Reduce Steel Authority of India; target of Rs 70: Sharekhan

Sharekhan's research report on Steel Authority of India

Q1FY23 operating profit of Rs. 2,302 crore (down 65% y-o-y; down 46.9% q-o-q) was 10% above our estimate of Rs. 2,086 crore due to higher-than-expected blended EBITDA margins of Rs. 7,307/tonne (down 21% q-o-q and 26% above our estimate of Rs. 5,795/tonne). Saleable steel volume of 3.2 million tonnes (down 32% q-o-q) missed estimates. Beat in margin was primarily due to higher-than-expected increase of 17% q-o-q in blended steel realization at Rs. 76,281/tonne. However, margins declined sharply q-o-q led by steep rise in coking coal cost. Chinese steel exports rose 54% y-o-y in Q1FY23 and thus would put further pressure on domestic steel prices. Thus we expect EBITDA margins to stay stressed. Weak profitability and capex would affect balance sheet deleveraging.

Outlook

Weak earnings to impact growth capex, likely increase debt and lower sector valuation and thus, we downgrade SAIL to Reduce (from Hold earlier) with a revised PT of Rs. 70. The stock trades at 6.6x FY24E EV/EBITDA.