SAIL likely to report average annual volume growth of 11% for FY19

Steel Authority of India (SAIL) has seen its stock price fall 28 per cent to Rs 72.9, since its peak at the start of this calendar year. While the Street’s sentiment has remained upbeat, the government-owned entity's much delayed capacity expansion, concerns on a global tariff war impacting this sector and overall market decline led to the muted return.

The good news is that domestic steel realisations continue to inch up, on the back of robust demand and higher Chinese prices. These have helped offset measures such as the US tariff hikes.

If SAIL can continue to improve its operational performance, as in the December quarter, when it had reported a profit after 10 quarters, sentiment on the Street could turn favourable. HSBC Global Research had, at the start of the June quarter, said completion of its modernisation and expansion projects had noticeably improved SAIL’s profitability . And, that they saw value emerging after a sharp correction.

Realisation rose about $60 a tonne in the December quarter (Rs 4,000 a tonne) sequentially. And, by $10-15 (Rs 600-1,000) a tonne in the ongoing quarter. The rise has been led by price improvement in long products. This bodes well for SAIL, as these comprise a large share of its portfolio. Rising infrastructure and housing demand will drive demand for these products.

While rebar and wire rod prices were up 28 per cent, those for flat products rose 15 per cent in the December quarter. Says Rahul Prithiani, director at CRISIL Research, “As the dynamics of a more consolidated industry play out in India’s flat steel space, spreads between landed and domestic prices are expected to narrow and higher utilisation and volumes, coupled with better pricing, will bode well for the profitability of players.”

The other trigger is completion of the expansion projects at Rourkela, Bokaro, IISCO & Durgapur, leading to annual capacity of 20.2 million tonnes in crude steel, largest in the country. This would result in a better product mix, a higher proportion of value-added-products and in market share. Earlier delay in the modernisation and expansion plan had led to a high conversion cost structure continuing. And, in operating performance not being able meet rising interest cost. These would now get addressed; there were indications in the December quarter.

With SAIL commissioning these five facilities, ramping up production and stabilising its operations, volume and profitability are expected to go up. Analysts at Elara Capital believe higher production and strong demand in the domestic market will help SAIL post 11 per cent annual volume rise over FY17-20 to 18 mt. Operating profit per tonne improved to Rs 3,946 in the December quarter, from a loss of Rs 767 a tonne in the March quarter of FY17. This trend is expected to improve; Elara expects per-tonne profitability to grow multi-fold to Rs 6,482 by FY20 (Rs 29 in FY17). HSBC also expects SAIL’s strong run in FY18 to continue in the March quarter and the period ahead. They both estimate SAIL to report average annual volume growth of 11 per cent and a growth in operating earnings of 46 per cent for FY19-20, with a return to profitability in FY19 for the first time in four years.