HOLD

Results Update SAIL Target Price

12th Aug 2022 Steel 75

Outlook Challenging; Maintain HOLD

(CMP as of 11th Aug, 2022)
SAIL delivered weak numbers in Q1FY23. This was largely anticipated due to lower sales
CMP (Rs) 79
volumes owing to traders de-stocking and higher coking coal costs in the quarter. Saleable steel
Upside/Downside (%) -4%
production (up 9% YoY/down 8% QoQ) stood firm, slightly above our estimate. However, saleable
steel sales (down 4%/32% YoY/QoQ) fell more than our expectation, a miss of 12% vs. our High/Low (Rs) 144/64
estimate. This was on account of aggressive destocking by traders in response to the downward Market cap (Cr) 32,565
trajectory of steel prices throughout Q1FY23 (led by lower demand and levy of export duty). The Avg. daily vol. (6m) Shrs. 3,80,82,767
average benchmark domestic HRC price stood up 7%/3% YoY/QoQ in Q1FY23. However, since
No. of shares (Cr) 413
the peak of Apr’22, the prices corrected by 21% by the end of Jun’22. Despite the 32% QoQ drop
in sales volume, revenue de-grew by only 22% QoQ and missed our estimate by only 3% due to
Shareholding (%)
higher NSR in the quarter (up 24%/12% YoY/QoQ). Realisation outpaced the benchmark steel
prices growth, led by a better product mix (semis down to 14% in Q1FY23 vs. 19.3% in FY22) Dec-21 Mar-22 Jun-22
and higher realisations from railways. Higher coking coal drove EBITDA down by 65%/47% Promoter 65.00 65.00 65.00
YoY/QoQ but stood ahead of our estimate by 12% led by the build-up of high-cost inventory. The FIIs 4.41 4.58 4.22
company’s PAT de-grew further down by 79%/67% YoY/QoQ due to higher depreciation and
MFs / UTI 3.91 3.67 2.59
lower other income.
Banks / FIs 0.02 0.11 0.01
Key Concall Highlights Others 26.66 26.64 28.18

 Coking coal consumption costs: The spot coking coal prices stood significantly high in Financial & Valuations
Mar-May’22 (~$500-600/t) due to a supply crunch. The spot prices have corrected Y/E Mar (Rs Cr) FY23E FY24E FY25E
significantly from the peak to a current level at $230-240/t. However, the benefit of the lower
Net Sales 91,043 89,844 92,968
coal prices will flow through only from mid-Aug’22.
EBITDA 12,805 11,379 13,460
 Increase in Net debt in Q1FY23: Gross debt increased to Rs 22,101 Cr in Q1FY23 Net Profit 6,035 5,084 6,545
(Q4FY22 at Rs 19,385 Cr), while cash came down marginally in Q1FY23 from Rs 786 Cr in EPS (Rs.) 14.6 12.3 15.8
Q4FY22. The increase in net debt is mainly due to higher WC requirement on coal PER (x) 5.4 6.4 5.0
purchases (WC increase by Rs 8,000 Cr) along with Capex spend of Rs 1,000 Cr. Inventory
P/BV (x) 5.7 5.4 5.0
days jumped to 110 days (from 70 days in Q4 and 99 days in Q1FY22).
EV/EBITDA (x) 3.7 3.8 2.8
 Capex guidance unchanged: In Q1FY23, Capex stood at Rs 1,000 Cr, against annual ROE (%) 10.9 8.7 10.5
guidance of Rs 8,000 Cr for FY23. The management keeps its guidance unchanged,
expects the orders to fructify this year, and spending to gather pace from Oct-Nov’22. The Change in Estimates (%)
company has multiple projects in the pipeline mainly toward de-bottlenecking on the Y/E Mar FY23E FY24E FY25E
upstream side.
Sales -10% -2% 5%
 Sales volume guidance: The management ruled out any shortfall on its sales volume EBITDA 27% -7% 16%
target for the year. In Q1FY23, the saleable steel volumes stood down at 3.15 MT down PAT 38% -9% 28%
5%/33% YoY/QoQ. It stated that it foresees domestic consumption to increase post-
monsoon with pick up in construction and infrastructure activities. The company had sales ESG disclosure Score**
of 1.4 MT in Jul’22, and its targeting maximum sales in Aug’22. Environmental Disclosure 39.78

Social Disclosure Score 44.17

Outlook & Valuation
Governance Disclosure Score 82.36
SAIL faced a twin challenge of higher coking coal cost and lower sales volume due to traders' de-
Total ESG Disclosure Score 55.47
stocking led by falling steel prices in Q1FY23. We expect margins to remain under pressure in
Source: Bloomberg, Scale: 0.1-100
Q2FY23 as steel realisations are down by 15% from the Q1FY23 average, while the benefit from **Note: This score measures the amount of ESG data a company reports
publicly and does not measure the company's performance on any data
the drop in coking coal prices will flow through only by mid-Aug’22. In Q3FY23, the management point. All scores are based on 2020 disclosures
expects a pick-up in steel demand which possibly could support margins. We remain cautious
about the steel and coking coal price trajectory. The company’s net debt is up and inventory days
Relative performance
have also increased, the return on Capex is not very visible in the immediate term while the steel
prices remain volatile. The risk of a further increase in debt can not be ruled out. We maintain 425
our HOLD rating on SAIL. We value the company at 4.0x FY24E EBITDA to arrive at a target 325
price of Rs 75/share (Unchanged from the Previous TP), against the CMP of Rs 79/share. 225
The TP implies a downside of 4% from the CMP. 125
25
Apr-21

Dec-21
Aug-20

Aug-22
Jan-20

Key Financials (Consolidated)

(Rs Cr) FY22A FY23E FY24E FY25E
Net Sales 1,03,477 91,043 89,844 92,968
SAIL BSE Sensex
EBITDA 21,342 12,805 11,379 13,460
Net Profit 12,243 6,035 5,084 6,545 Source: Capitaline, Axis Securities
EPS (Rs.) 29.6 14.6 12.3 15.8
PER (x) 2.7 5.4 6.4 5.0 Aditya Welekar
P/BV (x) 6.0 5.7 5.4 5.0 Research Analyst
EV/EBITDA (x) 2.4 3.7 3.8 2.8 Email: aditya.welekar@axissecurities.in
ROE (%) 24.6 10.9 8.7 10.5
Source: Company, Axis Research

1
Key Concall Highlights (Cont...)
 Coking Coal consumption cost: In Q1FY23 the imported coking coal cost stood at Rs 39,500/t vs..~Rs 29,000/t in Q4FY22. In Jul’22
it has corrected marginally to~Rs 38,000/t but is expected to come down by Rs 4,000-5,000/t in August and come down further in
September. As a result, the Q2 coal price will be lower QoQ. The company blends the imported coal with indigenous coal, which costs
lower at Rs 13,000/t and forms ~14-15% of total coal cost.

 Net sales Realisations (NSR): In Q1FY23 blended average net sales realisation stood at Rs 66,829/t (Q4FY22 blended NSR: Rs
59,495/t and Q1FY22: 53,929/t). With the fall in steel prices, the Realisation in June stood at Rs 58,000/t and declined further in July at
Rs 57,000/t and in August the NSR is almost flat MoM. The Management expects some improvement from August onwards with the
pick up in demand post monsoon. SAIL has higher long products in its portfolio as compared to Peers and management said it
witnessed more resilience in long products prices against flat products. The difference between the flat and long NSR in Q1 stood at
~Rs 7,000-8,000/t.

 Wage bill: The company expects employee expenses to soften to a steady-state level of Rs 12,000 Cr from Rs 12,862 Cr in FY22 as it
has already taken a major hit on the wage bill led by the actuarial valuation of leave encashment and gratuity (Rs 700-800 Cr impact),
and employee training cost in FY22.The focus will be on productivity improvement.

 Other Points:
 No inventory losses booked.
 Sale of iron ore: No sales of iron ore in Q1FY23, waiting for the right price for sales.
 Higher other expenses in Q1FY23: Royalty cost went up by Rs 400Cr and booked forex losses of ~Rs 500Cr.
 Export Duty Revocation: Not much headway on export tariff, following up with Indian steel association.

2
Change in Estimates

New Old % Change

FY23E FY24E FY25E FY23E FY24E FY25E FY23E FY24E FY25E

Sales 91,043 89,844 92,968 1,01,255 91,835 88,795 -10% -2% 5%

EBITDA 12,805 11,379 13,460 10,053 12,242 11,627 27% -7% 16%

PAT 6,035 5,084 6,545 4,362 5,570 5,108 38% -9% 28%

Source: Company, Axis Securities

Results Review
Q1 FY22 Q4 FY22 Q1 FY23 Q1 FY23
Actual Actual Axis Sec Est Actual YoY QoQ Vs Axis
Saleable steel Production (Mn t) 3.77 4.44 4.04 4.10 9% -8% 1%
Saleable steel Sales (Mn t) 3.33 4.71 3.64 3.20 -4% -32% -12%

Revenues 20,643 30,759 24,735 24,029 16% -22% -3%

Consumption of Raw Materials 6,374 14,564 14,669 17,701 178% 22% 21%
Increase/Decrease in Stocks -785 2,014 -1,181 -6,189 NA -407% NA
Employees Cost 2,773 3,035 2,911 3,019 9% -1% 4%
Other Expenses 5,713 6,807 6,284 7,196 26% 6% 15%
Total Expenditure 14,075 26,421 22,683 21,727 54% -18% -4%

EBITDA 6,568 4,338 2,052 2,302 -65% -47% 12%

EBITDA margin (%) 31.8% 14.1% 8.3% 9.6%
EBITDA per tonne (Rs/tonne) 17,422 9,769 5,079 5,614 -68% -43% 11%

Depreciation 1,026 1,144 1,108 1,194 16% 4% 8%

Other Income 112 416 247 171 53% -59% -31%
Interest Expense 503 440 216 374 -26% -15% 73%
Less: Exceptional Items - 11 - - NA -100% NA
Tax 1,315 800 292 243 -82% -70% -17%
Share of P/L of Associates 62 98 79 143 132% 45% 81%

PAT excl. Exceptional 3,897 2,468 762 804 -79% -67% 6%

Reported PAT 3,897 2,479 762 804 -79% -68% 6%

Underlying EPS (Rs/sh) 9.44 5.98 1.84 1.95 -79% -67% 6%

Reported EPS (Rs/sh) 9.44 6.00 1.84 1.95 -79% -68% 6%
Source: Company, Axis Securities

3
Financials (consolidated)
Profit & Loss (Rs Cr)
Y/E March FY 22A FY 23E FY 24E FY 25E

Total Operating income 1,03,477 91,043 89,844 92,968

Consumption of Raw Materials 42,890 46,054 39,682 40,099

Increase/Decrease in Stocks (280) (6,450) (356) (364)
Employees Cost 12,862 11,898 12,136 12,500
Other Expenses 26,663 26,735 27,003 27,273
Total Expenditure 82,135 78,238 78,465 79,508
EBITDA 21,342 12,805 11,379 13,460
Depreciation and Amortization 4,275 4,776 4,973 5,169
EBIT 17,067 8,029 6,406 8,291

Other Income 859 774 898 930

Share Of P/L Of Associates (Net of Tax) 418 542 535 553
Less: Interest & Fin Chg. 1,698 996 806 662
Less: Exceptional Items 353 - - -
Profit before tax 16,292 8,348 7,033 9,112
Provision for Tax 4,048 2,313 1,950 2,568
Reported PAT 12,243 6,035 5,084 6,545

EPS (Rs/sh) 29.6 14.6 12.3 15.8

DPS (Rs/sh) 8.8 4.3 3.6 4.7

Source: Company, Axis Securities

Balance Sheet (Rs Cr)

Y/E March FY 22A FY 23E FY 24E FY 25E
Net Block 68,383 68,506 68,434 68,164
Other Tangible assets 3,835 3,835 3,835 3,835
CWIP 4,017 6,117 8,217 10,317
Intangible assets 1,459 1,459 1,459 1,459
Investments 3,757 3,757 3,757 3,757
Inventories 24,167 21,263 20,983 21,713
Trade Receivables 4,771 4,198 4,142 4,286
Cash / Bank balance 786 4,240 4,605 8,022
Misc. Assets 8,934 8,934 8,934 8,934
Total assets 1,20,109 1,22,310 1,24,366 1,30,488

Equity capital 4,131 4,131 4,131 4,131

Reserves 50,081 52,502 55,804 60,848
Minority Interests 0 0 0 0
Borrowings 17,284 16,784 13,784 11,784
Deferred tax Liabilities 5,358 7,672 9,621 12,189
Other Liabilities and Provision 19,818 19,818 19,818 19,818
Provisions 6,515 6,515 6,515 6,515
Trade Payables 16,922 14,889 14,692 15,203
Capital employed 1,20,109 1,22,310 1,24,366 1,30,488

Source: Company, Axis Securities

4
Cash Flow (Rs Cr)
Y/E March FY 22A FY 23E FY 24E FY 25E
Profit before tax 16,292 7,806 6,499 8,559
Depreciation 4,275 4,776 4,973 5,169
Interest Expenses 1,607 996 806 662
Non-operating / EO item (580) 542 535 553
Change in W/C 9,484 1,444 139 (363)
Income Tax (92) - - -
Operating Cash Flow 30,987 15,565 12,951 14,580
Capital Expenditure (3,665) (7,000) (7,000) (7,000)
Free cash Flow 27,321 8,565 5,951 7,580
Other Investments (310) - - -
Investing Cash Flow (3,976) (7,000) (7,000) (7,000)
Proceeds / (Repayment) of Borrowings (22,409) (500) (3,000) (2,000)
Finance cost paid (1,922) (996) (806) (662)
Dividend paid (3,067) (3,614) (1,781) (1,501)
Financing Cash Flow (27,398) (5,110) (5,587) (4,162)
Change in Cash (387) 3,454 364 3,418
Opening Cash 518 786 4,240 4,605
Closing Cash 132 4,240 4,605 8,022

Source: Company, Axis Securities

Ratio Analysis (%)

Y/E March FY 22A FY 23E FY 24E FY 25E
Operational Ratios
Sales growth (% YoY) 50% -12% -1% 3%
EBITDA growth (% YoY) 68% -40% -11% 18%
Op. profit growth (% YoY) 98% -53% -20% 29%
Net Profit growth (% YoY) 195% -51% -16% 29%
EBITDA Margin % 21% 14% 13% 14%
Net profit Margin % 12% 7% 6% 7%
EBITDA/t (Rs/tonne) 12,632 7,476 6,419 7,659
Tax Rate % 26% 30% 30% 30%
Efficiency Ratios
Total Asset turnover (x) 0.9 0.8 0.7 0.7
Sales/Gross block (x) 0.9 0.8 0.7 0.7
Sales/Net block(x) 1.6 1.3 1.3 1.4
Working capital/Sales (x) 0.1 0.1 0.1 0.1
Valuation Ratios
PER (x) 2.7 5.4 6.4 5.0
P/BV (x) 6.0 5.7 5.4 5.0
EV/Ebitda (x) 2.4 3.7 3.8 2.8
EV/Sales (x) 0.5 0.5 0.5 0.4
Dividend Yield (%) 11% 5% 5% 6%
Return Ratios
ROE 24.6% 10.9% 8.7% 10.5%
ROCE 22.2% 9.7% 7.4% 9.0%
ROIC 17.5% 8.0% 6.3% 8.2%
Leverage Ratios
Debt / equity (x) 0.4 0.3 0.3 0.2
Net debt/ Equity (x) 0.3 0.3 0.2 0.1
Net debt/Ebitda (x) 0.9 1.1 1.0 0.4
Interest Coverage ratio (x) 12.6 12.9 14.1 20.3
Source: Company, Axis Securities

5
 SAIL Price Chart and Recommendation History

(Rs)

Date Reco TP Research

11-Jan-22 BUY 150 Initiating Coverage
11-Feb-22 BUY 125 Result Update
24-May-22 HOLD 75 Result Update
12-Aug-22 HOLD 75 Result Update

Source: Axis Securities

6
About the analyst

Analyst: Aditya Welekar

Email: aditya.welekar@axissecurities.in

Sector: Metals & Mining

Analyst Bio: Aditya Welekar is PGDBM in Finance with 10 years of experience in Equity Market/Research.

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations,
is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company
of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private sector bank and has its various subsidiaries engaged in businesses of
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ASL has no material adverse disciplinary history as on the date of publication of this report.
I/We, Aditya Welekar, MBAFinance, author/s and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report accurately
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7
 DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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