SAIL’s growth outlook dims amid lack of near-term capex plans

The problem is that earnings visibility is poor as the company may be staring at an extended period of muted growth with large expansion plans beginning only in the second half of FY26.

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In Q2FY25, SAIL’s Ebitda, adjusted for FY23 price revisions for sales to the railways, dropped a sharp 40% year-on-year to ₹1,270 crore. This adjustment reflects the steelmaker's practice of initially booking railway sales at an ad hoc price, which is later revised based on actual costs. The quarter also saw declines in sales volumes and a 4% drop in realization per tonne. Thus, while raw material prices were lower, adjusted Ebitda per tonne was down 30% to ₹3,091.

“SAIL’s market share loss continued in Q2FY25, with volume decline of 14% year-on-year, the worst among peers, a phenomenon likely to continue given capacity additions by private companies," said analysts from Kotak Institutional Equities.

Higher imports and reduced offtake due to heavier rainfall have weighed on SAIL’s average realizations. The steel industry also faces diverging trends across segments: flat products, mainly used in sectors like automobiles and consumer durables, are seeing greater price erosion due to subdued demand. On the other hand, long products, essential for construction and infrastructure, are experiencing a smaller price decline.

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With flat products comprising half of SAIL’s volumes, and 16% of its sales coming from semi-finished steel due to limited processing capacity, the company's Ebitda per tonne remains under one-fourth of ₹13,000 of peer Tata Steel Ltd’s domestic business.

While the management, during the earnings call, indicated that realization has picked up in November, it has revised downwards its FY25 volume guidance to 18 million tonnes from 19.1 million tonnes. In a positive, coking coal price is expected to drop further to about ₹20,000 per tonne in Q3, down from ₹22,000 in Q2 and ₹24,000 per tonne in Q1. SAIL has also started initial production from its captive coking coal mine, which would further lower costs after a full ramp-up.

Yet, SAIL’s larger problem lies in its limited growth visibility for the foreseeable future. Despite an ambitious long-term plan, none of its expansion projects are expected to take-off in the near term, with capital expenditure (capex) projected to start only from H2FY26.

“We envisage volume to marginally increase over FY24-26, limited scope of Ebitda growth and loss of market share in domestic market," said a Centrum Broking report dated 9 November. The report expects leverage position to deteriorate once capex starts from FY26 which may put further pressure on earnings as it takes three to four years for projects to come on stream.

SAIL’s net debt has risen to approximately ₹35,000 crore, up by around ₹5,000 crore from FY24 levels. According to the management, this increase is primarily due to a build-up of finished goods inventory ahead of a planned shutdown at one of its plants. They expect debt levels to return to FY24 levels by the end of FY25.

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SAIL’s shares currently trade at an enterprise value of 8.5x its estimated FY25 Ebitda, according to Bloomberg estimates. While the valuation appears reasonable, the absence of significant growth drivers may limit near-term gains.