SAIL Share price: Strong beat, net debt declines sharply, should further decline; risk-reward attractive says JP Morgan

SAIL reported a large operating beat in Q3. While JP Morgan increased their estimates sharply for FY21, JP Morgan broadly maintained our FY22-23 estimates (FY22 EBITDA/t at Rs7.4K/t vs. Rs12K/t in 3Q). JP Morgan expects net debt to decline further over the next few quarters. SAIL offers an attractive risk-reward at 0.5x P/B.

Large operating beat; while JP Morgan increase their FY21 estimate by 30%, maintain  conservative FY22-23 estimate:

Driven by sharply higher steel realizations (+18% yoy) and elevated steel volumes (+1% yoy), SAIL reported EBITDA at Rs 51 bn (+167% qoq) with EBITDA/t at Rs12K/t. Reported PAT at Rs 12.8 bn was impacted by a one-time tax charge that SAIL booked as it moved to the new tax regime. SAIL also declared a dividend of Rs 1/share. SAIL benefited from higher iron ore sales (1.3MT iron ore sales). In JP Morgan’s view, iron ore sales should remain elevated over the next few quarters.

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Net debt reduces sharply and should reduce further for SAIL:

SAIL’s net debt reduced to Rs 466 bn in Q3 vs. Rs 506 bn and Rs 544 bn in Q1. Given the strong steel environment and limited capex, JP Morgan would expect SAIL’s net debt to reduce further from current levels (SAIL guidance is less than Rs 400 bn). SAIL expects employee costs to increase sharply in 4Q given wage cost revision.

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SAIL highlighted that trade level expectations of a price fall has impacted near-term steel demand (destocking) but the price reduction has only been in long products and there has been no price correction in flat products. In our view, given strong export steel prices, we do not see a sharp decline in domestic steel prices, especially in flat steel.

Spot coking coal price surge more of normalization from very low levels – while we do not see prices at $100/t, prices sharply above $150/t also looks unlikely:

For SAIL (and for the Indian steel makers), the single largest cost item is coking coal. SAIL has benefited from higher steel prices and lower coking coal prices over FY21, and this should change over the next two quarters, as coking coal prices normalize. Spot coking coal prices surged by 29% over the week to $152/t, and prices are up 50% over the last one month. 

In JP Morgan’s view, coking coal prices are only normalizing from very low levels. We would also highlight that we are currently in a seasonally strong period of coking coal prices, as weather disruptions tend to reduce supply. JP Morgan would expect coking coal prices to be range bound from current levels. In our view, with iron ore prices at elevated levels, and now coking coal prices rising, we struggle to see regional HRC prices fall sharply below $600/t (spot at $680/t). Admittedly, the next meaningful data points on the steel market would only come after one month as China returns back from the holidays; we expect steel prices should be steady.