Less Steel, More Profit Per Tonne

ICICI Securities' Q1FY27 result update on Steel Authority of India, or SAIL, describes a quarter in which the headline volume numbers understate the underlying improvement in profitability. Consolidated topline was nearly flat, but the profit engine — margin per tonne of steel sold — accelerated sharply.

• Consolidated revenue was Rs 26,246 crore, up just 1% year-on-year, even as steel sales volume fell 10% year-on-year to 4.2 million tonnes.
• Reported EBITDA rose to Rs 4,153 crore, with margins expanding to 15.8%, up roughly 151 basis points sequentially.
• Adjusted EBITDA per tonne jumped to Rs 10,725 from Rs 8,287 in the prior quarter — an increase of nearly Rs 2,400 per tonne.
• Consolidated profit after tax stood at Rs 1,644 crore, down slightly from Rs 1,835 crore in the previous quarter, weighed down by a Rs 144 crore exceptional charge tied to a voluntary retirement scheme.

The brokerage attributes the margin expansion to stronger domestic steel realizations, with net sales realization climbing roughly Rs 5,100 per tonne, partly aided by safeguard-duty-driven spot price gains.

The Capacity Bet: From 21 to 35 Million Tonnes

The core of ICICI Securities' bullish thesis rests on India's steel demand headroom and SAIL's response to it. India's per capita steel consumption stands at just 103 kilograms, less than half the global average of approximately 215 kilograms, and the government has set a national target of 300 million tonnes of crude steel capacity by FY31.

Against that backdrop, SAIL is pursuing what the report calls an "aggressive capacity expansion programme," aiming to lift crude steel capacity from roughly 21 million tonnes per annum to 35 million tonnes per annum by FY31. A centerpiece of that plan is expanding the IISCO facility from 2.5 to 7 million tonnes per annum by FY29 through a Rs 36,000 crore investment, alongside debottlenecking and brownfield expansion across existing plants.

ICICI Securities forecasts sales volumes growing at a 6% compound annual rate over FY26-28E, reaching approximately 22.5 million tonnes by FY28E.

Inputs, Pricing and the Near-Term Swing Factors

1. Coking coal costs rose to approximately Rs 21,300 per tonne from Rs 18,100 per tonne in the prior quarter, though management expects a decline of Rs 1,200-1,500 per tonne in the current quarter as international prices soften from roughly $235 to $220 per tonne.
2. Domestic pricing showed a seasonal wobble. Long-product prices corrected nearly Rs 3,000 per tonne in July before recovering Rs 500-1,000 per tonne, while flat steel prices declined a more modest Rs 1,000 per tonne over the same period. Management expects net sales realization to soften a further Rs 1,000-2,000 per tonne sequentially before improving post-monsoon.
3. Captive coal production from the Tasra mine is expected to begin in December, a development management expects will reduce overall procurement costs over time.

Balance Sheet and Capex Discipline

Debt stood stable at approximately Rs 21,700 crore as of June, while the debt-to-equity ratio improved to 0.36x on better treasury management, with average borrowing costs falling to roughly 6.2% from 6.8% a quarter earlier. SAIL maintained its FY27 capital expenditure guidance of Rs 15,000 crore, though annual spending is expected to climb past Rs 20,000 crore in FY28 and toward Rs 25,000-26,000 crore in subsequent years as expansion projects gather pace.

Estimates and Valuation

ICICI Securities values SAIL at 6x EV/EBITDA on FY28E to arrive at its Rs 225 target, noting the stock currently trades at roughly 5x FY28E EV/EBITDA, a marked discount to domestic steel peers trading at 8x or higher. The brokerage projects sales and EBITDA to grow at roughly 12% and 31% compound annual rates, respectively, over FY26-28E.

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