Steel Authority of India Limited’s (SAIL) performance for Q2 was not only ahead of expectations but also gave confidence in terms of earnings prospects.
For one, the firm has been able to continue its decent earnings trajectory despite rising input costs. The outlook remains strong on the back of strong steel receipts. SAIL may also see an increase in volume driven by expansion projects. The special thing is that the demand for steel remains strong. In addition, good cash flow is driving significant debt reduction on its balance sheet. With SAIL expected to be net debt-free, a major concern for investors would be the lag behind. Not surprisingly, share prices ended Monday with gains of more than 8%.
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SAIL’s reported revenue for the quarter grew 59% year-on-year (YoY) and 30% sequentially. Raw material costs increased by 49.1% annually and 35.6% sequentially due to rising coal prices, while staff costs were also significantly higher. The firm still posted 7% yoy and 3% sequential growth in Ebitda. The rise in domestic steel prices during Q3 will help the firm maintain its performance.
“SAIL has hiked the prices of long product ₹3,500/ton and flat product prices ₹1,700/tonne in October which will partially offset the negative impact of higher coking coal prices in 2HFY22,” said analysts at Antique Stock Broking Ltd.
Meanwhile, with the completion of the downstream expansion, SAIL will see sustained volume growth which will help drive operating leverage. Analysts at Kotak Institutional Equities said: “After 2% CAGR over the past decade, 4.4% volume CAGR (compounded annual growth rate) in FY 2021-24 will improve cost metrics given higher operating leverage led by higher wages “
SAIL reduced its gross debt ₹7,800 crore in Q2 and plan to turn net cash positive in Q1FY23. This is another contributing factor to its earnings.
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