Steel Authority of India Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Volume and price both under pressure: H1 sales volume fell 6.3% YoY and net sales realization dropped ~5%, compressing turnover nearly 10% to INR48,262 crores.
• One-time rail price revision lifted the quarter: A INR1,637 crore benefit from prior-period rail pricing was recognized in Q2, masking underlying operational weakness.
• Borrowings peaked then pulled back: Debt hit INR39,163 crores in August before management reduced it by ~INR5,000 crores to INR34,224 crores by end-October, ending Q2 at INR35,596 crores.
• Coking coal costs are easing: Imported coal fell from INR24,000/ton in Q1 to INR22,000 in Q2, with October/November projected at INR20,000, though December may tick up on index moves.
• What to watch next quarter: Whether October's improved sales run-rate sustains into Q3, the pace of the promised INR4,500-5,000 crore debt reduction, and any stabilization in flat product realizations.

Volume & Realization: The Top-Line Squeeze

• Export displacement hit domestic sales: Lower exports from the country pushed more material into the domestic market, while SAIL itself was unable to export much, driving the 6.3% H1 volume decline. Q2 did improve sequentially to 0.41 crore tons from Q1's 0.4 crore tons.
• Realization sliding further: H1 overall realization was INR52,000/ton; Q2 dropped to INR50,500. October fell further to ~INR48,000 before November recovered to ~INR49,500, led by long products while flats remain a challenge.
• October sales provided some relief: October sales reached 1.648 lakh tons, helping reduce inventory by around 1 lakh ton. Management projects Q3 could end around 0.5 crore tons based on that run-rate.
• China's export surge is the macro villain: A surge of Chinese exports dented international prices significantly, with China's steel demand estimated negative at 3% in 2024 and 1% in 2025. World steel demand is poised to remain negative by 0.9% in 2024 before turning positive at 1.2% in 2025.
• Indian demand tells a different story: Despite softening prices, Indian steel production grew 3.6% and consumption grew 13.5% during H1 FY25. Prices declined consistently till August 2024, with signs of strengthening especially for long products after the monsoon. India steel demand is projected to grow at more than 8% during 2024 and 2025.

Rail Pricing: The Quarter's Big Swing Factor

• A INR1,637 crore prior-period benefit: The ad hoc rail price was around INR75,000/ton; CA Cost revised it to around INR89,000, yielding a benefit of ~INR14,000 per ton recognized in Q2 for FY22 and FY23. Cash inflow from this revision is expected from end-Q3 into Q4.
• The pricing mechanism is inherently conservative: SAIL submits a cost-based price to railways, but railways typically reduces it by ~INR5,000 and pays that lower ad hoc price. Final CA Cost determination settles the difference later, meaning the process always carries a lag and potential for adjustment.
• FY23-24 pricing still pending: SAIL's cost submission for FY23-24 has yet to be made to CA Cost; management expects pricing assessment by end of this financial year. The company is following up with railways to request CA Cost to start that activity.

Tulsiani: "Normally on that, they'll reduce another INR5,000 or something like that and give it to us as an ad hoc price. They will not give us that exact price."

Costs: Coal Relief, Iron Ore Overhang

• Coking coal costs trending down: Imported coal averaged INR23,000/ton in H1, down from INR24,000 in Q1 to INR22,000 in Q2. October and November are projected at INR20,000, though December may see a slight increase as Platts and Argus indices have moved up. The benefit of lower prices will reflect in November consumption.
• Long-term coal contracts provide stability: Agreements are for 3 years, extendable by another 2, with prices based on Platts and Argus indices and a negotiated discount prevailing throughout the year. The majority of current contracts are in years 2024-25 and coming to an end but will be continued.
• Iron ore inventory: a INR4,000+ crore asset management refuses to write down: An analyst flagged that ~4 crore tons of iron ore inventory recorded at INR4,000-odd crores inflates the book value and hurts return ratios. Management flatly rejected any write-off, calling it an asset whose value does not diminish even after 40-50 years.
• Goa dispatch permission secured: Permission has been received to dispatch iron ore from Goa to SAIL's steel plants. A pellet plant and manifestation plant at Goa are in the pipeline to deplete around 0.3-0.35 crore tons of Goa stocks, with gradual dispatch already underway.

Tulsiani: "There is no question of writing it off. Actually, it's an asset, which we have got... Iron ore fines are not going to diminish its value since they are stocks which are more than 40 to 50 years old also."

Product Mix & Structural Shift

• Structural steel production doubled: Structural steel now accounts for 16% of production, up from a historical 8-9%, because two new mills (MSM at Durgapur Steel Plant and Universal Structural Mill at IISCO) have stabilized and gained market acceptance.
• But profitability has not followed: Despite higher structural volumes, profitability at ~INR3,100/ton is not showing a corresponding increase because flat product prices have not risen this quarter. Long products including structurals have seen price improvement, but flats remain a drag.
• Semis proportion elevated by maintenance: The proportion of semis in saleable steel production was around 16%, though semis in sales were lower at 9% due to conversion services. A major planned maintenance shutdown of the hot strip mill at Bokaro during Q1 prevented production of finished HR coil, distorting the ratio.
• Bar Mill order placed to reduce semis further: An order for a 1 MTPA Bar Mill at Durgapur Steel Plant has been placed, which will help bring down the semis percentage.

Capex & Expansion: The INR1 Lakh Crore Ambition

• Near-term capex is modest, but the pipeline is building: Projected capex for this year is around INR6,000-odd crores. Next year will increase as major contracts are frozen for IISCO modernization and other projects, with initial advances, drawings and engineering payments starting in FY25-26. Major expenditures will begin from FY26-27.
• IISCO modernization is the most advanced: Stage 1 approval is already in place. Out of 14 major technical packages, 8 have been tendered out. Stage 2 approval is expected by the middle of next year.
• Durgapur brownfield expansion moving forward: The Board has considered a Stage 1 approval proposal. Stage 2 approval is expected in another 6-8 months, after which tendering will begin immediately.
• Bokaro and Rourkela are earlier-stage: A PFR for Bokaro Steel Plant has been made and the final DPR is prepared but under examination. Rourkela expansion is awaiting land clearances; once received, the expansion plan will be taken up.
• The INR1 lakh crore figure is indicative, not firm: Management acknowledged that DPRs of other plants are not yet frozen and the INR1 lakh crore figure is on an assumptive basis. Actual capex will be known only once DPRs are frozen and orders placed. Peak debt is expected around FY28-29 at a debt-equity ratio of ~1.1x.
• Debottlenecking adds near-term volume: Another 0.25-0.3 crore tons will be added over the coming 2-3 years through debottlenecking. The FY25 sales volume target is around 18 crore tons, and the 3.5 crore ton target by FY31 is still being maintained.
• Pellet capacity being built out: A Bhilai pellet plant (0.1 crore tons) is coming up on a COM basis; a Rourkela pellet plant (~0.2 crore tons) is also coming; and a DPR for a 0.4 crore ton pellet plant at Gua Ore Mines is being prepared by consultants. Additional plans exist for IISCO and Durgapur pellet security.

Balance Sheet & Debt

• Borrowings peaked and were pulled back: Borrowings hit INR39,163 crores in August before management reduced them by almost INR5,000 crores to INR34,224 crores by end-October 2024. Q2 ended at INR35,596 crores, similar to Q1 FY25 levels.
• Further reduction planned, market permitting: Management is planning a reduction of around INR4,500-5,000 crores in the remaining part of this financial year, targeting year-end debt of INR29,000-30,000 crores, provided markets support.

Tulsiani: "From today's level, like it's round about INR34,500, we are planning a reduction of around about another INR4,500 crores to INR5,000 crores in the remaining part of this financial year provided the markets support us."

Guidance & Commitments

Key Metrics