Target: ₹84

CMP: ₹78.85

SAIL’s Q1FY23 profitability was higher than our estimates. Its sales grew 16 per cent year-on-year to ₹24,000 crore, led by higher realisations even as sales volumes fell 5 per cent year-on-year to 3.15 million tonnes (lower than expected). SAIL witnessed sharper fall in volumes due to imposition of export duty in May compared to its peers. Its EBITDA stood at ₹2,300 crore (-63 per cent year-on-year, -47 per cent quarter-on-quarter). EBITDA/tonne fell 21 per cent quarter-on-quarter, mainly led by sharp rise in prices of coking coal.

Working capital was higher by ₹8,000 crore, but it is expected to come down due to fall in coking coal prices. The company expects coking coal prices to be far lower in Q2FY23 compared to Q1FY23, although realisation of steel may fall too.

SAIL’s Q1FY23 blended realisation stood at ₹66,000/tonne, while by June the realisation had fallen to ₹57,000/tonne. The raw material cost increased 4 per cent quarter-on-quarter in Q1FY23 to ₹36,455/tonne, led by increase in coking coal prices. However, there was a sharp rise in employee’s costs which jumped to ₹9,571/tonne. EBITDA fell 21 per cent quarter-on-quarter to ₹7,304/tonne. SAIL targets to restrict employee costs to be about ₹12,000 crore in FY23. The company does not anticipate much increase in employee costs, as retirees are getting replaced with young employees with lower salary base.

The government imposition of hefty export duties on steel will lead to decline in realisations for steel companies which have been resorting to exports in the last few years. Also, weak domestic demand in the near term will further lead to fall in steel prices in the domestic markets. SAIL exports nearly 10 per cent of its steel. Hence, we expect fall in profitability of steel companies in FY23. Lower profitability is likely to slow down the deleveraging process for large steel companies.

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