Steel Authority of India (SAIL) has been shunned by brokerage firms after the company reported a disappointing performance in the December 2022 quarter. A majority of the brokerages are negative on the PSU metal player, while a few have suggested exiting the counter.
State-owned SAIL posted around a 65 per cent fall in its consolidated net profit at Rs 542.18 crore in the December 2022 quarter, on account of higher expenses. The company clocked a net profit of Rs 1,528.54 crore in the October-December 2021 period.
SAIL”s total income also fell to Rs 25,140.16 crore from Rs 25,398.37 crore in the year-ago quarter, whereas its total expenses soared to Rs 24,825.11 crore, compared to Rs 23,209.88 crore a year ago. Sales were at 4.151 MT against 3.840 MT in the year-old quarter.
Kotak Institutional Equities (KIE) said that SAIL’s 3QFY23 EBITDA missed our estimates by 7 per cent mainly on weaker realizations. Margins should expand on stronger steel prices in 4QFY23 but surging coking coal costs suggest recovery could be short-lived, it said.
“SAIL’s net debt increased further in 3QFY23 or by Rs128 bn in 9MFY23 led by normalization of working capital. We see SAIL’s deleveraging phase behind us with likely restart of growth capex from FY2024E,” said KIE with a ‘sell’ rating, suggesting a fair value at Rs 55 apiece.
SAIL’s profitability was weaker than expected. Sales remained flat and sales volume declined by 5 per cent YoY to 4.15 MT, said IDBI Capital. “Its profitability improved QoQ on falling prices of key inputs. Lower coking coal prices led to a rise in EBITDA to Rs 2,000 crore. EBITDA/tonne jumped 187 per cent QoQ to Rs 5,003, but below estimate, it said.
“We have lowered our FY23 EBITDA forecast by 7 per cent given weaker than expected Q3FY23 profitability. We broadly maintain our FY24 forecasts and introduce FY25 forecasts in this report. We now value the stock at an EV/EBITDA multiple of 3x FY25 (earlier 3x FY24) to derive a target price of Rs73 and maintain a ‘sell’ rating on the stock,” it said.
Shares of SAIL were trading at Rs 85 on Thursday. The stock is down 15 per cent in the last one year, whereas it is trading flat in the ongoing year. The company is commanding a market cap of little more than Rs 35,000 crore.
Kotak’s fair value target suggests a 35 per cent downside potential in the counter, whereas IDBI Capital’s target price is about 13 per cent from its current price.
Nuvama Institutional Equities cited that coking coal costs were down by Rs 6,000 per tonne QoQ; blended steel realisation stood at Rs 54,422 per tonne, debt stood at Rs 33,780 crore, up 7 per cent QoQ as the key takeaways. For Q4FY23, the brokerage expects EBITDA/tonne of Rs 7,000 due to higher steel price and volume.
“Higher working capital will likely push FY23 and FY24 net debt higher to Rs 28,200 and Rs 23,400 crore, respectively. We increase FY23E EBITDA by 15 per cent to factor in higher steel prices. We roll over and value SAIL at 5x EV/EBITDA FY24/FY25 average,” it said with a ‘hold’ rating with a target price of Rs 92, suggesting a 10 per cent upside.
Management expects sales volume to improve further in Q4FY23 as underlying domestic demand stays strong; however, the recent uptick in coking coal prices might keep the spreads under pressure. The biggest positive for SAIL is relief on employee costs; however, the beginning of the capex cycle might lead to a further increase in debt, said ICICI Securities.
“Taking cognisance of prevailing steel and raw material prices, we raise our FY23E EBITDA by 45 per cent, but largely maintain FY24E EBITDA,” it said, maintaining a ‘reduce’ rating on the stock. However, it has increased its target price to Rs 77 from Rs 75 earlier on the stock.
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