ADVERTISEMENT

SAIL Q2 Review: Shares Gain The Most In Nine Months, Analysts Upbeat

Here's what brokerages made of SAIL's Q2 performance.

A steel slabs passes through a rolling machine inside the SAIL plant in Rourkela, Odisha. (Photographer: Dhiraj Singh/Bloomberg)
A steel slabs passes through a rolling machine inside the SAIL plant in Rourkela, Odisha. (Photographer: Dhiraj Singh/Bloomberg)

Shares of Steel Authority of India Ltd. gained the most in at least nine months as analysts remained optimistic, citing a fall in debt and improved balance sheet after the second-quarter earnings.

Still, rising coking coal prices and potential government levies remain a concern.

Q2 Highlights (Consolidated, QoQ)

  • Revenue up 30% at Rs 26,826.9 crore, against the Bloomberg estimate of Rs 25,000 crore.

  • Ebitda up 6.9% to Rs 7,016.9 crore.

  • Profit after tax up 11.8% to Rs 4,303.6 crore, against an estimated Rs 4,216.7 crore.

  • Ebitda margin at 26.2% against 31.8%.

Shares of the steelmaker gained as much as 13.25% in early trade on Monday to Rs 130.35 apiece. The stock's trading volume was 10 times the average for this time of the day. It was also the best performer among peers on the Sensex, albeit briefly.

Of the 27 analysts tracking the company, 21 recommend a 'buy', two maintain 'hold' and four suggest a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 30.5%. The stock ended at Rs 125.2 apiece, 8.7% higher.

Here's what brokerages made of SAIL's Q2 performance:

Dolat Capital

  • Maintains 'buy' rating with a target price of Rs 270, implying a potential upside of 134%.

  • After surprising the street with solid Rs 7,800 crore deleveraging in Q2, management sounded confident of being able to pay down entire debt by first quarter FY23-end. Dolat agrees with that in spirit, despite the headwinds of higher coking coal costs in Q3 and Q4. At this level of costs, steel companies would be compelled to take prices hikes progressively.

  • Ebitda was impacted by higher raw material (coking coal) cost, employee cost and other expenses.

Systematix Institutional Research

  • Maintains 'buy' rating, revises target price to Rs 182 per share from Rs 177 earlier, implying a potential upside of 58%.

  • Improved demand from construction and infrastructure segments (65% of output) led to strong offtake during the quarter. Surge in coking coal prices would put pressure on near-term margins.

  • Net debt has reduced helped by a surge in cash from operations led by strong steel pricing environment and tighter working capital management.

  • Acceleration in deleveraging, limited capex and improving rates of capacity utilisation would drive stock return.

  • Over the next 12-18 months, SAIL would likely reduce net-debt further by Rs 25,000 crore even after a likely dividend of Rs 23 per share based on a mandated 30% payout for public sector undertakings. This provides a strong downside support, and a de-leveraged balance sheet would drive stock re-rating.

  • Biggest risk to SAIL would be government’s measures to change it into a milch cow through levies, as has been the case with several other PSUs in India.

Prabhudas Lilladher

  • Maintains 'accumulate' rating, cuts target price to Rs 155 from the earlier Rs 170, implying a potential upside of 33.6%.

  • Sentiments on Chinese demand turned negative across the major steel consuming sectors. The impact of lower demand has been equally negated by stringent curbs on production. Given the restricted supplies of Chinese steel in its domestic and exports markets, global steel prices are expected to remain elevated, further supported by all-time high coking coal prices.

  • Margins were expected to soften due to unsustainably low coking coal prices. Margins are expected to stabilise at Rs 10,000 per tonne, higher by 30% over historical averages in spite of astronomical input prices.

  • Strong profitability have strengthened balance sheet with net debt expected at lowest levels of 1.4x (on normalised earnings in FY23) in a decade. Given better outlook on margins and strong balance sheet, we maintain our rating.

IDBI Capital

  • Maintains 'buy' rating, cuts target price to Rs 161 from earlier Rs 168, implying a potential upside of 40%.

  • SAIL’s Q2FY22 result was ahead of expectations backed by strong improvement in realizations. Importantly, SAIL’s net debt fell and the company aims to become net debt free by Q1FY23.

  • However, rising coking coal price will impact its operating margin in the near-term.

  • SAIL remains exposed to sharp fall in profitability in case steel cycle weakens due to its high and sticky fixed costs. However, we believe the steel cycle is likely to remain positive over the coming two years and SAIL is likely to benefit from higher volumes, improvement in profitability and falling debt.

  • SAIL’s major expansions are nearly complete and now it remains wellpoised to benefit from firm steel prices. Further its net debt is likely to fall meaningfully as it does not have any major capex plans in the near term. The next phase of growth capex will be much more efficient in our view.