Hold Steel Authority of India; target of Rs 95: Sharekhan

Sharekhan's research report on Steel Authority of India

Q2FY24 results had one-time benefit of Rs. 1749 crore related to rail price revision for FY22. Excluding the same, the consolidated adjusted operating profit of Rs. 2,126 crore (up 29% q-o-q) was 7% below our estimate due to miss in EBITDA margin which offsets beat in steel sales volumes. Adjusted EBITDA margin of Rs. 4,429/tonne (up 4.2% q-o-q) missed our estimate of Rs. 5450/tonne due to lower-than-expected blended steel realisations at Rs. 58256/tonne (down 7% q-o-q). The steel sales volume growth was robust at 14%/24% y-o-y/q-o-q to 4.8mt. A sequential improvement in the margin was led by lower imported coking coal cost (down Rs. 5000/tonne). Consolidated adjusted PAT of Rs. 321 crore (up 51% q-o-q) was also 52% below our estimate of Rs. 665 crore due to a miss in margin, substantially lower other income (down 63% y-o-y) and higher interest cost and tax rate.

Outlook

A recent surge in coking coal price is a concern on margin outlook for steelmakers as steel price largely remain stable. Moreover, steel upcycle (as seen in 2020-2021) may not be round the corner given a weak global economic outlook. SAIL’s major balance sheet deleveraging cycle is largely over as the company would focus on capex to expand capacities. We maintain a Hold rating on SAIL with an unchanged PT of Rs. 95. At CMP, the stock trades at 4.6x FY25E EV/EBITDA and 0.6x FY25E P/BV.