SAIL earnings beat estimates as stronger NSR offsets weak volumes, with volume growth key

Investment View and Earnings Outlook

Motilal Oswal Financial Services Limited (MOFSL) reiterated its Buy rating on SAIL in its July 28, 2026 results update. The broker considered the 1QFY27 earnings performance strong despite weak volumes, supported by elevated net sales realisation (NSR).

MOFSL expects earnings to moderate in subsequent quarters as long-steel prices soften and input costs rise. However, additional captive and third-party volumes, together with inventory liquidation, could limit the extent of earnings moderation. Meaningful earnings upside and a possible re-rating would depend on volume growth supported by third-party arrangements or captive expansion.

1QFY27 Financial Performance

Reported revenue included a one-time downward revision of Rs 3.1 billion in FY25 rail prices. On MOFSL's like-for-like adjustment, revenue was Rs 266 billion, up 3 per cent year on year and above the broker's estimate of Rs 258 billion, although it declined 14 per cent quarter on quarter.

Crude steel production declined because SAIL brought forward scheduled repair and maintenance activity. Sales volumes were also affected, while the higher average selling price supported profitability. Adjusted EBITDA exceeded MOFSL's estimate, and adjusted PAT was above the broker's forecast.

Iron Ore Sales and Volume Recovery

Iron ore sales rose to 1.1 million tonnes from 0.31 million tonnes in 1QFY26. Mining revenue increased to Rs 5.74 billion from Rs 1.57 billion and contributed about Rs 1.5 billion of incremental EBITDA.

Management retained its FY27 volume guidance of about 22.5 million tonnes and expects recovery over the coming quarters. Finished steel inventory increased by about 0.2 million tonnes during the quarter, but management expects no further build-up and plans inventory liquidation in 2HFY27.

• SAIL targets external iron ore sales of about 8 million tonnes in FY27, compared with about 3.5 million tonnes in FY26.
• The increase is expected to be aided by Odisha dispatches and the start of sales from Chhattisgarh and Jharkhand mines.
• The company plans to auction about 3 million tonnes of sub-grade iron ore fines from accumulated inventory of about 32 million tonnes.
• Finished steel's share increased to about 89 per cent from about 86 per cent a year earlier, while semi-finished steel production declined to about 12.5 per cent as SAIL continued third-party processing.

Steel Prices, Costs and Margins

Management expects 2QFY27 blended NSR to decline by about Rs 1,000 to Rs 2,000 per tonne quarter on quarter because of monsoon-related weakness. Long-steel prices corrected by about Rs 2,000 to Rs 3,000 per tonne during June-July 2026, while flat-steel prices fell by Rs 1,000 per tonne.

Imported coking-coal procurement cost rose by about Rs 3,200 per tonne to about Rs 21,300 per tonne in 1QFY27. Management expects costs to begin easing by about Rs 1,000 to Rs 2,000 per tonne during August-September 2026.

Management targets FY27 cost reduction of about Rs 2,000 to Rs 3,000 per tonne through productivity and efficiency measures. New facilities from FY29 onwards are expected to deliver net cost savings of about Rs 2,000 per tonne after higher fixed costs.

Capex, Debt and Project Execution

SAIL maintained FY27 capex guidance of Rs 150 billion after spending Rs 25.8 billion in 1QFY27. The company expects annual capex to exceed Rs 200 billion as brownfield projects accelerate.

The Durgapur TMT bar mill, with about 0.9 million tonnes per annum of capacity, remains on track for commissioning in 2HFY28. Net debt was about Rs 217 billion despite inventory build-up. Gross debt subsequently declined to about Rs 320 billion, while average borrowing cost fell to 6.24 per cent from 6.8 per cent year on year.

Valuation and Key Risks

MOFSL marginally increased its FY27 and FY28 estimates, supported by healthy steel prices and lower international coal costs. Its target price of Rs 195 is based on 7.5 times FY28 estimated EV/EBITDA, assuming FY28 volume of 22.5 million tonnes, EBITDA of Rs 7,544 per tonne and total EBITDA of Rs 170 billion.

Key factors that could weaken the outlook include:

• A sharper decline in steel prices.
• Higher input costs.
• Failure to recover volumes or monetise inventory.
• Higher capex and debt requirements.