Poor execution, higher debt may take wind out of SAIL’s plans
MUMBAI
:
At a time when investing in capacity expansion is seen as a strategy for long-term revenue growth, Steel Authority of India Ltd’s (SAIL) expansion plans appear to have made investors anxious. The worry is that the steelmaker’s expansion plans would lead to significantly higher capital expenditure (capex) thus keeping debt high in the coming years. This could explain why SAIL’s shares have underperformed so far in 2023, gaining 10% compared to 14% rise in the Nifty 500 index.
The company’s management is evaluating various expansion plans including modernization and removing of bottlenecks in the business. As mentioned in its September quarter (Q2FY24) earnings call, SAIL is planning to take initiatives to improve utilization of its existing assets. This would be led by some minor investments, greenfield expansion of IISCO steel plant, and some brownfield expansions that will take place in Durgapur and Bokaro steel plants.
These plans will unfold over the next three-four years, ensuring SAIL avoids a liquidity crisis similar to past expansions at IISCO, Bhilai, and Rourkela, said the company. However, delays are likely given the company’s poor execution track record and existing debt burden.
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“SAIL’s next phase of capex wave raises concerns as it completed its earlier hot metal expansion plan from 14.6 million tonnes to 25 million tonnes after much delay and capex overrun,” said Aditya Welekar, analyst at Axis Securities. He added that a delay in the past and capex over-run had put pressure on return on invested capital. Even analysts at Kotak Institutional Equities believe SAIL faces the risk of an extended period of high capex, negative free cash flow and rising leverage.
For FY24, the expected capex is approximately ₹5,500 crore, which is in line with the spending in FY23. As far as deleveraging is concerned, as of September end, SAIL’s debt stood at about ₹25,500 crore, which is the same as the March end level, with an anticipated year-end debt of around ₹22,000 crore.
Another worry that seems to trouble investors is the possibility of SAIL’s margin taking a beating in the second half of FY24. The cost of coking coal, a key raw material for steelmakers, during Q2 stood at ₹23,000 per tonne, and management expects it to rise to ₹27,000 per tonne in Q3. Additionally, the domestic steel prices are under pressure. SAIL’s Ebitda margin after adjusting for rail price revision, expanded sequentially to 7.6% from 6.76% led by lower input costs. Having said that, implementation of expansion plans and debt levels are key monitorables.