The March quarter results of Steel Authority of India Ltd (SAIL) have quite a few bright spots. For one, its Ebitda per tonne surged a massive 3.2 times year-on-year to Rs.14,145 helped by better realisations as well as volumes. Last quarter’s realisation and sales volume had risen 24% and 16%, respectively, on a year-on-year basis.
Ebitda is earnings before interest, tax, depreciation and amortisation, a key measure of profitability for companies.
Note that the company had reported an operating loss for the June 2020 quarter. Since then, it has improved its quarterly Ebitda continuously during the financial year 2021. Even so, while SAIL’s Ebitda increased 21% sequentially, the measure is 5% lower year-on-year.
But strong outlook for steel prices should offer comfort to investors. As such, analysts expect SAIL to perform even better in the June quarter. “With steel prices at a record high, SAIL is poised to post its best ever Ebitda per tonne of around Rs.20,000 in 1QFY22," said analysts from Motilal Oswal Financial Services Ltd in a report on 12 June. The broking firm added, “We upgrade our FY22E/FY23E Ebitda estimate by 71%/33% to factor in higher steel prices, and estimate a further Rs.10200 crore (Rs.25 per share) fall in net debt to Rs.26500 crore (1 times Ebitda) in FY22E."
SAIL has done also well on the debt front in financial year 2021. “In FY21, the company reduced debt by nearly Rs.20,000 crore to Rs.35,400 crore," said analysts from Edelweiss Securities Ltd in a report on 11 June. SAIL’s management has guided for net debt to drop to around Rs.25,000 crore by the end of financial year 2022.
Note that finance costs for the March quarter have declined 41% year-on-year and 19% on a quarter-on-quarter basis.
To be sure, investors have taken cognizance of improved business conditions for steel companies and SAIL is not an exception. Small wonder, the stock has risen as much as 165% from its pre-covid highs in January 2020. To that extent, valuations are pricey and suggest near-term upsides may be limited. “Despite likely significant consensus upgrades, we see balanced risk-reward for SAIL as the benefit of higher prices is likely to be lower than peers and cost escalation is impending," said analysts from Edelweiss Securities.