of hot metal, crude steel and saleable steel grew ~19%, ~19.8% and ~22.3% YoY, respectively.
Higher coking coal prices to impact margins. 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 increase further during Q4FY22 which is likely to impact profitability. As per peers’ commentary, Q4FY22 can see further increase of US$40-50/te.
Management guided SAIL to be a net debt free entity by FY23E; we see clear risks to actualisation of the guidance. Management has guided for SAIL to be net debt free by FY23E, depending upon market scenario. Q3FY22 net debt performance has been 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 of650bn across three plants. 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 is also limited as FY22E has shown.
Valuations and key risks: We maintain HOLD with a price target of `99/share (unchanged). We value the company at 0.65x P/B based on FY23E. Key upside and downside risks: Key downside risks are i) cycle corrects itself and ii) higher organic capex announcement. Key upside risks are i) Higher iron ore sales to continue fetching additional EBITDA and ii) better-than-expected deleveraging over FY21-23E.
