Subdued steel prices can keep upside capped for SAIL’s stock

An increase in steel offtake in the fourth quarter has seen Steel Authority of India Ltd (SAIL) report notable revenue growth of 8.6% year-on-year. But that was not enough to hold up its stock as the results fell far short of consensus estimates. SAIL’s stock dipped 1% on Friday after its results were announced post-market hours on Thursday.

The highlight of the results has been better volume growth in Q4. Saleable steel sales totalled 4.133 million tonnes (mt) in the March quarter, increasing 10% over the same period last year. The company also increased its hot metal, crude steel and value-added production in the last quarter, a sign that domestic demand is fairly robust.

However, steel price realizations have dipped in the domestic market, squeezing Ebitda (earnings before interest, tax, depreciation and amortization) margins.

The margins were further hurt on account of the rise in iron ore prices due to a supply disruption in Brazilian and Australian mines. SAIL’s Ebitda margins shrank from 13.8% in Q4 FY18 to 12% in Q4 FY19.

To add to the pain, an increase in coking coal prices added to the net profit fall, which dropped 42.5% in Q4. Interestingly, profit for FY19 increased to ₹2,179 crore. In FY18, SAIL had reported a loss of ₹482 crore.

In FY20, the company’s management has guided a production target of 17mt.

Besides, analysts are also worried about its cash outlay. SAIL has outlined a plan of ₹4,000 crore capex in FY21. “We are concerned on cash commitments: 1) capex of INR40bn in FY20E; 2) INR12bn outflow on new pension scheme; and 3) INR 37bn debt repayment obligation. Besides, INR30bn annual interest cost is expected to constrain cash balance further. These are expected to account for bulk of EBITDA amidst a challenging operating environment besieged by weak prices,” said Edelweiss Securities Ltd in a note to clients on 31 May.

While steel demand is robust in India, analysts reckon that it may not translate into much higher realizations. Much depends on how iron prices pan out in the international markets. But as iron ore supply disruption is likely to be persistent, investors will have to watch steel prices a lot closely, too.