Why SAIL Has Surpassed Analysts’ Forecasts
Sparks fly from a ladle at a steel mill. (Photographer: Simon Dawson/Bloomberg)

Why SAIL Has Surpassed Analysts’ Forecasts

Shares of Steel Authority of India Ltd. have surged to surpass analysts’ estimates as the state-run producer deleveraged faster than expected and is close to achieving its sales target.

The integrated state-run steelmaker, once considered a laggard because of slow expansion, has gained in 11 of the last 16 sessions till Jan. 11, surging more than 38%. The stock has been the best performer on the Nifty Metal Index in the last three months and is trading higher than the average of 12-month target prices of analysts’ estimates tracked by Bloomberg.

Here’s what’s driving SAIL’s rally:

Iron Ore Sales

The integrated player has 42 million tonnes of sub-grade iron ore dumps and 30 million tonnes of iron ore tailings, according to previous year’s annual report. It has mandate to sell up to 25% of its total ore mined in the previous year. As a result, SAIL has already sold approximately 2.16 million tonnes of fresh fines through auctions during the ongoing financial year. Around 0.3 million tonnes of dump fines and tailings have also been successfully auctioned during this period.

SAIL may sell up to 50% of freshly mined fines next year, according to Vishal Chandok, analyst for Emkay Global Services, because the government is actively looking to address the shortage of iron ore in the country as mines in Odisha take time to start after e-auctions.

Sales from freshly mined mines is expected to result in higher realisation than the sale of dumps, aiding the company’s bottom line.

Faster Deleveraging

The company aims to bring its debt below Rs 40,000 crore by March. Net debt as on April 2020 was Rs 51,100 crore, which fell to Rs 44,308 crore on Dec. 31, it said in a statement. It has achieved this largely through liquidation of inventory and internal accruals, given higher steel prices.

Pinakin Parekh, analyst at JP Morgan, forecasts a near-30% debt reduction for SAIL during FY 2020-23 as inventory and receivables normalise during FY2021-22 and a volume pick-up in FY2022-23 drives debt lower.

Closer To Sales Target

The steel major reiterated its FY21 sales target at 15.5 million tonnes and FY22 target of 18 million tonnes even as the blast furnace at its IISCO steel plant faces technical issues. For the nine months through Dec. 30, 2020, it has produced 10.2 million tonnes of saleable steel, according to SAIL’s media statement.

Steel Cycle Upswing

Hot-rolled coil prices have risen since July, and are trading at multi-month highs. With iron ore prices, too, on an uptick, integrated players like Tata Steel Ltd. and SAIL—those who produce their own raw material—are better placed compared with their counterparts.

Capacity Expansion

SAIL is in the final stages of its ongoing modernisation and expansion programme, costing about Rs 70,000 crore, and plans to add 29.6 million tonnes per annum in capacity in two phases by 2030.

The company had capex of Rs 822 crore in the quarter ended September and Rs 1,475 crore for the six months ending September. With a large multi-year capex cycle behind, SAIL’s volume growth comes at a time when India’s steel market is structurally tightening.

JPMorgan, however, said in a recent report the market is writing off SAIL’s near-$10 billion spend on increasing steel capacity by almost half. This is unjustified, the brokerage said, given limited steel capacity addition in India over the coming years, a highly consolidated steel market and policy support against cheap imports.

Morgan Stanley sees room for earning estimate upgrades for steelmakers if the current situation prevails in the fourth quarter, given the tighter inventory levels and favourable supply-demand situation across markets. Raw material (especially iron ore) dynamics should also support higher steel prices and eight-year Indian spreads are still lower than historical averages, it said.

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