Home >Markets >Mark To Market >Lower volume growth and tepid realisations hinder SAIL’s progress
SAIL has formed joint venture firms in different areas, namely power generation, rail wagon manufacturing, slag cement production, securing coking coal supplies from overseas sources, among others. Photo: Mint
SAIL has formed joint venture firms in different areas, namely power generation, rail wagon manufacturing, slag cement production, securing coking coal supplies from overseas sources, among others. Photo: Mint

Lower volume growth and tepid realisations hinder SAIL’s progress

  • Analysts have been scaling down volume growth for the sector this year given the weak economic conditions. Hence, it seems unlikely that steel prices will recover drastically

MUMBAI: Shares of Steel Authority of India Ltd may have rallied 20% in the past month, but there is little upside left in the stock now. The company's Q4 performance was weaker than expected. Besides, steel demand and prices may remain subdued in the coming quarters. The stock traded flat on Monday.

While average realisations in Q4 improved about 7% sequentially, with steel prices showing a marginal recovery, overall performance took a beating. Volumes were lower during January-March, falling about 10% quarter-on-quarter. That dragged down Q4 revenues about 3% from a quarter ago. These figures were lower than the Street’s estimates.

But thanks to better realisations, operating efficiency per tonne improved. This expanded Ebitda per tonne as well. Ebitda is earnings before interest, tax, depreciation and amortization.

For now, the outlook for the steel sector remains uninspiring. The lockdown has slammed the brakes on construction activity and demand for steel from other sectors is unlikely to be significant. Analysts have been scaling down volume growth for the sector this year given the weak economic conditions. Hence, it seems unlikely that steel prices will recover drastically.

A higher operating-cost structure may also weigh on cash flows in the coming quarters, according to analysts. Also, rising debt is particularly worrying when cash flows could be lower. "Net debt stood at 53,400 crore at FY20-end against 44,500 crore at FY19-end. FY20 net debt to Ebitda stood at 9.3 times," said analysts at Motilal Oswal Financial Services in a client note.

Some of the growth slowdown could be offset by lower input costs as iron ore prices are soft. The outlook for some steel stocks could be subdued if the recovery is prolonged. Besides, SAIL’s enterprise-value-to-Ebitda for the year is expected to shoot up considerably in FY21 thus making the stock a tad expensive. A sharp recovery is being pencilled in volumes for FY22, but that may still see any major uptick in the stock given the weak cashflows.

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