Steel Authority of India Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Severe margin compression, in line with industry: Profitability was hit by falling steel prices, especially in Flat products, and a spike in coking coal costs, though QoQ input costs eased.
• Flat vs. Long product divergence: Flat product realizations crashed ~₹13,000/tonne QoQ, dragging overall NSR down ~₹14,000/tonne, while Long product prices held relatively firm.
• Coking coal cost relief is coming: Imported coking coal costs fell from ~₹39,000 to ~₹33,000/tonne QoQ, and management expects a further ~₹5,000/tonne reduction in Q3.
• Working capital swelled on coal costs: A ~₹15,000 crore buildup was driven by higher imported coal prices and a shift to LC-based payments, though the position improved marginally from Q1.
• What to watch next quarter: Whether the promised ~₹5,000/tonne coking coal cost reduction materializes, if NSR can be maintained at Q2 levels, and progress on the ~₹4,000 crore H2 capex spend.

Profitability & Cost Drivers

• Flat products drove the NSR collapse: Q2 NSR fell ~₹14,000/tonne QoQ because Flat product prices, which had been hovering at ₹70,000+, dropped drastically by ~₹13,000, while Long product prices fell only ~₹6,000.
• Coking coal was the primary cost villain: Profitability was adversely affected by higher coking coal costs, though imported coal prices fell from ~₹39,000 to ~₹33,000/tonne QoQ, delivering a ₹1,994 crore input cost gain.
• Raw material usage improved: A ₹550 crore QoQ benefit came from lower coke rates, reduced coal usage, increased use of indigenous coal and CDI, and better iron ore consumption patterns.
• Other expenses fell sharply: A ~₹1,000 crore QoQ decline was driven by a one-time royalty benefit of ~₹400 crore from Odisha mines (highest lump rate no longer applied to fines, effective April '22) and a halving of foreign currency losses from ~₹570 crore to ~₹280 crore.
• Employee cost trend is flat, not falling: The current run rate is ~₹2,800 crore/quarter, and while retirements of 2,500-3,000/year will continue for 2-3 years, DA increases and normal increments will more or less offset the savings.
• Cash tax payments resume: Accumulated losses are fully adjusted, so SAIL will pay cash tax at 25% from this year onwards.

Coking Coal: Cost Trajectory & Sourcing

• Q3 cost reduction expected: Management expects imported coal average consumption cost to reduce by ~₹5,000/tonne (~$60) in Q3 from the Q2 base of ₹33,000, as lower-priced coal imported in August/September flows through.
• Q4 faces spot price risk: Coal procured now at higher spot prices (~₹31,000) will impact Q4, with a cycle of ~3 months for US coal and ~2-2.5 months for Australian coal.
• Mozambique coal is a small but growing source: Production is gradually picking up, with ~0.1-0.12 crore tonnes being produced and utilized.
• Coal prices threaten steel prices: Management cautioned that if the recent $60-70/tonne spike in coal prices continues, it will surely have an impact on steel prices as well.

Tulsiani: "It is very early to say all these things because the thing is that basically the Long products, we should see prices firming up a bit, but all these things also depend on another factor which is the coal prices. If the coal prices also start shooting up - because they have gone up in the past 1-1/2 months substantially by nearly $60 to $70. If the similar trend continues, maybe it will surely have an impact on the prices of the steel also."

Product & Market Dynamics

• Flat products are internationally linked, Longs are domestic: Flat products felt much greater adverse impact because they are guided by international markets, while Long product prices held up better due to a shortage of thermal power and secondary producers not reducing prices.
• Plant-level profitability split: Durgapur and ISP (Long product plants) saw positive EBIT vs negative EBIT in Q1, while Rourkela, Bokaro, and Bhilai (Flat product plants) were severely affected by the fall in steel prices.
• Q3 NSR outlook is flat at best: Management said sales realizations may not be better than Q2 and will try to keep them at the same levels, though Long product prices should see some firming up.
• H1 revenue still grew YoY: Top line grew in H1 FY23 vs CPLY because average realizations during H1 remained higher than CPLY, despite the substantial reduction during the period.

Rail Business & PLI Opportunity

• Rail pricing submissions in progress: SAIL has submitted pricing for FY21, with final pricing expected this financial year; the FY22 submission will be made shortly after Railways intimated the CA/Cost at end of October.
• Ad-hoc price for FY23 fixed: An ad-hoc price of ~₹67,500 has been fixed for 2022-23, with the final price to be submitted in 2023-24; any benefit or reduction will be recognized in the year final pricing is received.
• Head hardened rails under development: Trials are ongoing, with pricing under negotiation with Railways on a mutually agreed basis considering cost and productivity impact; initial volumes are expected at 200 kt to 300 kt.
• PLI scheme application submitted: SAIL has applied under the government's PLI scheme, mainly for rails including head hardened rails and new profiles; if the proposal goes through, NSR is expected to improve and the price of these rails will be substantially higher.

Tulsiani: "I really don't know, but we have submitted which is a higher price to the Railways. And let us see. We finalize that then mutually. We expect a higher price, no doubt about that."

Capex & Expansion Pipeline

• H2 capex spend to accelerate: Full year target is ~₹6,000 crore, with only ₹2,000 crore spent in H1, implying ~₹4,000 crore to be spent between October and March.
• H2 projects are a mix of refurbishment and new capacity: Spending covers casters at Bhilai and Rourkela, major refurbishing of blast furnaces and coke ovens, water pipeline projects, and providing additional power for plants on a deposit term basis.
• Blast furnace strategy is dual-track: Older blast furnaces at Bokaro, Durgapur, and Bhilai are being refurbished within required ~20-year timelines, while capacity enhancement is also being taken up to increase volumes; new blast furnaces with matching casters and mills are in the expansion pipeline.
• Iron ore mine development progressing: Bolani is planned to reach 1 crore tonne capacity in ~2 years; Kiriburu and Meghahatuburu expect production from new south and central blocks in maybe a year; Rowghat has a contractor appointed for interim mining with a couple of racks already dispatched.
• Chiria remains blocked: The mine has become a non-mining zone, and SAIL is trying to convince the government to allow mining.

Tulsiani: "What do I do with the existing casting capacity which is there? I have to use that also."

Balance Sheet & Working Capital

• Working capital swelled ~₹15,000 crore: The buildup was primarily due to the increase in price of imported coking coal and a shift to LC-based payments extending the payment cycle, though the position improved marginally from Q1.
• Debt reduction is a Q4 goal: Not much increase in debt is expected in Q3; in Q4, management will try to reduce debt to some extent but may not reach March '22 levels, with a plan to bring borrowings down to ~₹25,000 crore levels by year-end.
• Tasra mine seen as a future game-changer: The mine will operate on a cost basis, not index-linked, and is currently at the tendering stage for a mine developer and operator.

Tulsiani: "Always we are very comfortable when there is no debt. But then we cannot accept that on today's date."

Guidance & Commitments

Key Metrics