Steel Authority of India Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Best-ever Q2 volumes, but NSR softened: Crude steel, saleable steel and sales volumes all grew double digits over CPLY, yet NSR fell ~INR3,000 QoQ, partially offsetting a sharp drop in imported coking coal costs.
• One-off rail benefit drove the profit swing: The long-overdue FY22 rail price revision added ~INR1,750 crores to the top line this quarter, the single largest factor in the return to profitability.
• Coking coal tailwind is already reversing: Imported coal cost fell from ~INR27,800 to ~INR23,000 per ton in Q2, but prices have started rising again and management flagged a higher-cost challenge in Q3.
• Debt reduction plan stays on track despite capex: Year-end debt target of INR22,000 crores implies a INR3,500 crore reduction from March levels while still spending INR5,500 crores on capex.
• What to watch next quarter: Whether October NSR of ~INR56,000 holds into November and December, the pace of the Q3 coking coal cost increase, and any progress on an ad hoc rail price increase for FY22-23 and FY23-24 supply.

Volume & Realization Dynamics

• Physical performance hit a record: Crude steel production, saleable steel production and sales volumes all recorded double-digit growth over CPLY, driven by strong domestic demand. The company also drew down Q1 stock levels by ~3 lakh tons in Q2.
• NSR decline ate into the coal benefit: Though imported coal price fell more than INR5,000 per ton QoQ, NSR fell ~INR3,000, leaving only a marginal reduction in opex per ton once higher stores, spares and salary costs were factored in.
• Flat vs long premium narrowed: Flat products commanded an INR3,000-4,000 premium over longs in Q2 (flat ~INR55,000 vs long ~INR51,000), down from a wider spread in Q1. October pricing averaged ~INR56,000.
• Import pressure is real but contained: Flat product pricing is driven by import parity; import quantity is small relative to total Indian production but still exerts an influence. Longs are less affected by imports, and primary producers' longs command a premium over secondary producers, who are not operating at capacity.
• November and December pricing is uncertain: Management is trying to at least retain October prices in November; December pricing depends on whether infrastructure and building activity pick up.

The Rail Price Story

• FY22 revision booked in full: The entire benefit of ~INR1,750 crores for FY22 was taken in Q2, after final pricing was set at ~INR85,300 per ton versus the original provisional price of INR67,500 for 0.09 crore tons sold.
• Ad hoc increase now the priority: Management will approach Indian Railways for an ad hoc increase for FY22-23 and FY23-24 supply, since costs are substantially higher than the provisional INR67,500 per ton. Cost data for FY22-23 will be submitted to the CA Cost Office shortly, after FY21-22 cost finalization.
• No cost disclosure and no FY23-24 price comment: Management declined to disclose current rail costs and would not comment on whether the FY23-24 price would be lower than INR85,300.
• Rail price revision for current supply is expected: Any revision and provisional price benefit for current supply will add straight to the top line and bottom line.

Tulsiani: "We will be approaching the railways to give us an ad hoc increase until we submit the cost data of '22-'23 to the CA Cost Office and it is finalized."

Coking Coal & Cost Structure

• Q2 coal cost fell sharply, then reversed: Imported coal cost dropped from ~INR27,800 per ton in Q1 to ~INR23,000 in Q2, but prices have started rising again. Management expects an average consumption cost of ~INR27,000 per ton.
• Q3 flagged as a higher-cost quarter: The challenge from higher coking coal prices will prevail in Q3, but given the current price trend, cost should come down in Q4 FY24.
• Operational efficiencies are improving steadily: Coal and coke consumption rates are falling, CDI usage is rising, specific energy consumption is lower, and blast furnace productivity is higher.
• Employee expenses are a stable headwind: The full-year run rate for employee expenses is ~INR12,000 crores, with marginal increases in salaries and wages contributing to the limited opex-per-ton reduction in Q2.

Tulsiani: "The challenges from higher coking coal price during Q3 prevail, but given the current price trend, the cost should come down in Q4 financial year '24."

Product Mix & Conversion Strategy

• Semis share is being driven down: The proportion of semis in production has fallen below 15%, and through conversion services arrangements, the semis share in sales has been lowered to 8%.
• Conversion model explained: The company uses wet leasing and conversion agents for long products (TMTs, structurals), who convert semis and sell under the SAIL brand. Management did not quantify the conversion cost or margin differential when asked.
• Structural mill ramp-up is accelerating: Universal and medium structural mills are each planned to produce more than 6 lakh tons, with growth described as "phenomenal" over the last two to three years. Exact utilization figures were not disclosed on the call.
• New TMT bar mill planned: A TMT bar mill at Durgapur Steel Plant is being planned and will be finalized in the next few months.

Capex, Debottlenecking & Growth Pipeline

• FY24 capex is maintenance-heavy: Capex is likely to end the year at INR5,500 crores, with minimal growth spending. Growth capex is expected to start only from 2025 onwards.
• Debottlenecking via casters: Casters at Rourkela and Bhilai are already under implementation and will add ~0.2 crore tons of volume (0.1 crore tons each). Bhilai benefits start from FY25, ramping from 60% to 75% and 90% utilization; Rourkela will take two years.
• IISCO Steel Plant expansion is nearing Board approval: An in-principal approval is expected by the end of this quarter or the beginning of next quarter. The DPR is under preparation and being finalized to cut costs; capacity is ~0.35 crore tons additional steel volume, phased over the next three years starting from FY25.
• Brownfield expansions are multi-year: Durgapur Steel Plant and Bokaro Steel will be expanded in phases over the next three to four years.
• Growth capex peaks later this decade: First payments for ISP design engineering come in FY26, with spending peaking from FY28 onwards.

Tulsiani: "That will take place in '25-'26. And subsequently, it will peak from '27-'28 onwards."

Balance Sheet & Mining

• Debt rose then was pulled back: Debt rose to INR29,500 crores in June and was brought back to March levels of INR25,500 crores. The year-end target of INR22,000 crores implies a INR3,500 crore reduction while absorbing INR5,500 crores of capex, including coking coal cost impacts.
• Rowghat mining has begun: Interim mining has started, an MDO has been appointed, and tree-felling activity is underway. Management hopes to get sufficient material in the next three to four years.
• Jharkhand inventory sell-off awaits clearances: The company is hopeful of getting evacuation clearances during FY24.
• Gua MDO tender drew no response: A tender was issued for Gua mining but no response was received.

Tulsiani: "So, this INR22,000 crores -- a reduction of, you can say, INR3,500 crores with a capex of INR5,500 crores during this period. This is what we are looking at."

Guidance & Commitments

Key Metrics