SAIL rating: Reduce — Sharp rise in stock price unjustified

Workers stand near a control room inside the steel tube mill unit at the Steel Authority of India Ltd. (SAIL) Rourkela Steel Plant (RSP) in Rourkela district, Odisha, India (Image: Bloomberg)

Steel Authority of India’s (SAIL’s) Q4FY20 Ebitda (adjusted for one-offs) of Rs 16.5 bn fell 25% y-o-y. Key highlights:
(i) Ebitda/t (adjusted) at Rs 4,420/t was aided by higher realisation; (ii) sales volume fell 9% y-o-y to 3.74mt primarily due to lockdown-related impact; (iii) gross debt rose to a record Rs 512 bn. We believe the recent sharp uptick in the stock price is unjustified by fundamentals as: (i) Inventory is unlikely to fall owing to limited sales of sub-grade iron ore fines; (ii) debt is estimated to rise to Rs 542 bn by FY21-end; (iii) receivables locked up with Indian Railways. Maintain Reduce with TP of Rs 28 (exit multiple of 0.35x FY22e BV).

Ebitda slightly below estimate: Highlights: (i) Blended realisation of Rs 43,304/t (down mere 3% y-o-y) surpassed estimate; (ii) operating expenses and staff cost were ahead of estimates; (iii) sharp jump in receivables to Rs 88 bn.
Going ahead, we expect earnings to remain under pressure due to: (i) Adverse operating leverage impact; (ii) lower realisation; (iii) lower reliance on exports. However, lower global coking coal price and higher PCI injection should aid cost.

Cash accretion an uphill task in near term: Cash accretion seems a formidable task as: (i) Sales of sub-grade iron ore fines likely to be spread over four-five years; (ii) receivables expected to be elevated; (iii) high interest cost and capex commitment of Rs 40 bn each; (iv) gross debt likely to swell to Rs542 bn in FY21e. Hence, leverage is likely to remain at an elevated level.

Outlook: Challenges persist—SAIL’s relative performance is likely to remain subdued compared to peers owing to high-cost structure and lower realisation & volumes. Additionally, high leverage and capex commitments are likely to keep cash flows constrained. The stock is trading at 13.4x FY22e Ebitda. We maintain ‘REDUCE/SU’.