Motilal Oswal, in its report, said that with limited capex and higher pricing, SAIL should drive significant deleveraging and boost equity value. Motilal Oswal estimates net debt to decline by Rs 232 bn (Rs 56/sh, 76% of CMP) over FY20-23E to Rs 305 bn. Motilal Oswal also expects higher dividend payouts going forward (implying 5% yield), supported by strong Free Cash Flow of Rs 19/sh (25% yield). Motilal Oswal are raising our FY22E/FY23E EBITDA estimate by 34%/37% on expectation of higher realization and volumes. SAIL share price has moved up nearly 60% in the last 1 month and over 20% in the last 1 week.
 
Motilal Oswal sees Steel Authority of India (SAIL) as the best play on higher steel prices as:

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1)       it is backward integrated with captive iron ore
2)      has a higher operating leverage due to high conversion cost
3)      has a higher financial leverage

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Higher realization and volume growth to drive earnings:

Given a strong steel cycle, Motilal Oswal expects realization to remain high in the medium term, which, coupled with an inefficient cost structure (higher conversion cost), should provide disproportionate margin gains to SAIL. Every Rs 1,000/t of higher steel price improves SAIL’s FY22E EBITDA by 11%. Supported by under-utilized capacities, volume growth is expected to be strong at 9% CAGR over FY21-23E. There is also a likelihood of product mix improvement (higher finished steel sales).

On the back of capacity expansion, ICICI Securities expects SAIL to register a volume CAGR of 10% during FY20-23E. Going forward, ICICI Securities expects SAIL to report EBITDA/tonne of Rs 8250/tonne in FY21E and Rs 6750/tonne in FY22E and Rs 7000/tonne in FY23E. Healthy growth in sales volume coupled with relatively firm steel prices augur well for SAIL.

SAIL has iron ore mines in the states of Chattisgarh, Jharkhand and Odisha, which aids in meeting 100% of its iron ore requirements captively. In FY20, SAIL produced 29.3 MT of iron ore from its captive mines, which ensured that it met its total requirement of iron ore from captive resources. Even on the expanded capacity, SAIL would be self-sufficient in meeting its iron ore requirements, says ICICI Securities.