17 Dec , 2021 By : Kanchan Joshi
Steel Authority of India Ltd’s (SAIL’s) investors should not be too worried about the ongoing weakness in steel demand, as this is a temporary phenomenon that has resulted from a combination of unfavourable factors, analysts pointed out.
The ban on construction activity in National Capital Region to curb pollution is said to have hit steel demand in the December quarter so far.
“The correction in international steel prices has been the key reason for poor demand as buyers have deferred purchases," analysts at Motilal Oswal Financial Services Ltd said in a report on 13 December. This means SAIL’s investors could brace themselves for muted volume growth for the December quarter.
Another pain point is input cost inflation, which may hit SAIL’s profitability in Q3. “While coking coal prices would impact Q3FY22 margins significantly, we believe this is already priced in. The coking coal impact is likely to ebb in Q4 as prices have already softened from the peak, while steel prices are likely to pick up from January/February," said the Motilal Oswal report.
The company’s employee cost is also expected to rise, though SAIL has been provisioning regularly for higher wage expenses.
Even as Q3 earnings performance may not be exciting, analysts hope demand will pick up in Q4, which is a busy construction season. “India’s steel consumption will rise by high-single-digit percentages through 2022, with strong demand from infrastructure and construction, but weaker auto demand amid semiconductor shortage," said Moody’s Investors Service release on 2022 outlook.
Another breather for SAIL’s investors comes from the fact that its major investments relating to capacity expansion and modernization are behind it. SAIL’s aggressive capacity expansion in the past resulted in huge debt, but now its management would initiate capex at a single location at one time. Further, the management aims to ensure that SAIL becomes net debt-free by Q1FY23. According to analysts at Centrum Broking Ltd, while the management’s intention to make SAIL net debt-free by Q1FY23 looks ambitious, it could be achieved by FY24. SAIL’s shares have appreciated by about 50% so far in 2021, suggesting that investors are capturing a good portion of the optimism in the stock.
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