Nuvama downgrades SAIL to 'Reduce' on weak steel margins, rising debt

Nuvama Institutional Equities has downgraded the Steel Authority of India (SAIL) to 'Reduce', flagging concerns around excess flat steel supply in India and weak steel margins

Nuvama on SAIL: Domestic brokerage Nuvama Institutional Equities has downgraded the state-owned steel manufacturer Steel Authority of India (SAIL) to ‘Reduce’, flagging concerns around excess flat steel supply in India, weak steel margins hurting earnings, rising debt due to the upcoming 4.5 million tonne per annum IISCO expansion, and poor return ratios over the next three years.

 

On the NSE, SAIL share price fell nearly 2 per cent to an intraday low of ₹127.78. At 12:50 PM, SAIL share price was trading almost flat at ₹129.68, down 0.4 per cent from previous session's close of ₹130.2. In comparison, the benchmark NSE Nifty50 was trading 0.29 per cent higher at 25,889.30 levels.

 

 

Nuvama noted that the company's return ratios are too poor with anticipated return on equity (RoE) of 3.2 per cent, 6.4 per cent, and 6.5 per cent in FY26E, FY27E, and FY28E, respectively. 

 

It has lowered its target price to ₹106 from ₹141, earlier, based on 6x FY28E EV/Ebitda. At the current market price (CMP), the stock trades expensive at 6.9x EV/Ebitda for both FY27E and FY28E, Nuvama said in its note. Ebitda stands for earnings before interest, tax, depreciation and amortisation.

 

Earnings pressure from weak steel prices, higher coal costs

According to analysts, lower-than-expected steel prices and volumes are likely to drag SAIL’s performance, with Ebitda projected to decline around 30 per cent quarter-on-quarter (Q-o-Q) in the December quarter of fiscal 2026 (Q3FY26) and Ebitda per tonne falling to about ₹3,700, down ₹1,400 sequentially. At current steel and coking coal prices, Ebitda per tonne could slip further to nearly ₹2,100.

 

While the brokerage expects steel prices to recover modestly in Q4FY26, the recent sharp rise in coking coal prices is likely to offset part of the benefit. As a result, estimates for Ebitda for FY26, FY27 and FY28 have been cut by 17 per cent, 13 per cent and 13 per cent, respectively, to reflect weaker margins.

IISCO expansion to lift capex, raise debt levels

SAIL is expected to begin the ordering process for its 4.5 million tonne per annum IISCO expansion by January 2026, with estimated capital expenditure of around ₹330 billion, which could rise further due to rupee depreciation. The project is likely to be completed by FY30.

 

Given weak earnings and elevated capital spending, the brokerage expects SAIL’s debt to increase to fund the expansion. It has factored in capital expenditure of ₹75 billion, ₹110 billion and ₹130 billion in FY26, FY27 and FY28, respectively, which could push net debt to about ₹374 billion by the end of FY28, with net debt-to-Ebitda at 2.8 times. While debt servicing is not seen as a concern, higher leverage is expected to weigh on equity valuation.

Unfavourable risk-reward; cut to ‘Reduce’

Over FY16 to FY25, the company reported average Ebitda per tonne of about ₹5,022, with losses in FY16 and a peak in FY22. Even after adjusting for these extremes, the decade-long average stands at around ₹5,650 per tonne. Despite recent earnings cuts, estimates for FY27 and FY28 still assume Ebitda per tonne of ₹6,348 and ₹6,474, respectively, which remain above the long-term average, Nuvama said in its note.

 

With the start of large capital expenditure expected to push up debt, and steel margins unlikely to see a sharp improvement, SAIL’s earnings are projected to trail peers. RoE is also expected to remain modest at 6–7 per cent. In this backdrop, the brokerage sees an unfavourable risk-reward at current market prices and has downgraded the stock to ‘Reduce’ from ‘Hold’.  (Disclaimer: Target price and stock outlook has been suggested by Nuvama Institutional Equities. Views expressed are their own.)