Steel Authority of India Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Volume-led quarter, price headwinds: 9M FY23 production and domestic sales hit all-time highs, but Q3 revenue fell YoY/QoQ as steel prices dropped sharply; EBITDA still jumped >87% QoQ because costs fell faster.
• Debt build-up moderating: Borrowings rose ~INR 11,000 crores over nine months on coal costs and capex, but the quarterly increase slowed to ~INR 2,000 crores in Q3, and management targets INR 24,000–25,000 crores by year-end.
• Rail price revision is a near-term catalyst: SAIL has submitted cost data for FY21 and FY22 rail prices; a benefit on ~0.11 crore tons is expected in FY23 itself, though the amount is unquantified.
• Coal is the swing factor for Q4 and Q1: Coking coal costs are flat for Jan/Feb but could rise ~INR 4,000/t in March; management bets steel price increases will offset the hit, but the outcome is uncertain.
• What to watch next quarter: Whether the rail price revision benefit materializes and is quantified, the actual March coal cost and steel price offset, and the pace of debt reduction toward the INR 24,000–25,000 crores target.

Volume & Operational Momentum

• Best-ever nine months: Hot metal, crude steel, and saleable steel production all set 9M records; crude steel output grew ~4% YoY to 1.33 crore tons.
• Domestic sales surge: 9M domestic sales rose ~9% YoY to 1.12 crore tons, more than absorbing an ~830,000-ton drop in exports as SAIL pivoted away from export markets.
• January peak: January was one of the best months ever for SAIL, and management expects the trend to continue through Q4.
• New mills ramping: The Medium Structural Mill at Durgapur has stabilized at ~50,000 tons/month in orders; the USM at IISCO Burnpur has ramped from 15,000–20,000 tons last year to 35,000 tons/month and continues to grow.
• Semis share falling: The component of semis in the product mix is gradually coming down, improving the value-added mix.
• Q4 production target: Crude steel output expected above 0.45 crore tons in Q4, implying a strong exit rate.

Tulsiani: "January was one of the best months ever for SAIL and we expect the trend will continue in the remaining two months. So we feel that we should be doing more than 0.45 crore ton of crude steel in the last quarter."

Pricing, Costs & Margins

• Q3 margin recovery: Steel prices fell significantly in Q3, pulling revenue down YoY and QoQ, but input costs also declined, lifting EBITDA more than 87% over Q2 and returning the company to positive PBT and PAT after a Q2 loss.
• Coal cost trajectory: January and February coking coal costs are roughly in line with December, with only INR 1,000–1,500/t extra; March could see a ~INR 4,000/t increase as higher-indexed cargoes land.
• Steel price offset: Steel prices have improved in recent weeks for both flat and long products, and management expects the increase to more or less neutralize the coal cost headwind.
• Rebar-HRC convergence: Rebar prices, which had been higher, have slightly come down in February while HRC has risen marginally; the two are now more or less at par.
• NSR trajectory: Net sales realization improved in January and showed some stabilization or cooling off in February; March is too early to call.
• Q1 FY24 margin outlook: Directionally flat versus Q4, assuming coking coal and steel prices hold at current levels, though the coal price increase will start having a major impact in Q1.
• Industry-wide coal pressure: The coking coal cost increase affects the entire industry, so management expects sector-wide efforts to push steel prices higher.

Tulsiani: "Yes, actually the prices of coal which has gone up, luckily along with that there has been some increase in the price of steel also. So it is going to offset, more or less neutralize the effect of the increase in coal prices."

Rail Price Revision Catalyst

• Dual-year submission: SAIL has submitted cost data for rail price revisions covering both 2021 and 2022 to the CA Cost Organization; a benefit on ~0.11 crore tons is expected in FY23 itself.
• Quantification withheld: Management declined to quantify the expected benefit, stating it depends entirely on how the CA Cost calculates it, and also declined to disclose what price increase SAIL has asked for.
• FY23 revision timeline: The FY23 railway price revision will be submitted only after the AGM, probably in September or October; if the FY22 pricing gets revised higher, the ad hoc price for FY23 will likely be revised upward as well.
• Railways context: Railways had already given a INR 5,000/t hike in NSR for rails after realizing input costs had risen and that NSR for structures was higher than for rail products.

Balance Sheet & Capex

• Borrowings trajectory: Borrowings rose sharply in H1, with ~INR 9,000 crores added in Q1 alone, but the increase moderated to ~INR 2,000 crores in Q3; year-end borrowings are expected at INR 24,000–25,000 crores, barring surprises.
• Receivables reduction: A targeted INR 1,500–2,000 crores reduction in receivables over the remaining two months of FY23 is expected to help bring down borrowings.
• Inventory target: Management aims to bring inventory below 0.1 crore tons by the end of this financial year.
• FY23 capex: Full-year capex expected at ~INR 5,500 crores.
• FY24 capex: Expected to rise to INR 6,500–7,000 crores.
• Debt reduction confidence: Management pointed to its track record of reducing borrowings from ~INR 52,000 crores in June 2020 to ~INR 13,386 crores as evidence it can manage the current cycle.

Tulsiani: "Basically, the past gives us the confidence for the future. As on June 20, we had total borrowings of nearly INR 52,000 crores, which you can say in a matter of -- you can say, less than two years, we could bring it down to roundabout INR 13,386 crores."

Expansion & Capacity Growth

• Debottlenecking: Schemes expected to add 0.3 crore tons of capacity over 3–4 years.
• IISCO expansion: A 0.45 crore ton expansion at IISCO Steel Plant is expected to be the first new greenfield addition; capex will start from FY2024–2025 after DPR finalization and tendering, a 1.5–2 year process.
• 2030–2031 target: Total expansion of 1.2 crore to 1.3 crore tons targeted by the end of the decade.
• Wheel capacity: Planning to increase wheel capacity next year with plant modifications, and SAIL has participated in the railways' tender for a new wagon wheel facility.
• Hot Strip Mill 2: The new plant will be ramped up further; product quality is very good and is expected to earn higher NSR.

Costs, People & Other Tailwinds

• Employee cost declining: Costs have been gradually reducing as ~3,000 senior-level people aged ~60 have left the company; recruitment has been very low, and management is trying to reduce it further.
• Retirement tailwind: The employee cost reduction trend of INR 50–100 crores per quarter should continue, with retirements of 3,000–3,500 people per year in the near future and new hires coming in at the lowest grades with much lower salaries.
• Odisha royalty benefit: The Odisha government changed its royalty basis from the highest lump rate to the highest fines rate this financial year, giving SAIL some benefit.
• Import pressures absent: Import pressures that existed at one point have now subsided.
• Budget support: Management expects infrastructure investments in the Union Budget to help significantly in marketing products.

Guidance & Commitments

Key Metrics