SAIL share price: strong pace, net debt is falling sharply, should decline further; attractive risk-return according to JP Morgan
SAIL reported a sharp decline in operations in the third quarter. While JP Morgan sharply increased its estimates for FY21, JP Morgan generally maintained our estimates for FY22-23 (FY22 EBITDA / t at Rs7.4K / t vs. Rs12K / t in 3Q). JP Morgan expects net debt to continue to decline over the next few quarters. SAIL offers an attractive risk / reward ratio at 0.5x P / B.
Great operating beat; while JP Morgan increases its FY21 estimate by 30%, maintains a conservative FY22-23 estimate:
Driven by sharply increasing steel production (+ 18% year-on-year) and high steel volumes (+ 1% year-on-year), SAIL declared an EBITDA of Rs 51 billion (+ 167% quarter on quarter) ) with an EBITDA / t at Rs12K / t. The PAT declared at Rs 12.8 billion was affected by a single tax charge that SAIL recorded during its transition to the new tax regime. SAIL also declared a dividend of Rs 1 / share. SAIL benefited from an increase in iron ore sales (1.3 MT of iron ore sales). According to JP Morgan, sales of iron ore are expected to remain strong for the next several quarters.
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Net debt is falling sharply and should decline further for SAIL:
SAIL’s net debt was reduced to Rs 466 billion in the third quarter against Rs 506 billion and Rs 544 billion in the first quarter. Given the strong steel environment and limited investment, JP Morgan expects SAIL’s net debt to decline further from current levels (SAIL’s forecast is below Rs 400 billion). SAIL expects wage costs to increase sharply in the fourth quarter given the revised wage costs.
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SAIL pointed out that expectations of lower prices at the commercial level had an impact on the demand for steel in the short term (destocking), but that the reduction in prices only concerned long products and that it did not there was no price correction for flat products. In our view, given the high export steel prices, we do not see a significant decline in domestic steel prices, particularly flat steel.
The spot coking coal price increases further normalization from very low levels – although we don’t see a price at $ 100 / t, prices well above $ 150 / t also seem unlikely:
For SAIL (and for Indian steelmakers), the main cost item is coking coal. SAIL has benefited from rising steel prices and falling coking coal prices in FY21, and that is expected to change over the next two quarters, as coking coal prices normalize. Spot coking coal prices jumped 29% during the week to $ 152 / t, and prices are up 50% in the past month.
According to JP Morgan, coking coal prices only normalize from very low levels. We would also like to point out that we are currently going through a seasonally high period of coking coal prices, as weather disturbances tend to reduce supply. JP Morgan would expect coking coal prices to be within a limited range of current levels. In our opinion, with iron ore prices at high levels and now coking coal prices on the rise, we are struggling to see regional HRC prices drop significantly below $ 600 / t (spot at 680 $ / t). Granted, the next significant data points in the steel market would only come after a month, as China returned from vacation; we expect steel prices to be stable.