Sell Steel Authority of India; target of Rs 112: Prabhudas Lilladher

Prabhudas Lilladher's research report on Steel Authority of India

We cut FY25/26E EBITDA estimates by 7%/9% on account of weak steel pricing in the near term and high cost coking coal inventory. SAIL reported weak operating performance in Q1FY25 on account of muted 3% volume growth; costs were largely in-line. Average NSR improved 3% QoQ to Rs59,845/t due to higher long product prices in domestic markets. As steel prices are on a declining trend, we expect SAIL’s Q2FY25 performance to be impacted. Mgmt. has reiterated FY25 sales guidance of ~19.2mt, which seems ambitious. We estimate 17.9/19.4mt volumes for FY25/26E as near term domestic and export market remains weak. SAIL targets to reach 35mtpa by FY32 in phases. In the first phase of this capex, Rs370bn is planned to be spent at IISCO for 4mtpa capacity addition, much higher than industry benchmark. Even 3mtpa capacity addition planned via debottlenecking is targeted over next 3-4 years. We expect SAIL to remain a play on steel prices in the long term as a) its volume growth would depend upon successful execution of planned capex by FY27E, and b) higher capex can deteriorate balance sheet unless there is timely execution.

Outlook

At CMP, stock is trading at an EV of 7x/6x FY25/FY26E EBITDA. Maintain ‘Sell’ with revised TP of Rs112 (Rs134 earlier) giving 5.5x FY26E EV/EBITDA.

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