Q4FY23 Review: SAIL: Costs drive Q4 miss; targeting 15% vol. growth

29 May 2023 , 02:12 PM

SAIL’s Q4 Ebitda of Rs29.14bn missed estimates with costs, exceeding estimates as the company did not realise any gains on coking coal. Incrementally, spot steel prices are back to Q3 levels (down 2500/t vs Q4), which along with 10% higher coal cost would hurt Q1 Ebitda. Fall in coking coal prices will cushion the impact post Q1. Management guided to 18.7mt vol. on FY24, which seems optimistic. End-FY23 net debt at Rs304bn translates to 2.6x ND/Ebitda, but should fall to 1.5x by FY25 with only sustenance capex expected. Planned ~Rs1trn spend over FY26-32 to add ~15mt capacity is currently at DPR stage. Analysts of IIFL Capital Services retain ADD with TP of Rs90/share.

Q4 a miss on higher costs: 

SAIL reported Q4 SA Ebitda of Rs29.14bn (up 40% QoQ) on volume of 4.68mt (up 13% QoQ) – missing estimates by 13% with Ebitda/t of Rs6,226 for Q4. While NSR was up by Rs1,917/t QoQ as expected, RM cost/t also rose with no gains from fall in coking coal prices, unlike peers. Employee costs jumped on actuarial valuations and pension revaluation (based on better profitability QoQ), while other expenses saw impact of royalty, higher conversion charges and CSR expenses. For FY23, the company reported volume of 16.15mt (up 8% YoY) with lower share of semi volumes (13% vs 19%) and higher value addition.

Near-term visibility weak; gains on coking coal to come with a lag: 

With spot steel prices back to avg. Q3 levels and coking coal cost expected to rise QoQ (10%), Q1 would be weak. Lower coking coal prices will flow through with 60-75 days delay, given inventory and transit times and will provide some cushion. In terms of volumes, the company is targeting 15% growth to 18.7mt in FY24 – optimistic in our view, both in terms of operations and demand growth.

Elevated debt levels; expansion capex a year away: 

End-FY23 net debt stood at Rs304bn-2.6x ND/Ebitda (Q4 annualised). analysts of IIFL Capital Services estimate that this will fall to 1.5x by the end of FY25 post Rs65bn/year of sustenance capex. Mgmt. indicated capex spend of Rs1trn over FY26-32 to expand capacity from 20mt to ~35mt in a phased manner across various plants, with a target to not exceed ND/Equity of 1x.