Home >Markets >Mark To Market >SAIL’s prospects are bright, but debt reduction and volume growth are key

Steel Authority of India Ltd’s (SAIL) prospects have improved after the recent increase in steel demand and realizations. The 65% surge in the share price since October shows that investors have taken notice of the improvement. Indeed, the company has already increased its capacity to 18 million tonnes (mt) earlier in FY19 itself. This expansion did not benefit immediately considering the weak steel cycle.

That said, SAIL’s September quarter metrics did not disappoint and showed the effects of unlocking of the economy. The company’s per tonne Ebitda (earnings before interest, tax, depreciation and amortization) was at 4,518, compared with an operating loss in the June quarter.

But analysts are not impressed, considering the better performance by peers. Sector majors such as Tata Steel Ltd, JSW Steel Ltd and Jindal Steel and Power Ltd had reported Ebitda per tonne in the range of 10,136- 13,247.

Improving metrics
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Improving metrics

SAIL also needs to further work on cost structure, say analysts.

But there are upsides emerging now. SAIL has a large portion of long products in its portfolio, which are used in construction activities. The improvement in steel demand and realizations during Q2 was led by a rise in demand and realizations for flat steel products (used in the manufacturing of automobiles and white goods, among others).

After the end of the monsoon season, the demand and realizations for long products is picking up pace, and that should help.

The steelmaker has also taken significant price increases during the ongoing quarter. The extent of the benefits here, however, remains to be seen.

Analysts at Phillip Capital India Research said that although the blended price hike has been about 9,500 till date, overall blended realizations are still lower than the FY18 peak. Nevertheless, there is still scope for more price hikes as hot-rolled coil (HRC) export prices are still about 2,000 per tonne higher than domestic prices.

Meanwhile, benefits for the company are likely to accrue from captive iron ore as well. Not only do captive supplies insulate its production costs from the impact of rising iron-ore price (international prices near all-time highs), SAIL has also been allowed to sell some iron ore in the open market. This can boost its revenues and earnings further.

Importantly, sales volumes are expected to improve during the second half and the company is working on reducing its debt. Its net debt-to-equity stood at close to 1.2 times, which can come down with its planned debt reduction by 4,000-4,500 crore during FY21. Investors would also keep an eye on these metrics.

“Healthy volumes and deleveraging playing out drives our rating upgrade for SAIL," said analysts at IIFL Securities Ltd.

Analysts thereby are expecting better days ahead for SAIL.

The stock ended at 55.35 on Monday. At this level, it is trading at 11.5 times one-year forward earnings estimates, which analysts term reasonable. Further upside hinges on the progress of the execution in terms of volume growth and debt reduction.

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