(Kotak) 24june2021 - SAIL

Company Report
SAIL (SAIL) BUY

Metals & Mining
June 24, 2021
INITIATING COVERAGE
Sector view: Attractive
In a sweet spot. We initiate coverage on the stock with a BUY rating and Fair Value CMP (`): 125
of Rs170 assuming mid-cycle margins and significant upside optionality. SAIL is well-
placed to benefit from strong steel prices coupled with elevated iron ore prices given Fair Value (`): 170
its high costs and captive iron ore. Its expansion projects should help deliver volume BSE-30: 52,699
growth in a tight domestic market and provide operating leverage benefits. It would
reduce debt by +58% over FY2020-22E and allow net debt/EBITDA to remain below
1X during FY2022-24E.
Initiate with BUY: well-positioned to benefit from strong steel up-cycle

SAIL, a high-cost producer, is in a sweet spot to benefit from higher prices in steel/ iron ore
driven by China’s trade policy changes and supply-side reforms. Its expansion projects are at
the final stage of completion and should drive 4.4% CAGR volume over FY2021-24E. Strong
FCF should help reduce leverage from 13X net debt/EBITDA in FY2020 to 0.8X in FY2022E.
We estimate margins to moderate to mid-cycle levels in FY2023E after record levels in
FY2022E and arrive at a Fair Value of Rs170/share at 5X EV/EBITDA March 2023E. We estimate
bear/bull case value of Rs110/240/share (-12%/+92% versus CMP) (see Exhibit 8).
Expansion projects to drive volume growth and operating leverage

SAIL’s expansion projects, initiated in 2004, have repeatedly missed guidance and are yet to be
completed. Given the last stage of completion, we conservatively build +7% yoy volume in
FY2022E versus guidance of 25%. A 4.4% volume CAGR over FY2021-24E after a 2% CAGR
in the past decade would improve cost metrics given high operating leverage led by high
wages. The approval to sell iron ore inventory is an added upside to margins. We estimate
steel EBITDA of Rs15,700/9,000/ton and 6/8 mn tons of iron ore sales in FY2022/23E.
Balance sheet has significantly improved and deleveraging should continue

SAIL reduced net debt to Rs368 bn in FY2021 from Rs533 bn in FY2020, aided by strong
margins in 2HFY21. We estimate net debt to reduce further to Rs218 bn as of FY2022, aided
by current strong prices. Post this, SAIL would likely end FY2022 with the strongest balance
sheet, after being the most leveraged steel major in FY2020. We estimate Rs75/share, 60% of
the current price, being justified by just debt to equity transfer over FY2021-22E. Mid-cycle
margins from FY2023E would support growth spends and keep net debt/EBITDA below 1X.
Chinese policy changes have structurally elevated steel prices and margins
Sumangal Nevatia
China’s decarbonization agenda will continue to promote supply-side reforms, which along with sumangal.nevatia@kotak.com
Mumbai: +91-22-4336-0861
changes in trade policies could decouple its steel market with rest of the world (RoW). The
removal of 13% export rebate has structurally elevated global steel prices whereas speculated Prayatn Mahajan
export duty on steel provides further upside risk. With limited capacity addition, we see global prayatn.mahajan@kotak.com
Mumbai: +91-22-4336-0863
utilization on an uptrend over the next 3-4 years and prices/margins to remain elevated in the
medium term.
Company data and valuation summary
Company data Stock data High Low Price performance 1M 3M 12M

Rating: BUY 52-week range (Rs) 151 29 Absolute (%) 0 77 305
Rel to BSE-30 (%) (4) 66 168
CMP (Rs) Price at close of: 6/24/2021
Kotak Institutional Equities
125 Capitalization Forecast/ valuation 2021 2022E 2023E Research
Market cap (Rs bn) 517 EPS (Rs) 9.9 37.7 19.8
Promoter (%) 65 P/E (X) 12.6 3.3 6.3 Important disclosures appear
Free float (%) 35 P/B (X) 1.1 0.9 0.8 at the back
Shares outstanding (# mn) 4,130 RoE 9.4 29.6 13.0
Source: Bloomberg, Company, Kotak Institutional Equities estimates
For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution
and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricte d by law or
regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions.
Metals & Mining SAIL
TABLE OF CONTENTS
Financial and operational snapshot.......................................................3
Initiate with BUY: Well-positioned to benefit from strong steel up-cycle .4
Expansion projects to drive volume growth and operating leverage........8
Deleveraging to continue with strong cashflows ................................. 17
Appendix 1: Management profile and contingent liabilities .................. 23
Appendix II: Indian steel industry—To sustain high utilization............... 24
Appendix III: China policy changes have elevated global steel prices ..... 30
The prices in this report are based on the market close of [June 24, 2021].
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

SAIL Metals & Mining
FINANCIAL AND OPERATIONAL SNAPSHOT

Exhibit 1: We estimate SAIL’s volumes to see 4.4% CAGR over FY2021-24E
SAIL, assumptions, March fiscal year-ends, 2017-24E (Rs/ton, US$/ton)
2017 2018 2019 2020 2021 2022E 2023E 2024E

Assumptions
Average HRC price (US$/ton) 435 540 545 495 545 650 560 560
Iron ore revenues (Rs mn) — — — — 12,030 15,525 16,560 12,420
Steel deliveries ('000 tons) 13,110 14,120 14,117 14,231 14,940 16,000 16,500 17,000
Steel ASP (Rs/ton) 33,907 40,764 47,443 42,339 45,456 53,712 47,649 47,638
Steel cost (Rs/ton) 33,8 78 37,493 40,528 39,332 37,734 37,975 38 ,58 5 38 ,295
Raw material cost (Rs/ton) 16,206 19,699 21,030 19,900 18 ,400 17,738 18 ,8 50 19,059
Employee costs (Rs/ton) 6,8 25 6,268 6,269 6,18 2 7,002 6,539 6,394 6,247
Other costs (Rs/ton) 10,8 47 11,527 13,230 13,251 12,332 13,698 13,341 12,98 9
Steel EBITDA (Rs/ton) 29 3,270 6,915 3,007 7,721 15,737 9,064 9,343
Source: Company, Kotak Institutional Equities estimates
Exhibit 2: Condensed financials for SAIL

Consolidated income statement, balance sheet and cash flow, March fiscal year-ends, 2017-24E (Rs mn)
2017 2018 2019 2020 2021 2022E 2023E 2024E

Profit model (Rs mn)
Net sales 444,524 575,585 669,736 602,528 691,136 874,921 802,770 822,262
EBITDA 380 46,179 97,615 42,793 127,387 267,318 166,124 171,245
Interest (25,278) (28,228) (31,549) (34,868) (28,172) (23,924) (18,324) (12,024)
Depreciation (26,800) (30,649) (33,853) (37,557) (41,028) (44,560) (47,220) (49,880)
Profit before tax (46,341) (7,854) 37,158 (20,574) 66,795 207,441 109,187 117,948
Taxes 20,176 3,130 (11,957) (11,809) (30,575) (51,860) (27,297) (29,487)
Reported net income (26,165) (4,725) 25,152 (32,383) 36,220 155,581 81,890 88,461
Adjusted net income (26,165) (4,725) 27,430 (30,440) 40,897 155,581 81,890 88,461
Fully diluted EPS (Rs) (6.3) (1.1) 6.6 (7.4) 9.9 37.7 19.8 21.4
Balance sheet (Rs mn)
Equity 360,091 369,467 396,462 415,102 454,062 595,765 663,777 738,360
Borrowings 413,957 420,215 450,416 538,026 376,770 306,770 216,770 126,770
Other current liabilities 239,037 276,221 244,487 235,157 260,654 260,654 260,654 260,654
Other non-current liabilities — 1,383 15,838 17,660 30,781 80,567 96,945 96,945
Total liabilities 1,013,084 1,067,286 1,107,202 1,205,946 1,122,267 1,243,756 1,238,146 1,222,729
Net fixed assets 502,855 586,246 613,734 690,332 676,171 711,611 724,391 754,511
Capital work in progress 232,754 183,954 160,136 87,533 88,806 68,806 68,806 68,806
Investments 13,955 26,248 29,759 32,415 34,434 34,434 34,434 34,434
Cash 2,891 3,456 2,877 4,450 7,964 88,663 88,613 38,121
Other current assets 86,506 85,086 80,976 86,375 96,400 96,400 96,400 96,400
Other non-current assets 40,058 55,985 51,963 41,352 21,435 21,435 21,435 21,435
Working capital 134,065 126,312 167,758 263,489 197,059 222,409 204,068 209,023
Total assets 1,013,084 1,067,286 1,107,202 1,205,946 1,122,268 1,243,756 1,238,146 1,222,729
Net debt 411,066 416,759 447,539 533,576 368,807 218,107 128,157 88,649
Free cash flow (Rs mn)
Operating cash flow excl. working capital 3,059 50,437 97,497 98,941 125,054 256,637 146,598 133,152
Working capital changes 17,272 11,141 (26,646) (106,582) 100,643 (25,349) 18,341 (4,955)
Net finance cost/income (24,358) (28,515) (31,804) (35,074) (20,812) (15,317) (9,717) (3,417)
Cash flow from operations (4,028) 33,063 39,048 (42,715) 204,885 215,971 155,222 124,779
Capital expenditure (54,272) (66,044) (38,805) (43,813) (35,297) (60,000) (60,000) (80,000)
Free cash flow (58,300) (32,981) 243 (86,527) 169,588 155,971 95,222 44,779
Ratios
Net debt/equity (X) 1.1 1.1 1.1 1.3 0.8 0.4 0.2 0.1
EV/EBITDA (X) 2,437.9 20.2 9.9 24.5 6.9 2.7 3.9 3.5
P/B 1.4 1.4 1.3 1.2 1.1 0.9 0.8 0.7
P/E (19.7) (109.3) 18.8 (17.0) 12.6 3.3 6.3 5.8
Net debt/EBITDA (X) 1,080.6 9.0 4.6 12.5 2.9 0.8 0.8 0.5
RoAE (%) (7.0) (1.3) 7.2 (7.5) 9.4 29.6 13.0 12.6
RoACE (%) (1.9) 1.6 5.5 8.5 6.4 20.0 10.7 11.2
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

INITIATE WITH BUY: WELL-POSITIONED TO BENEFIT FROM STRONG STEEL UP-CYCLE

We Initiate coverage on SAIL with a BUY rating and Fair Value of Rs170/share based on 5X EV/EBITDA March
2023E, implying a 1X P/B on March 2023E. SAIL, given its high-cost operations and captive iron ore mines, has
a high sensitivity to the steel cycle and is in a sweet spot amid the current market dynamics. Its expansion
projects are at the final stage of completion and should drive 4.4% CAGR in volumes over FY2021-24E. Strong
FCF should help reduce leverage from 13X net debt/EBITDA in FY2020 to 0.8X in FY2022E. We estimate
margins to moderate to mid-cycle levels in FY2023E after record levels in FY2022E in our base case and see
upside risks. We estimate bear/bull case value of Rs110/240/share (-12%/+92% versus CMP) (Exhibit 8).
Fair Value of Rs170/share at 5X EV/EBITDA

We initiate coverage on SAIL with a BUY rating and Fair Value of Rs170/share, based on 5X
March 2023E EBITDA, at a discount to private steel producers factoring the risks around
execution and high cost structures.
Exhibit 3: Our Fair Value of Rs170/share is based on 5X EV/EBITDA March 2023E

SAIL, valuation details, March 2023E financials
EBITDA Multiple Value Value

(Rs bn) (X) (Rs bn) (Rs/share)
Consolidated EBITDA 166 5 8 31 201
Net debt 128 31
Arrived market capitalization for SAIL 702 170
Fair Value 170
Exhibit 4: SAIL is trading below mean on two-year forward P/B Exhibit 5: SAIL is trading below mean on two-year forward EV/IC
SAIL, two-year forward P/B, June 2004-21 (X) SAIL, two-year forward EV/IC, June 2004-21 (X)
SAIL - P/B - 2Y FWD SAIL - EV/IC - 2Y FWD

(X) (X)
4.0 -1sd 15Y Avg +1sd 3.0 -1sd 15Y Avg +1sd
3.5
2.5
3.0
2.0
2.5
2.0 1.5
1.5
1.0
1.0
0.5 0.5
0.0 0.0
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-04
Jun-05
Jun-06
Jun-07
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-08
Jun-16
Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

Exhibit 6: Metals valuation matrix
Market cap. P/E (X) Price/BV (X) EV/EBITDA (X) RoE (%)
Company (US$ mn) 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E 2021 2022E 2023E
SAIL 7,072 12.6 3.8 6.4 1.1 0.9 0.8 6.9 2.8 4.1 9.4 26.1 13.3
Tata Steel 17,911 15.5 4.3 7.7 1.8 1.3 1.2 6.9 3.6 4.8 11.8 35.8 16.0
JSW Steel 22,680 21.3 11.9 13.6 3.6 2.9 2.4 11.0 7.3 8.0 19.1 27.0 19.3
Jindal Steel and Power 5,436 6.3 5.3 7.2 1.3 1.0 0.9 4.3 3.5 4.0 16.8 21.5 13.5
International Companies
Arcelor Mittal 32,353 (27.7) 3.9 6.6 0.9 0.7 0.6 10.2 2.9 4.2 (3.0) 19.1 9.2
US Steel 6,124 (5.5) 2.5 7.2 1.4 0.9 0.7 (53.6) 2.8 5.0 (32.6) 41.0 12.3
Nippon Steel & Sumitomo 15,777 (3.9) (19.5) 6.9 0.6 0.7 0.6 28.6 12.3 5.8 (14.6) (3.4) 8.1
POSCO 26,131 20.1 7.4 7.6 0.6 0.6 0.6 6.3 3.9 3.9 3.1 8.5 7.7
JFE Holdings 7,051 (3.8) (22.2) 5.2 0.4 0.5 0.4 9.6 11.2 5.4 (10.9) (2.2) 7.3
China Steel Corporation 19,836 1,458 10.1 10.8 1.8 1.6 1.5 20.4 8.4 8.4 0.2 17.3 14.2
Angang Steel Company 6,080 1.4 0.9 27.3 0.7 0.7 0.6 7.3 4.4 4.0 3.7 8.5 9.4
Source: Kotak Institutional Equities estimates
Exhibit 7: Enterprise value for SAIL has remained range-bound in the past two years
Enterprise value (EV), net debt and market cap of SAIL, 4QFY18-4QFY21, FY2022E (Rs bn)
SAIL - EV (Rs bn)

Net Debt Market Cap
900
800
700
600
500
400
300
200
100
0
4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 FY2022E
Bull and bear case scenarios

In scenario analysis, we calculate that SAIL offers ~92% upside in a bull case scenario
whereas the bear case suggests only a 12% downside from current levels. At current levels,
we see attractive risk-reward with limited downside.
For our bull case scenario, we assume
 Higher margins in FY2023E versus our base case but still factor a 50% reduction from
spot levels.
 Higher volumes at 18 mn tons, closer to the management’s FY2022E guidance of 18.4

mn tons.
 Higher iron ore sales at 12 mn tons but still lower than the management’s guidance of 13
mn tons in FY2022E.
 In our bear case scenario, we assume lower volumes in case the expansion projects take
longer to complete and ramp-up volumes, lower margins and lower iron ore sales.

Exhibit 8: We estimate ~92% upside in our bull case scenario analysis

Scenario analysis of SAIL, FY2023E financials (Rs bn, Rs/share, %)
Units Bear Case Base Case Bull Case Comments

Iron ore sales mn tons 5.0 8.0 12.0 Company targets 13 mn tons in FY2022E
EBITDA Rs/ton 1,570 2,070 3,105 Spot at Rs4,500/ton
Steel volumes mn tons 15.0 16.5 18.0 Company targets 18 mn tons in FY2022E
EBITDA Rs/ton 7,564 9,064 10,000 Spot at Rs20,000/ton
EBITDA Rs bn 121 166 217
Net debt Rs bn 160 128 92
EV/EBITDA X 5.0 5.0 5.0
Equity Rs bn 447 702 994
Fair value Rs/share 110 170 240
CMP Rs/share 125 125 125
Upside/(downside) % (12) 36 92
Exhibit 9: SAIL’s earnings remain acutely sensitive to changes in HRC prices

Sensitivity of SAIL’s FY2023E EBITDA and FV on key drivers (%)
EBITDA Fair Value

9.0 8.29
8.0
7.0
6.0 5.56
5.0
4.0
3.0 2.33
1.83
2.0 1.31
0.97 0.89
1.0 0.64
0.0
+1% Realisation +1% Volume -1% Coking coal costs -1% Employee costs
Exhibit 10: SAIL’s FV changes by 8% for every 1% change in HRC Exhibit 11: SAIL’s EBITDA changes by 5% for every 1% change in
prices HRC
Sensitivity of SAIL’s FV to HRC prices and US$/INR on FY2023E Sensitivity of SAIL’s FY2023 EBITDA on HRC prices and US$/INR
financials (Rs/share) (Rs mn)
HRC Prices (US$/ton) HRC Prices (US$/ton)
500 530 560 600 650 500 530 560 600 650
75 38 90 143 214 302 75 69,006 107,760 146,515 198 ,18 7 262,778
76 49 103 157 228 317 76 77,777 117,048 156,319 208 ,68 1 274,133
US$/INR
US$/INR
77 61 116 170 242 333 77 8 6,548 126,336 166,124 219,174 28 5,48 8

78 73 128 18 3 257 348 78 95,319 135,624 175,928 229,668 296,8 42
79 85 141 197 271 364 79 104,090 144,911 18 5,733 240,161 308 ,197
Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates

Risks
 The government is aiming to divest a few steel plants ( NMDC’s 3 mtpa Narnagar steel
plant and RINL having 6 mtpa steel capacity). SAIL’s balance sheet has seen sharp
deleveraging in FY2021-22E and there is a risk of SAIL being asked to acquire the plants
in case of limited interest from the private sector.
 Lower than our estimated volumes (4.4% CAGR FY2021-24E) in case the company fails
to complete its expansion projects over the next 1-2 years.
 Higher employee cost in FY2022-23E in case the wage revision is higher than
estimated/guided by the management.
 Lower iron ore sales in case of regulatory bottlenecks in a few states prevent SAIL from
monetizing its iron ore inventory.
 Higher coking coal costs, we estimate coking coal at US$150/ton versus FY2021 at
US$123/ton and spot at US$170/ton.
 Higher capex led by government push.
 Cash outflows from contingent liabilities.

EXPANSION PROJECTS TO DRIVE VOLUME GROWTH AND OPERATING LEVERAGE

SAIL’s expansion projects, initiated in 2004, have seen significant delays, missed guidance and are yet to be
completed. Given the last stage of completion, we conservatively build +7% yoy volume in FY2022E versus
guidance of +25% yoy. A 4.4% volume CAGR FY2021-24E after a 2% CAGR in the past decade would
improve costs metrics given high operating leverage led by high wages. SAIL’s modernization and expansion
projects would also upgrade product mix and should aid margin expansion. Lastly, the iron ore sales, if
approvals and logistic issues fall in place, would be an added cash generation avenue in the medium term.
SAIL’s expansion plans set to deliver volume growth
SAIL’s modernization and expansion project was initiated in 2004 with an aim to complete
by 2010 whereas work started only from FY2009 after several delays at the planning stage.
The execution, again, saw cost overruns and delays with initial cost estimated at Rs540 bn
for total 23 mtpa capacity. The latest estimated cost for the entire project is Rs720 bn for
total 21 mtpa capacity and is expected to be completed by FY2022-23E in phases. The
project encompasses capacity expansion, product mix upgradation, debottlenecking and raw
material augmentation.
SAIL has spent ~Rs663 bn out of the planned capex of Rs721 bn in the past 10 years. With
the modernization and expansion plan nearing its end in FY2022-23, we expect SAIL to
benefit from the expansion project through:
 Higher volumes
 Enhanced margins with a better product mix
 Cost benefits from modernized capacities and operating leverage
Exhibit 12: SAIL’s steel volumes have increased at a 2% CAGR over the past decade
SAIL’s steel volumes, March fiscal year-ends, 2005-21 (mn tons)
Steel deliveries (mn tons)

16
14
12
10
0
2006
2007
2008
2011
2012
2015
2016
2017
2019
2020
2021
2005
2009
2010
2013
2014
2018
Source: Kotak Institutional Equities estimates, Company

Exhibit 13: SAIL plans to expand its saleable steel capacity to 20.2 mtpa over FY2022-24E
SAIL’s saleable steel capacity at plants (mtpa)
Exisiting capacity Post expansion

(mtpa) capacity (mtpa) Increase (mtpa)
Integrated steel plants
Bhilai (BSP) 4.0 6.6 2.6
Durgapur (DSP) 2.0 2.1 0.1
Rourkela (RSP) 3.2 4.0 0.8
Bokaro (BSL) 3.2 4.2 0.9
IISCO (ISP) 1.8 2.4 0.6
Sub total 14.3 19.2 5.0
Alloy steel plants
Alloy (ASP) 0.1 0.4 0.3
Salem (SSP) 0.3 0.3 0.1
Visvesvaraya (VISL) 0.0 0.2 0.2
Sub total 0.4 0.9 0.6
Total 14.6 20.2 5.6
Exhibit 14: SAIL’s capacity expansion plan has a total capex of Rs721 bn
Break up of ongoing capex plan of SAIL (Rs bn)
Description Amount (Rs bn)

Expansion of existing capacity 391
Value-addition/Product-mix improvement 70
Technological up gradation /Modernization 35
Sustenance including de-bottlenecking, AMR & Environment 122
Augmentation of raw material facilities 103
Total estimated cost 721
Exhibit 15: SAIL has spent Rs663 bn towards the ongoing expansion plan as on FY2021
SAIL’s capex, March fiscal year-ends, 2012-21, (Rs bn)
Annual capex (Rs bn)

120 110
97 99
100
80
68
60
60 51
49
43 41 43
40
20
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Exhibit 16: We estimate a 4.4% CAGR in volumes over FY2021-24E led by expansion projects
SAIL’s steel volumes, March fiscal year-ends, 2020-24 (mn tons)
Steel deliveries (mn tons)

17
16
15
14
13
12
2020 2021 2022E 2023E 2024E
Product mix upgrade to aid in margin expansion
SAIL’s modernization and expansion would enhance its product mix and reduce the mix of
semi-finished steel in the sales volume mix. We note that downstream/value added capacity
would increase from 7.5 mtpa to 14 mtpa, +85%, after completion of expansion projects
led by higher CRC, structurals, TMT bar and rails. Higher value added volumes would
enhance SAIL’s blended margins by ~Rs1,500/ton on complete ramp-up over FY2022-24E.
Exhibit 17: SAIL’s existing product mix has a high proportion of Exhibit 18: Mix of value-added volumes to increase after
semis expansion
SAIL’s product mix on existing capacity (%) SAIL’s product mix after expansion projects (%)
Existing product mix Post expansion

CR Others, 2 product mix
Coils/Sheets CR
Semis, 21 Coils/Sheets Others, 4
,6 Semis, 12
, 11
Railway
HR materials, 8
Coils/Sheets
, 26 HR
Railway Coils/Sheets
materials, , 16
10 Structurals,
14
Structurals,
6
Plates, 14 Bars & Plates, 16 Bars &

Rods, 15 Rods, 19
Source: Kotak Institutional Equities estimates, Company Source: Kotak Institutional Equities estimates, Company

Exhibit 19: SAIL’s proportion of value-added products will increase post completion of its expansion
projects over FY2022-24E
SAIL’s proportion of value added products (%, mtpa)
Exisiting mix Capacity Proposed mix Capacity Increase

(%) (mtpa) (%) (mtpa) (mtpa)
Product Mix
Semis 21 3.07 12 2.42 (0.65)
Railway materials 10 1.46 8 1.61 0.15
Structurals 6 0.8 8 14 2.8 3 1.95
Bars & Rods 15 2.19 19 3.8 3 1.64
Plates 14 2.05 16 3.23 1.18
HR Coils/Sheets 26 3.8 0 16 3.23 (0.57)
CR Coils/Sheets 6 0.8 8 11 2.22 1.34
Others 2 0.29 4 0.8 1 0.52
Total 14.6 20.2 5.6
Volume growth to drive operating leverage benefits

SAIL suffers from high fixed costs as compared to private peers mainly because of higher
employee costs. SAIL’s employee cost/ton of steel is significantly higher (Exhibit 20) versus
TATA and JSTL. The wage cost inflation has kept the wage bill on an uptrend despite
employee count reduction at 5% CAGR over the past decade. However, with 4.4% CAGR
volume, reducing employee count, we estimate employee cost/ton to reduce from
Rs7,000/ton in FY2021 to Rs6,250/ton by FY2024E.
Exhibit 20: SAIL’s employee costs/ton of steel remains highest Exhibit 21: SAIL’s number of employees continued to decline at
within peers a CAGR of 5% over the past decade
Employee cost/ton of steel for SAIL, TATA, JSTL, March fiscal year- Number of employees at SAIL, March fiscal year-ends, 2010-21
ends, 2010-21 (Rs/ton)
130,000 No of employees
SAIL TATA JSW
9,000 120,000
8,000 110,000
7,000 100,000
6,000
90,000
5,000
80,000
4,000
70,000
3,000
60,000
2,000
50,000
1,000
40,000
-
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

Exhibit 22: SAIL’s number of employees/ton of steel remains Exhibit 23: SAIL’s average wage per employee continues to
highest within peers increase
Number of employees/ton of steel for SAIL,TATA,JSTL, March fiscal Average annual wage per employee for SAIL,TATA,JSTL, March fiscal
year-ends, 2010-21 (Employees/ton) year-ends, 2010-21 (Rs mn)
Number of employees/ton of steel Average annual wage per employee (Rs mn)
SAIL TATA JSW SAIL TATA JSW
12,000 1.7
10,000 1.5
8,000 1.3
6,000 1.1
4,000 0.9
2,000 0.7
- 0.5
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2010
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2011
Exhibit 24: We estimate employee cost/ton of steel to decline on higher volumes and a reduction in
employee headcount
SAIL’s employee cost/ton of steel, number of employees, March fiscal year-ends, 2011-24 (Rs/ton)
Employee cost/ton of steel (Rs) (RHS) Number of employees (LHS)

120,000 9,000
8,500
110,000
8,000
100,000 7,500
90,000 7,000
6,500
80,000 6,000
70,000 5,500
5,000
60,000
4,500
50,000 4,000
2012
2014
2015
2016
2017
2019
2021
2011
2013
2018
2020
2022E
2024E
2023E

Exhibit 25: SAIL’s blended realization/ton of steel is lower than that of peers
Blended realization of steel for SAIL,TATA,JSTL, March fiscal year-ends, 2010-24E (Rs/ton)
Realization (Rs/ton)
75,000
SAIL TATA JSW
70,000
65,000
60,000
55,000
50,000
45,000
40,000
35,000
30,000
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022E
2023E
2024E
Exhibit 26: SAIL’s cost/ton of steel is higher than that of peers

Cost of steel for SAIL,TATA,JSTL, March fiscal year-ends, 2010-24E (Rs/ton)
Cost (Rs/ton)
55,000
SAIL TATA JSW
50,000
45,000
40,000
35,000
30,000
25,000
20,000
2011
2012
2013
2014
2017
2018
2019
2020
2010
2015
2016
2021
2023E
2024E
2022E

Exhibit 27: SAIL’s EBITDA/ton of steel is lower than that of peers

EBITDA/ton of steel for SAIL,TATA,JSTL, March fiscal year-ends, 2010-24 (Rs/ton)
EBITDA (Rs/ton)
23,000 SAIL TATA JSW
19,000
15,000
11,000
7,000
3,000
(1,000)
(5,000)
2010
2011
2014
2015
2017
2018
2021
2012
2013
2016
2019
2020

Iron ore sales – another cash flow avenue

In FY2020, government allowed SAIL to sell its surplus iron ore production and sub-grade
inventory in order to address the domestic iron ore shortage amidst the auction process.
Initially, SAIL was allowed to sell 25% of its previous year production and dispose the old
stock of 70 mn tons (majorly sub-grade fines) for a period of two years.
With the recent MMDR amendment (dated 28th March 2021), all captive mines have been
allowed to sell up to 50% of their current year production but at an additional royalty cost.
The total royalty to be paid would be 37.5% for fines (15% plus 150% of base royalty) and
52.5% for lumps (15% plus 250% of base royalty).
SAIL sold 3.2 mn tons of iron ore inventory in FY2021 and has guided for 13 mn tons sales
in FY2022E. It has surplus production capacity and 43 mn tons of sub-grade fines inventory.
Issues, related to royalty rate with the Odisha government has been resolved and auctions
have resumed after a dip in April 2021. State approvals in Jharkhand are awaited and
management expects to receive these approvals soon.
We estimate 6/8/8 mn tons of iron ore inventory sales in FY2022/23/24E with an assumption
of declining iron ore realization. However, there is an upside risk given the company’s target
of 13 mn tons of sales in FY2022E.
Exhibit 28: We estimate annual iron ore sales of ~6-8 mn tons Exhibit 29: Iron ore earnings form 6-10% of SAIL’s EBITDA
SAIL iron ore sales, March fiscal year-ends, 2021-24E (mn tons) Iron ore earnings as a % of EBITDA, March fiscal year-ends, 2021-24E
Sales (mn tons) Iron ore revenues as a % of consolidated EBITDA

9 12%
8 .0 8 .0
8 10%
10% 9%
7
6.0
6 8% 7%
5 6%
6%
4
3.2
3 4%
2
2%
1
0 0%
2021 2022E 2023E 2024E 2021 2022E 2023E 2024E
Exhibit 30: SAIL has auctioned ~ 5.5 mn tons of iron ore in the past 12 months
Auction of captive iron ore by SAIL, May 2020-21, (000 tons)
Bolani Barsua Rajhara Dalli kiruburu Meghahatuburu Bhadravati Taldih

900
800
700
600
500
400
300
200
100
0
June'20
Aug'20
Sep'20
Mar'21
Apr'21
Nov'20
May'20
Oct'20
May'21
Dec'20
Jan'21
Feb'21
Source: Kotak Institutional Equities estimates, Steelmint

Divestment of special steel plants to curb losses

SAIL has been working on the divestment of three special steel plants over the past four
years. The cabinet approved the outright sale of the three special steel plants in 2017 and
over the past four years, the divestment process has seen little progress. These three plants
have been incurring losses (EBIT loss of Rs3.5 bn per annum over FY2012-21) since years but
have good land bank and facilitating infrastructure to attract private players.
Exhibit 31: We expect limited capacity additions at special steel plants

Hot metal, crude steel and saleable steel capacity at three special steel plants for SAIL, FY2021, (mtpa)
Hot metal (mtpa) Crude steel (mtpa) Saleable steel (mtpa)

FY2021 Post expansion FY2021 Post expansion FY2021 Post expansion
Alloy Steels Plant (ASP) 0.0 0.0 0.1 0.5 0.1 0.4
Salem Steel Plant (SSP) 0.0 0.0 0.1 0.2 0.3 0.3
Visvesvaraya Iron & Steel Plant (VISL) 0.0 0.3 0.0 0.2 0.0 0.2
Total 0.0 0.3 0.2 0.9 0.4 0.9
Exhibit 32: The three special steel plant have made EBIT loss of Exhibit 33: Production at special steel plants has been declining
Rs3.5 bn per annum over the past decade Production at special steel plants, March fiscal year-ends, 2010-21,
EBIT at special steel plants, March fiscal year-ends, 2010-21 (Rs bn) (mn tons)
ASP SSP VISL 0.6 ASP SSP VISL

1.0
- 0.5
(1.0)
0.4
(2.0)
0.3
(3.0)
0.2
(4.0)
0.1
(5.0)
(6.0) -
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates
Two plants out of three (VISP and SSP) have received good investor interest and SAIL is
hopeful of divestment of these two plants in FY2022E. The data centers have been made
accessible to the shortlisted bidders and financial bids for the two plants are expected soon.
The due diligence process by the prospective bidders had got delayed due to Covid-19.

DELEVERAGING TO CONTINUE WITH STRONG CASHFLOWS

SAIL reduced net debt to Rs368 bn in FY2021 from Rs533 bn in FY2020, aided by strong margins in 2HFY21.
We estimate net debt to reduce further to Rs218 bn as of FY2022, aided by current strong prices. Post this,
SAIL would likely end FY2022 with the strongest balance sheet, after being the most leveraged steel major in
FY2020. We estimate Rs75/share, 60% of the current price, being justified by just debt to equity transfer over
FY2021-22E. Mid-cycle margins from FY2023E would support growth spends and keep net debt/EBITDA below
1X. Sharp improvement in balance sheet has significantly reduced SAIL’s financial leverage in the current
cycle.
Sharp improvement in balance sheet

The lost decade FY2010-20
With delays in expansion plans and cost overruns, SAIL’s debt ballooned from a debt-free
balance sheet till 2010 to Rs530 bn debt as of FY2020. We note that Rs300 bn debt was
added between FY2014-FY2020.
Exhibit 34: High capex and low margins kept FCF negative Exhibit 35: Negative FCF ballooned SAIL’s net debt in the past
during FY2010-20 10 years
Free cash flow for SAIL, March fiscal year-ends, 2010-20 (Rs bn) Net debt for SAIL, March fiscal year-ends, 2010-20 (Rs bn)
Free Cash Flow (Rs bn) Net Debt (Rs bn)

60 47 600
534
40
500 448
20 411 417
0 400 348
-
300 276
(20) 224
177
200
(40) (33)
(39) 99
100
(60) (50) (50) 19
(58 )
(80) -
(75)
(100) (90) (90) (8 7) (100) (59)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2010
2011
2012
2014
2015
2016
2017
2018
2019
2020
2013
Strong cash-flows in FY2021-22E to repair balance sheet
Strong cash flows from current high margins should significantly reduce SAIL’s net debt. We
note that two strong years FY2021/22E would reduce net debt by Rs300 bn, built over the
past seven years, 2014-20.

Exhibit 36: We estimate strong FCF over FY2021-24E on higher Exhibit 37: We forecast a sharp reduction in SAIL’s net debt over
steel prices FY2021-24E
Free cash flow for SAIL, March fiscal year-ends, 2020-24E (Rs bn) Net debt for SAIL, March fiscal year-ends, 2020-24E (Rs bn)
Free cash flow (Rs bn) Net Debt (Rs bn)

200 600
170 534
156
150 500
95 400 369
100
45 300
50
218
- 200
128
89
(50) 100
(100) (8 7) -
2020
2021
2022E
2023E
2024E
2020
2021
2022E
2023E
2024E
Deleveraging to continue
With volume growth and completion of capex program, we estimate FCF generation to
continue and Net debt/EBITDA to remain <1X over FY2021-24E.
Exhibit 38: Higher operating cash flow and lower capex to result in lower net debt
Operating cash flow and capital expenditure for SAIL, March fiscal year-ends, 2011-24E (Rs bn)
Operating cash flow excl. working capital Capital expenditure (Rs bn)
300
250
200
150
100
50
-
2011
2014
2015
2016
2019
2020
2021
2012
2013
2017
2018
2024E
2022E
2023E
(50)

Exhibit 39: Higher operating cash flow and lower capex to drive strong FCF and reduce debt
Net debt for SAIL, March fiscal year-ends, 2011-24E (Rs bn)
Net debt (Rs bn)

600
534
500 448
411 417
400 369
348
300 276
224 218
200 177
128
99 89
100
19
-
2011
2012
2013
2016
2017
2018
2021
2014
2015
2019
2020
2022E
2023E
2024E
Exhibit 40: We estimate leverage to remain below 1X through FY2022-24E

Net debt, net debt/EBITDA for SAIL, March fiscal year-ends, 2018-24E (Rs bn, X)
Net debt (Rs bn) (LHS) Net debt/EBITDA (X) (RHS)

600 14
534
500 12.5 12
448
417
10
400 369
9.0
8
300
218 6
200 4.6
128 4
2.9 89
100 2
0.8 0.8 0.5
- 0
2018 2019 2020 2021 2022E 2023E 2024E

Exhibit 41: We estimate strong FCF over FY2022-24E Exhibit 42: We estimate high FCF yield over FY2022-24E
Free cash flow of SAIL, March fiscal year-ends, 2011-24E (Rs bn) Free cash flow yield of SAIL, March fiscal year-ends, 2011-24 (%)
Free cash flow (Rs bn) FCF Yield (%)

200 40
170 33
156 30
150 30
95 18
100 20
45 9
50 10
0 0
- -
(50) (33) (10) (6)

(39) (8 )
(50) (50) (58 ) (10) (10) (11)
(100) (75) (20)
(90) (90) (8 7) (17) (17)
(150) (30)
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022E
2024E
2023E
2011
2012
2013
2015
2016
2017
2018
2019
2020
2021
2014
2022E
2023E
2024E
Enterprise value remains stable since FY2020

We note that SAIL’s enterprise value (EV) has remained range bound at Rs700 bn over the
past two years. The benefits of (1) Chinese policy changes, (2) sharp reduction in leverage
and (3) progress on expansion projects are yet to reflect in SAIL’s EV or equity value.
Exhibit 43: Enterprise value for SAIL has remained range bound over the past two years
Enterprise value (EV), net debt and market cap of SAIL, 4QFY18-4QFY21, FY2022E (Rs bn)
SAIL - EV (Rs bn)

Net Debt Market Cap
900
800
700
600
500
400
300
200
100
0
4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 FY2022E

Exhibit 44: We expect SAIL’s volumes to grow at the rate of 4.4% over FY2021-24E
SAIL, assumptions, March fiscal year-ends, 2017-24E (Rs mn)
2017 2018 2019 2020 2021 2022E 2023E 2024E

Assumptions
Average HRC price (US$/ton) 435 540 545 495 545 650 560 560
Iron ore revenues (Rs mn) — — — — 12,030 15,525 16,560 12,420
Steel deliveries ('000 tons) 13,110 14,120 14,117 14,231 14,940 16,000 16,500 17,000
Steel ASP (Rs/ton) 33,907 40,764 47,443 42,339 45,456 53,712 47,649 47,638
Steel cost (Rs/ton) 33,8 78 37,493 40,528 39,332 37,734 37,975 38 ,58 5 38 ,295
Raw material cost (Rs/ton) 16,206 19,699 21,030 19,900 18 ,400 17,738 18 ,8 50 19,059
Employee costs (Rs/ton) 6,8 25 6,268 6,269 6,18 2 7,002 6,539 6,394 6,247
Other costs (Rs/ton) 10,8 47 11,527 13,230 13,251 12,332 13,698 13,341 12,98 9
Steel EBITDA (Rs/ton) 29 3,270 6,915 3,007 7,721 15,737 9,064 9,343
Exhibit 45: HRC price assumptions remain much below spot Exhibit 46: We expect coking coal prices to normalize over
prices FY2022-24E
HRC price assumptions versus spot HRC prices, March fiscal year- Coking coal price assumptions, March fiscal year-ends, 2016-24E
ends, 2016-24E (US$/ton) (US$/ton)
HRC prices - CFR India (US$/ton) Hard Coking Coal - Australia FOB (US$/ton)
1,000 Spot HRC prices (US$/ton) 250 Spot HRC prices (US$/ton)
204 200
900
200
175
800
148 150 150
150 140
700 650 123
600 560 560 93

540 545 545 100
495
500 435
50
400
307
300 0
2016
2017
2018
2019
2020
2021
2022E
2023E
2024E
2016
2017
2018
2019
2020
2021
2022E
2023E
2024E
Source: Kotak Institutional Equities estimates Source: Kotak Institutional Equities estimates

Exhibit 47: We expect SAIL’s EBITDA to grow at 10% CAGR over FY2021-24E
Consolidated income statement, balance sheet and cash flow, March fiscal year-ends, 2017-24E (Rs mn)
2017 2018 2019 2020 2021 2022E 2023E 2024E
Profit model (Rs mn)
Net sales 444,524 575,585 669,736 602,528 691,136 874,921 802,770 822,262
EBITDA 380 46,179 97,615 42,793 127,387 267,318 166,124 171,245
Other income 5,356 4,8 44 4,945 9,058 8 ,607 8 ,607 8 ,607 8 ,607
Interest (25,278 ) (28 ,228 ) (31,549) (34,8 68 ) (28 ,172) (23,924) (18 ,324) (12,024)
Depreciation (26,8 00) (30,649) (33,8 53) (37,557) (41,028 ) (44,560) (47,220) (49,8 8 0)
Profit before tax (46,341) (7,854) 37,158 (20,574) 66,795 207,441 109,187 117,948
Extraordinaries — — (49) — — — — —
Taxes 20,176 3,130 (11,957) (11,8 09) (30,575) (51,8 60) (27,297) (29,48 7)
Reported net income (26,165) (4,725) 25,152 (32,383) 36,220 155,581 81,890 88,461
Adjusted net income (26,165) (4,725) 27,430 (30,440) 40,8 97 155,58 1 8 1,8 90 8 8 ,461
Fully diluted EPS (Rs) (6.3) (1.1) 6.6 (7.4) 9.9 37.7 19.8 21.4
Balance sheet (Rs mn)
Equity 360,091 369,467 396,462 415,102 454,062 595,765 663,777 738 ,360
Deferred tax liability — — — — 13,341 63,127 79,505 79,505
Borrowings 413,957 420,215 450,416 538 ,026 376,770 306,770 216,770 126,770
Other current liabilities 239,037 276,221 244,48 7 235,157 260,654 260,654 260,654 260,654
Other non-current liabilities — 1,38 3 15,8 38 17,660 17,441 17,441 17,441 17,441
Total liabilities 1,013,084 1,067,286 1,107,202 1,205,946 1,122,267 1,243,756 1,238,146 1,222,729
Net fixed assets 502,8 55 58 6,246 613,734 690,332 676,171 711,611 724,391 754,511
Capital work in progress 232,754 18 3,954 160,136 8 7,533 8 8 ,8 06 68 ,8 06 68 ,8 06 68 ,8 06
Investments 13,955 26,248 29,759 32,415 34,434 34,434 34,434 34,434
Cash 2,8 91 3,456 2,8 77 4,450 7,964 8 8 ,663 8 8 ,613 38 ,121
Other current assets 8 6,506 8 5,08 6 8 0,976 8 6,375 96,400 96,400 96,400 96,400
Other non-current assets 40,058 55,98 5 51,963 41,352 21,435 21,435 21,435 21,435
Working capital 134,065 126,312 167,758 263,48 9 197,059 222,409 204,068 209,023
Total assets 1,013,084 1,067,286 1,107,202 1,205,946 1,122,268 1,243,756 1,238,146 1,222,729
Net debt 411,066 416,759 447,539 533,576 368 ,8 07 218 ,107 128 ,157 8 8 ,649
Free cash flow (Rs mn)
Operating cash flow excl. working capital 3,059 50,437 97,497 98 ,941 125,054 256,637 146,598 133,152
Working capital changes 17,272 11,141 (26,646) (106,58 2) 100,643 (25,349) 18 ,341 (4,955)
Net finance cost/income (24,358 ) (28 ,515) (31,8 04) (35,074) (20,8 12) (15,317) (9,717) (3,417)
Cash flow from operations (4,028) 33,063 39,048 (42,715) 204,885 215,971 155,222 124,779
Capital expenditure (54,272) (66,044) (38 ,8 05) (43,8 13) (35,297) (60,000) (60,000) (8 0,000)
Free cash flow (58,300) (32,981) 243 (86,527) 169,588 155,971 95,222 44,779
Ratios
Net debt/equity (X) 1.1 1.1 1.1 1.3 0.8 0.4 0.2 0.1
EV/EBITDA (X) 2,437.9 20.2 9.9 24.5 6.9 2.7 3.9 3.5
P/B 1.4 1.4 1.3 1.2 1.1 0.9 0.8 0.7
P/E (19.7) (109.3) 18 .8 (17.0) 12.6 3.3 6.3 5.8
Net debt/EBITDA (X) 1,08 0.6 9.0 4.6 12.5 2.9 0.8 0.8 0.5
RoAE (%) (7.0) (1.3) 7.2 (7.5) 9.4 29.6 13.0 12.6
FCF Yield (%) (11.3) (6.4) 0.0 (16.8 ) 32.8 30.2 18 .4 8 .7
RoACE (%) (1.9) 1.6 5.5 8.5 6.4 20.0 10.7 11.2

APPENDIX 1: MANAGEMENT PROFILE AND CONTINGENT LIABILITIES

Short stints at various top management positions have been an area of concern at SAIL. For
instance, the current Chairperson, Ms Soma Mandal is the fifth chairperson since 2015 and
due to retire in two years.
Exhibit 48: The Chairman’s position has seen high attrition since 2015
Past Chairman and their tenures at SAIL
Person From To Term

Ms Soma Mandal 1-Apr-21 1-Apr-23 2 years
Mr Anil Kumar Chaudhary 22-Sep-18 31-Dec-20 2.5 years
Mr Saraswati Prasad 2-Jul-18 21-Sep-18 3 Months
Mr P.K Singh 10-Dec-15 30-Jun-18 2.5 Years
Dr Anup K Pujari 1-Oct-15 10-Dec-15 2 Months
Mr Rakesh Singh 11-Jun-15 30-Sep-15 3 months
Mr C.S.Verma 11-Jun-10 10-Jun-15 5 years
Mr S.K. Roongta 18-Aug-06 31-May-10 4 years
Mr V.S.Jain 3-Sep-02 31-Jul-06 4 years
Exhibit 49: Contingent liabilities increased further in FY2020

Contingent liabilities for SAIL, March fiscal year-ends, 2019-2020 (Rs mn)
2019 2020
In respect of SAIL
Claims against the SAIL pending appellate/judicial decisions 247,300 298 ,439
Other claims against the SAIL not acknowledged as debt 33,100 49,632
Disputed income tax/service tax/other demand on joint venture company for which SAIL may
364 429
be contingently liable under the joint venture agreement
Bills drawn on customers and discounted with banks. 1,8 90 8 49
Price escalation claims by contractors/suppliers and claims by employees. 4,020 3,620
In respect of Subsidiaries/Jointly controlled entities
Claims against the Subsidiaries/Jointly controlled entities pending appellate/judicial decisions 90 13
Other claims against the Subsidiaries/Jointly Controlled entities not acknowledged as debt 12,38 8 20,362
Total 299,150 373,344
As a % of FY2022 net worth 50% 63%
The company deposited an amount of Rs1.6 bn in FY2021, under the Settlement of Dispute
2020 scheme brought by the Directorate of Commercial Taxes, Government of West Bengal
for settling of entry tax disputes in the State of West Bengal. The claim outstanding as on
March 31, 2020 stood at Rs2.9 bn.

APPENDIX II: INDIAN STEEL INDUSTRY—TO SUSTAIN HIGH UTILIZATION

We expect India’s steel utilization to remain above 90% over FY2021-25E notwithstanding the capacity
addition announcements in the past one quarter. Indian producers’ planned 32 mtpa capacity over FY2021-
25E is back-ended and just keeping up with demand. Given the spike in leverage between FY2019 to 1HFY21,
most steel majors deferred their expansion projects and focused on deleveraging. In the long term, with
challenges around Greenfield additions, we believe India is unlikely to see a supply surge despite
improvement in balance sheets.
Greenfield capacity addition remains a key challenge
Greenfield (GF) capacity addition has been quite challenging in India. Difficulty in acquiring a
large parcel of land in a timely manner and getting regulatory approvals (forest and
environment) has been the key reason behind delays and unsuccessful attempts for GF
plants. In the past 15 years, we note that only two GF steel plants have come up in India – (1)
Tata Steel’s Kalinganagar steel plant and (2) Jindal Steel and Power’s Angul Steel plant.
Global majors like Arcelor Mittal and Posco unsuccessfully toiled for many years and
eventually abandoned their plans to organically enter the country. Out of the total 60 mtpa
capacity addition in the past 15 years through integrated steel plants, only 2/15 plants or 13%
of total capacity addition has come through the GF route whereas the remaining 13/15
plants or 87% of the capacity addition has come through the brownfield (BF) route.
Exhibit 50: Only 13% of steel capacity in the past 15 years has come from greenfield plants
Steel capacity addition by route in the past 15 years (mn tons, %)
Capacity (mtpa) % mix Number of Plants

Greenfield 8 13 2
Brownfield 52 87 13
Total 60 15
Industry consolidation underway
Steelmaking is the most complex manufacturing process given a number of processing stage,
land area requirement, capital intensity and project gestation period. Not all corporate groups
who entered in early 2000s have survived the down-cycles of the business. In the past five years,
through the Insolvency and Bankruptcy Code, 2016 (IBC), four companies with integrated steel
plants and multiple other standalone companies in the steel supply chain have changed hands.
We note that the market share of top five producers increased to 60% in FY2021 and is set to
increase further to 63% by FY2025E from 47% in FY2015.

Exhibit 51: We expect the market share of top steel companies in India to increase further
Market share of top-5 steel players in India, March fiscal-year ends, 2015-25E (%)
Market Share of Top 5 (%)

70
62 63
60 60 60 60 60
60 56
53
47 48
50
40
30
20
10
0
2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E 2025E
Utilizations to remain high and government policies unlikely to turn adverse
 With recovery in demand and lagging supply addition, we estimate the steel industry to
operate at +90% utilization and India to move towards becoming a net importer of steel
over FY2021-25E.
 For calculating effective utilization, we incorporate two adjustments – (1) we estimate

that 15 mtpa of steel capacity belonging to the secondary steel plants is not in operating
condition and the higher operating costs for these plants practically eliminate the risk of
them re-entering the market and (2) only 50% of newly commissioned plant is available
in year 1 of commissioning followed by 100% from year 2 onwards.
 Policy risk
Steel prices in India have doubled in the past 12 months in line with global steel prices.
The demand environment remains fragile after the second Covid-19 wave and few
consumer categories are not able to fully pass-on the cost inflation. This has given rise to
a risk of adverse government policy action to reduce domestic steel prices. Government
can either cut import duty and/or impose export duty on steel.
 A reduction in import duty (currently at 7.5%) is unlikely to have any impact as (1)
domestic prices are already at 10% discount to import parity (2) majority of steel
imports in India comes from FTA countries (Japan and South Korea) which have no
import duty.
 Export tax – would be a draconian step by the government and can backfire as
government needs to encourage more risk-capital into the sector given the high
utilization. We see this as a very low probability possibility.
 In the medium-term, the tight domestic market should have two favorable implications
on the steel producers.
(1) Government policy would remain favorable such as
(a) High export duty on iron ore, currently at 30%, to ensure availability of raw
materials at a discounted price in India.
(b) Supportive government policies in case of a down-turn - Trade restrictions and

protection from cheap imports. Currently India has a 7.5% import duty.

(2) As India moves towards becoming a net importer of steel, domestic steel prices
should move towards import parity prices versus 4-5% discount historically and 13%
discount currently.
Exhibit 52: We estimate domestic steel industry to add ~32 mtpa of crude steel capacity over FY2022-25E
Crude steel capacity additions by players in India, March fiscal year-ends, 2020-25E (mtpa)
2020 2021 2022E 2023E 2024E 2025E Addition (2021-25E)

Tata Steel 1.0 — — — — 5.0 5.0
SAIL — — — — — — —
JSW Steel — — 5.0 1.0 — 5.0 11.0
Essar — — — — — — —
JSPL — — 1.0 — 3.3 3.0 7.3
RINL 1.0 — — — — — —
Bhushan — — — — — — —
NMDC — — — 3.0 — — 3.0
Others (1.0) — — — — — —
EAF/IF - Mini Mills — — — 2.0 2.0 2.0 6.0
Total capacity addition (mn tons) 1.0 — 6.0 6.0 5.3 15.0 32.3
Source: Kotak Institutional Equities Estimates, Steelmint
Exhibit 53: Capacity additions are back-ended and face risk of execution delays
Steel capacity additions in India, March fiscal-year ends, 2011-25E (mtpa)
16 Total capacity addition (mn tons) 15.0
14
12
10.1
9.5
10 9.0
8 6.8
6.0 6.0
6 5.4 5.3 5.3
3.6
4
2.5
2 1.0
- —
0
2011
2014
2015
2017
2018
2020
2021
2012
2013
2016
2019
2023E
2024E
2022E
2025E

Exhibit 54: Domestic steel industry utilization should remain elevated despite capacity additions
Finished steel production, consumption and capacity details in India, March fiscal year-ends, 2015-25E (mn tons)
2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Crude steel capacity - Gross (end of year) 110.0 112.5 122.0 127.3 127.3 128.3 128.3 134.3 140.3 145.6 160.6
Crude steel capacity - Effective (end of year) 100.0 102.5 112.0 117.3 117.3 118.3 118.3 124.3 130.3 135.6 150.6
Finished steel capacity - Effective (during the year) 87.8 95.3 101.1 108.0 110.3 110.8 111.2 114.2 119.9 125.2 135.0
Production 90.7 90.4 101.8 111.2 115.7 102.6 94.7 106.0 111.3 116.9 122.7
Less: Double counting 15.9 16.5 15.3 19.0 19.7
Net production 74.8 73.9 86.5 92.3 96.0 102.6 94.7 106.0 111.3 116.9 122.7
Imports 9.3 11.7 7.2 7.5 7.8 6.8 4.8 4.0 7.0 8 .0 12.0
Exports 5.6 4.1 8 .2 9.6 6.4 8 .4 10.8 10.0 10.0 9.0 11.0
Add: Net Imports 3.8 7.6 (1.0) (2.1) 1.5 (1.6) (6.0) (6.0) (3.0) (1.0) 1
Assumed consumption 78.6 81.5 85.5 90.1 97.5 101.0 88.6 100.0 108.3 115.9 123.7
Stock change 1.6 1.1 1.4 (0.6) (1.2) 0.9 (4.8 ) — — — —
Consumption 76.9 80.4 84.0 90.7 98.7 100.2 93.4 100.0 108.3 115.9 123.7
Capacity utilization (%) 85.2 77.6 85.5 85.5 87.1 92.6 85.1 92.8 92.9 93.4 90.9
Growth (%)
Production 0.0 (1.2) 17.0 6.7 4.0 6.9 (7.8) 12.0 5.0 5.0 5.0
Consumption 4.1 4.6 4.5 7.9 8.8 1.5 (6.7) 7.0 8.3 7.0 6.8
Source: Kotak Institutional Equities Estimates, Steelmint, Industry Data
Domestic flat steel prices still at a 13% discount to import parity
Exhibit 55: Domestic HRC prices increase 5% mom in June 2021

India domestic prices of HRC and rebar (secondary), June 2020-21 (Rs/ton)
HRC prices (Rs/ton) Secondary rebar 12mm (Rs/ton)

70,000
65,000
60,000
55,000
50,000
45,000
40,000
35,000
30,000
Jul-20
Jun-20
Jun-21
Mar-21
Sep-20
Jan-21
Apr-21
Nov-20
Oct-20
May-21
Feb-21
Aug-20
Dec-20
Source: Kotak Institutional Equities Estimates, Steelmint

Exhibit 56: Domestic prices remain at a discount to import parity prices

Import parity HRC prices from China and FTA, domestic HRC prices, June 2018-21 (Rs/ton)
Import Parity - FTA (Rs/ton) Mumbai HRC (Rs/ton) Import parity - China (Rs/ton)
90,000
80,000
70,000
60,000
50,000
40,000
30,000
Jul-19
Jul-20
Aug-20
Aug-19
Sep-19
Mar-20
Apr-20
Sep-20
Mar-21
Apr-21
Oct-19
Oct-20
Feb-21
Feb-20
Nov-19
Nov-20
Jun-19
Jun-20
Jun-21
Dec-19
Jan-20
Dec-20
Jan-21
May-20
May-21
Exhibit 57: Domestic prices are at 13% discount to import parity

Premium/discount of domestic HRC prices to import parity prices from China/South Korea
Japan/South Korea export - FOB US$/ton 1,105

Sea freight US$/ton 25
Japan/South Korea export - CNF India…..a) US$/ton 1,130
China export - FOB US$/ton 943
Sea freight US$/ton 25
Import duty % 7.50
China Export - CNF India…..b) US$/ton 1,041
Anti dumping reference price US$/ton 48 9
Anti dumping duty…………c) US$/ton —
Landed import cost ………Lower (a,b) +c US$/ton 1,041
Port & other charges US$/ton 20
Price at port gate US$/ton 1,061
FX 73
Price at port gate Rs/ton 77,424
India domestic price (Mumbai HRC) Rs/ton 67,500
Premium/(Discount) to import parity Rs/ton (9,924)
Premium/(Discount) to import parity % (13)

Exhibit 58: Domestic steel inventory has been on a declining trend and market remains tight
Domestic Inventory levels, May 2019-21 (mn tons)
20 Domestic Steel Inventory (mn tons)
18
16
14
12
10
8
6
4
2
-
Jul-20
Jun-19
Jun-20
Jul-19
Sep-19
Apr-20
Sep-20
Apr-21
Mar-20
Mar-21
Jan-20
Jan-21
Oct-19
Oct-20
May-21
May-19
May-20
Nov-19
Feb-20
Nov-20
Feb-21
Aug-19
Dec-20
Dec-19
Aug-20
Source: JPC, Kotak Institutional Equities estimates

APPENDIX III: CHINA POLICY CHANGES HAVE ELEVATED GLOBAL STEEL PRICES
China’s commitment towards decarbonization will likely continue to promote supply-side reforms in the steel
sector through supply restrictions. Removal of 13% export rebate has structurally elevated global steel prices
and is unlikely to reverse. Further, recent media reports on possible imposition of steel export duty in China is
a key upside risk for global steel prices and steel stocks. However, in the short term, rising inflation has
become a worry for the government and recent warnings against speculation are just short-term policy
adjustments. Strict supply controls have capped steel capacity in China and with limited capacity addition
elsewhere would keep global utilization on an uptrend over the next 3-4 years.
China – striving to balance inflation concerns and emissions; supply reforms to continue
The news flow from China, over the past two months, has been a mixed bag. Late April
2021, China removed export incentives and reduced import tax on steel products, reflecting
its determination to reduce domestic production/emissions. However, the surge in
commodity prices in May 2021 (+21%/17% iron ore/steel prices in two weeks) raised
inflation concerns. The subsequent warning by regulators against price speculation and
recent media reports on easing of production relaxation in Tangshan have dampened
sentiments and reversed the price spike.
We read these developments as short-term policy adjustments towards a short-term goal to

cool down prices. We believe that China’s medium to long term goals of emission reduction
and restricting steel production remain intact and supply-side reforms should continue.
Removal of 13% export rebate has structurally elevated global steel prices and is unlikely to
reverse. Further, recent media reports on possible imposition of steel export duty in China is
a key upside risk for global steel prices and steel stocks.
 Tangshan production cuts. In February 2021, Tangshan city announced steel supply cut
policy. The duration of policy was broken down into two periods, March 2021 to June
2021 and July 2021 to December 2021. Seven mills are asked to cut BF capacity by 50%
in Period 1 and 30% in Period 2, the rest to cut by 30% throughout. Total volume of
capacity cut in Tangshan was at 38.8 mtpa (22.2% of Tangshan's total iron-making
capacity). But the impact would be less for production. Using a post-Covid capacity
utilization rate (UR) as a proxy, ~72% in Tangshan, the impact is ~28 mtpa, which is 3%
of total production in China. Considering that the restrictions are for nine months in
2021, the impact would be around 21 mtpa for hot metal production.
 Rebate cut and import duty reduction. China announced the removal of VAT rebates
on exports of 146 steel products from May 2021. The prevailing rebate of 13% has been
discontinued on key exported products like hot rolled coil (HRC), wire rod and rebar. In a
separate announcement, China had also cut import duty on pig iron, crude steel and steel
scrap. Further, it has raised export duty by 5 percentage points on high silicon steel (to
25%), ferrochrome (to 20%) and foundry pig iron (to 15%).
With these policy changes, China is discouraging exports and reducing trade barriers on
imported steel. This suggest that the Chinese government no longer wants steel
producers to produce steel for the export market and is open to address the domestic
shortage with imports.
 Warning against speculation. Commodity prices in China peaked mid-May 2021, after
rising to record high, after Chinese Premier Li Keqiang urged the country to take actions
on commodity price rally and regulators in Shanghai and Tangshan warned of price
manipulation by steel mills. Later, China’s National Development and Reform Commission
and another five departments held a meeting on May 23, 2021 to discuss the recent price
surge of some key commodities and requested participating firms to “operate in an
orderly manner in accordance with laws and regulations” and warned that companies
should not “collude with each other to manipulate market prices, fabricate and spread
information about price increases”.

 Tangshan production relaxation. Media reports suggest that the steelmaking city of
Tangshan plans to ease restrictions on steel production. The local authorities held a
symposium on Monday June 1, 2021, mulling over plans to lower the output curtailment
ratio for some mills that had completed ultra-low emission upgrades, according to media
reports.
In our opinion, this relaxation of production restrictions in Tangshan is an example of

taking market-oriented means to adjust the market's balance and stability. However, we
do not expect China to relax its overall environmental protection efforts and see this as a
short-term measure in controlling inflation.
 Media reports on potential export tax. As highlighted in media reports and in our
interaction with traders, China is mulling export duty on finished steel items, in a bid to
further restrict exports and control inflation. As per trading sources, the duty could be
anywhere from 10-25%.This would achieve dual goals of the Chinese government – (1)
further discourage steel exports and potentially reduce production and (2) increase
domestic availability of steel and deflate domestic prices. Structurally lower risk of Chinese
exports would raise the steel price floor in RoW market and could re-rate steel stocks.
 China targeting fresh round of steel capacity cut. As per CISA chairman, the Chinese
government aims to eliminate old/inefficient 236 mtpa of crude steel capacity during its
14th 5-year plan over CY2021-25E. China also plans to update 221 mtpa of capacity
during the same time to reduce carbon emissions. Meanwhile, the ecology and
environment ministry has announced it will strengthen controls on energy-intensive,
polluting industries such as steel and aluminum to promote low-carbon development.
Each provincial environment regulator now has to coordinate and manage high-energy
intensity and high-emission projects in their area, report the findings to the ministry by
the end of October and then give updates every six months
Exhibit 59: China domestic ferrous prices corrected on government warning against speculation
China domestic prices of HRC, rebar and iron ore, June 2020-21 (US$/ton)
China Domestic Rebar prices (US$/ton) China domestic HRC prices (US$/ton)
China domestic iron ore prices (US$/ton) (RHS)
1,150 300
1,050 250
950
200
850
150
750
100
650
550 50
450 0
Jun-20
Jun-21
Jul-20
Mar-21
Sep-20
Apr-21
Jan-21
Oct-20
May-21
Nov-20
Feb-21
Aug-20
Dec-20
Source: Kotak Institutional Equities Estimates, Bloomberg

Exhibit 60: China’s CPI and PPI increased 0.9% and 6.8% yoy respectively in April 2021
China CPI, PPI, April 2020-21 (% yoy)
8 China CPI % yoy China PPI % yoy
0
Jun-18
Jun-19
Jun-20
Apr-21
Apr-18
Apr-19
Apr-20
Oct-18
Feb-19
Oct-19
Feb-20
Oct-20
Feb-21
Dec-20
Dec-18
Dec-19
Aug-18
Aug-19
Aug-20
(2)
(4)
Source: Kotak Institutional Equities Estimates, Bloomberg
Exhibit 61: Chinese export prices trade a premium to domestic prices post removal of export rebates
in China in March 2021
China domestic HRC spot prices, China Export HRC prices, June 2012-21 (US$/ton)
1,200 Domestic HRC steel price in China (US$/ton)
China export HR coil fob prices (US$/ton)

1,000
800
600
400
200
0
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Feb-13
Feb-14
Feb-15
Feb-17
Feb-18
Feb-16
Feb-19
Feb-20
Feb-21
Source: Kotak Institutional Equities Estimates, Steelmint, Bloomberg

Exhibit 62: Chinese export prices are trading at a premium to domestic prices, an aberration due to
risk of export duty
China export prices versus domestic prices, June 2012-21 (%)
25% Export vs domestic prices

20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Jun-12
Jun-14
Jun-15
Jun-17
Jun-18
Jun-21
Jun-13
Jun-16
Jun-19
Jun-20
Oct-13
Oct-14
Oct-16
Oct-17
Oct-19
Oct-20
Oct-12
Oct-15
Oct-18
Feb-14
Feb-15
Feb-17
Feb-18
Feb-20
Feb-21
Feb-13
Feb-16
Feb-19
Source: Kotak Institutional Equities Estimates, Steelmint, Bloomberg
Limited supply additions to keep utilizations on an uptrend

Divergent price moves in China and RoW as fundamentals are robust
The prices in the US and Europe continue to rise with HRC prices up 32%/55% in two
months and 57%/86% CYTD 2021. With strong underlying demand recovery and relatively
rigid supply, fundamentals remain strong. We estimate RoW steel utilization at 72% in
CY2021E and see limited risk of restarts. Of the total 275 mtpa of effective surplus capacity
in RoW, we estimate that (1) ~75-80% is EAF-based with product mismatch (make long
steel whereas the tightness is in flat steel) or have issues with power and scrap availability, (2)
8-10% of capacity is permanently shut and (3) only ~10% capacity is mothballed that could
restart. With limited capacity addition except India, we estimate an uptrending global steel
utilization over CY2021-25E.
 China’s capacity swap program is likely to restrict further capacity additions. China
renewed its capacity swap program in CY2020 (first drafted in CY2018) enforcing stricter
restriction on capacity swaps. Key changes were as follows:
 The closure/addition ratio has been further increased in Version 2020 to 1.5:1 from
1.25:1 earlier in 28 key cities, whereas for other sensitive regions, the closure/addition
ratio has been further increased to 1.1:1 from 1.25:1. As per CISA, the earlier program
resulted in a net capacity reduction of 29 mtpa in CY2019. These policies are likely to
result in higher capacity cuts going forward.
 The scope of the “26+2” cities had been extended in Version 2020 to include cities
in provinces such as Anhui, Henan, Shanxi, Shaanxi and Shandong in the Yangtze River
Delta and Fenwei Plain regions.
 Small furnace swaps are no longer allowed. The new version does not allow for
swaps of BF volumes less than 1,200 m3, BOFs less than 100 tons or EAFs less than 50
tons.
 Encouraging EAF steelmaking. Exceptions are made in Version 2020 for companies
that change from BF/BOF steelmaking to EAF steelmaking such that they can enjoy a
‘one-for-one’ swap, meaning that new capacity can equal the closed capacity.

Exhibit 63: Steel prices in the US and the UK continue to increase and diverge from China
HRC prices for US, UK ,Germany and China, June 2017-21 (US$/ton)
2,000 China US UK Germany
1,800
1,600
1,400
1,200
1,000
800
600
400
Jun-18
Jun-20
Jun-21
Jun-17
Jun-19
Apr-18
Apr-19
Apr-20
Apr-21
Feb-18
Feb-19
Feb-20
Feb-21
Oct-17
Oct-18
Oct-19
Oct-20
Aug-17
Aug-19
Aug-20
Aug-18
Dec-17
Dec-19
Dec-20
Dec-18
Source: Kotak Institutional Equities estimates, Steelmint, Bloomberg
Exhibit 64: Demand tailwinds arising from sharp recovery in manufacturing activity
PMI data for US, UK ,Germany and China, May 2018-21
China Germany USA UK
70
65
60
55
50
45
40
35
30
Jul-18
Jul-19
Jul-20
Sep-18
Sep-19
Sep-20
Mar-19
Mar-20
Mar-21
Nov-18
Nov-19
Nov-20
Jan-19
Jan-20
Jan-21
May-18
May-19
May-20
May-21
Source: Kotak Institutional Equities estimates, Bloomberg

Exhibit 65: RoW steel production recovering back to pre-Covid Exhibit 66: China’s steel production remains higher than pre-
levels Covid levels
World Ex-China steel production, April 2017-21 (mn tons, % yoy) China steel production, April 2017-21 (mn tons, % yoy)
World Ex-China crude steel production (LHS) 120 China crude steel production (LHS) 25
90 World Ex- China growth (% yoy) (RHS) 50 China growth (% yoy) (RHS)
80 40 100 20
70 30
80 15
60 20
50 10 60 10
40 0
30 (10) 40 5
20 (20)
20 0
10 (30)
0 (40) 0 (5)
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Apr-17
Apr-18
Apr-20
Apr-21
Aug-17
Aug-18
Aug-19
Aug-20
Apr-19
Dec-17
Dec-18
Dec-19
Dec-20
Aug-17
Dec-17
Aug-18
Dec-18
Aug-19
Dec-19
Aug-20
Dec-20
Source: Bloomberg, Kotak Institutional Equities estimates Source: Bloomberg, Kotak Institutional Equities estimates

Exhibit 67: Global steel production is expected to grow at 7.7% yoy in CY2021E
Steel capacity, production, demand and exports data from China, World ex-China, December calendar year-ends, 2014-24E (mn tons)
2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E
Capacity (mtpa)
China steel capacity 1,175 1,250 1,08 9 1,048 1,073 1,123 1,211 1,18 8 1,178 1,178 1,178
World ex-China capacity 1,152 1,151 1,178 1,190 1,197 1,203 1,213 1,219 1,228 1,236 1,254
World steel capacity 2,316 2,334 2,281 2,251 2,270 2,326 2,424 2,407 2,406 2,414 2,432
China demand-supply (mn tons)

China steel capacity 1,175 1,250 1,08 9 1,048 1,073 1,123 1,211 1,18 8 1,178 1,178 1,178
Crude steel production 8 63 901 8 70 8 94 949 998 1,056 1,104 1,121 1,134 1,134
Utilization (%) 73 72 80 85 88 89 87 93 95 96 96
Demand (apparent) 781 788 768 833 872 928 1,004 1,064 1,101 1,124 1,124
Growth yoy (%) 3 1 (3) 8 5 6 8 6 4 2 —
China Exports 79 100 96 62 56 52 33 40 20 10 10
Exports as % of world ex-China demand 9 11 10 7 6 6 4 4 2 1 1
World ex-China demand-supply (mn tons)

Crude steel production 8 46 8 16 8 20 8 58 883 8 71 78 9 884 910 937 960
Growth yoy (%) 2 (4) 0 5 3 (1) (9) 12 3 3 2
Utilization (%) 73 71 70 72 74 72 65 72 74 76 77
Demand (apparent) 925 916 916 920 939 923 822 924 930 947 970
World (mn tons)

Crude steel production 1,669 1,620 1,690 1,752 1,8 32 1,8 69 1,8 45 1,98 8 2,032 2,071 2,094
Utilization (%) 72 69 74 78 81 80 76 83 84 86 86
Growth yoy (%) 1.2 (2.9) 4.3 3.7 4.6 2.0 (1.3) 7.7 2.2 1.9 1.1
Source: WSA, Kotak Institutional Equities Estimates, Steelmint
Exhibit 68: We estimate global steel utilization levels to increase on limited capacity additions
China and World ex-China steel utilizations, December calendar year-ends, 2007-24E (%)
100 China Utilization (%) World Ex-China Utilization (%)
95
90
85
80
75
70
65
60
2007
2009
2011
2013
2015
2017
2019
2008
2010
2012
2014
2016
2018
2020
2021E
2023E
2022E
2024E
Source: WSA, Kotak Institutional Equities estimates

Exhibit 69: We estimate 275 mtpa of surplus steel capacity in World ex-China in CY2021E
World ex-China steel rated capacity, effective capacity, production and surplus capacity in CY2021E (mtpa)
World ex China Steel capacity - CY2021E

1,400
1,200
1,000 275
800
600 1,219 1,158

883
400
200
0
Rated Capacity Effective Capacity Surplus Production
Exhibit 70: Surplus capacity in World ex-China has limited flexibility to restart
Proportion of surplus steel capacity by production type in World ex-China in CY2021E (%)
BF- Permanently
closed
10%
BF - Mothballed
10%
EAF
8 0%

"Each of the analysts named below hereby certifies that, with respect to each subject
company and its securities for which the analyst is responsible in this report, (1) all of the
views expressed in this report accurately reflect his or her personal views about the subject
companies and securities, and (2) no part of his or her compensation was, is, or will be,
directly or indirectly, related to the specific recommendations or views expressed in this
report: Sumangal Nevatia, Prayatn Mahajan."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.
60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.
40% * The above categories are defined as follows: Buy = We expect

32.5% this stock to deliver more than 15% returns over the next 12
30% 27.4% months; Add = We expect this stock to deliver 5-15% returns
23.6% over the next 12 months; Reduce = We expect this stock to
deliver -5-+5% returns over the next 12 months; Sell = We
20% 16.5% expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
10% basis. These ratings are used illustratively to comply with
3.8% 4.7%
2.8% applicable regulations. As of 31/12/2020 Kotak Institutional
0.5%
Equities Investment Research had investment ratings on 212
0%
equity securities.
BUY ADD REDUCE SELL
Source: Kotak Institutional Equities As of March 31, 2021
SAIL (SAIL IN)

Kotak Institutional Equities rating and stock price target history
180 58,000
54,000
160
50,000
140 46,000
42,000
120 38,000
100 34,000
30,000
80 26,000
60 22,000
18,000
40 14,000
10,000
20
6,000
- 2,000
Jun-18
Jul-18
Jun-19
Jun-20
Jul-19
Jul-20
Mar-18
Mar-20
Mar-19
Jan-18
Jan-19
Jan-20
Jan-21
Apr-18
Sep-18
Apr-19
Sep-19
Apr-20
Sep-20
May-18
May-20
Oct-18
Nov-18
May-19
Oct-19
Nov-19
Oct-20
Nov-20
Feb-18
Feb-19
Feb-20
Aug-18
Aug-19
Aug-20
Dec-18
Dec-19
Dec-20
Index
Price
Stock
Price
Source: Kotak Institutional Equities Research for ratings and price targets, Bloomberg for daily closing prices.
BSE-30 Index (RHS) Covered by Sumangal Nevatia

Price target Not covered by current analyst
The price targets shown should be considered in the context of all prior published Kotak Institutional Equities research, which may or may
not have included price targets, as well as developments relating to the company, its industry and financial markets

Analyst coverage
Companies that the analyst mentioned in this document follow
Covering Analyst: Sumangal Nevatia

Company name Ticker
ACC ACC IN
Ambuja Cements ACEM IN
Dalmia Bharat DBEL IN
Grasim Industries GRASIM IN
Hindalco Industries HNDL IN
Hindustan Zinc HZ IN
J K Cement JKCE IN
Jindal Steel and Power JSP IN
JK Lakshmi Cement JKLC IN
JSW Steel JSTL IN
National Aluminium Co. NACL IN
NMDC NMDC IN
Orient Cement ORCMNT IN
SAIL SAIL IN
Shree Cement SRCM IN
Tata Steel TATA IN
The Ramco Cements TRCL IN
UltraTech Cement UTCEM IN
Vedanta VEDL IN
Source: Kotak Institutional Equities research

Ratings and other definitions/identifiers

Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our Fair Value estimates are also on a 12-month horizon basis.
Our Ratings System does not take into account short-term volatility in stock prices related to movements in the market. Hence, a particular Rating may not strictly be in
accordance with the Rating System at all times.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations:
Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and fair value, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak
Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in
certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and fair value, if any, for this stock, because there is not a sufficient fundamental
basis for determining an investment rating or fair value. The previous investment rating and fair value, if any, are no longer in effect for this stock and should not be relied
upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Corporate Office Overseas Affiliates
Kotak Securities Ltd. Kotak Mahindra (UK) Ltd Kotak Mahindra Inc
27 BKC, Plot No. C-27, “G Block” 8th Floor, Portsoken House 369 Lexington Avenue
Bandra Kurla Complex, Bandra (E) 155-157 Minories 28th Floor, New York
Mumbai 400 051, India London EC3N 1LS NY 10017, USA
Tel: +91-22-43360000 Tel: +44-20-7977-6900 Tel:+1 212 600 8856
Copyright 2021 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and
2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject
company, public appearances and trading securities held by a research analyst account.
3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in
the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at vinay.goenka@kotak.com.
This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the
Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore
048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of
Singapore.
Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates are
leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationships with a
significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other
business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the company or
companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our
research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited
generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that
the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of
any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect
opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the
recommendations expressed herein.
In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important
information regarding our relationships with the company or companies that are the subject of this material is provided herein.
This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be ille gal. We are not
soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation or take into account the
particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is
suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go
down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original
capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment.
Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all
investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions
expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory,
compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this
material, may from time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak
Securities Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent t hat it relates to non US issuers, prior to
or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or
income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by f oreign currencies affectively assume currency risk. In addition
options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current der ivatives risk disclosure document before entering into any
derivative transactions.
Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock
Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange(MCX). Our businesses include stock broking, services rendered
in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.
Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited
is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor
registered with Association of Mutual Funds in India (AMFI). Kotak Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI,
Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on KSL for certain operational
deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point
of time.
We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us
Details of Associates are available on website i.e. www.kotak.com
Research Analyst has served as an officer, director or employee of subject company(ies): No
We or our associates may have received compensation from the subject company(ies) in the past 12 months.
We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. YES. Visit our website for more details
We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our
associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the
past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report.
Our associates may have financial interest in the subject company(ies).
Research Analyst or his/her relative's financial interest in the subject company(ies): No
Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: SAIL - YES
Nature of Financial interest: Holding equity shares or derivatives of the subject company.
Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of
Research Report.
Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of
publication of Research Report: No
Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of
Research Report: No
Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.
A graph of daily closing prices of securities is available at https://www.moneycontrol.com/india/stockpricequote/ and http://economictimes.indiatimes.com/markets/stocks/stock-quotes.
(Choose a company from the list on the browser and select the"three years" icon in the price chart).
Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22
43360000, Fax No.: +22 67132430. Website: www.kotak.com / www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg,
Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No. INZ000200137(Member of NSE, BSE, MSE, MCX & NCDEX). Member Id: NSE-08081; BSE-673; MSE-1024;
MCX-56285; NCDEX-1262. AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Compliance Officer Details: Mr. Manoj Agarwal.
Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
In case you require any clarification or have any concern, kindly write to us at below email ids:
Level 1: For Trading related queries, contact our customer service at ‘service.securities@kotak.com’ and for demat account related queries contact us at ks.demat@kotak.com or call us on:
Toll free numbers 18002099191 / 1860 266 9191
Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation @kotak.com or call us on 022-42858445 and if you feel you are
still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: Mr. Manoj Agarwal) at
ks.compliance@kotak.com or call on 91- (022) 4285 8484.
Level 4 : If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach Managing Director / CEO (Mr. Jaideep Hansraj) at ceo.ks@kotak.com or
call on 91-(022) 4285 8301.
First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been
verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject.
There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability
for the contents of the First Cut Notes.

(Kotak) 24june2021 - SAIL

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

(Kotak) 24june2021 - SAIL

Uploaded by

Copyright:

Available Formats

Company Report

SAIL (SAIL) BUY

Initiate with BUY: well-positioned to benefit from strong steel up-cycle

Expansion projects to drive volume growth and operating leverage

Balance sheet has significantly improved and deleveraging should continue

Company data and valuation summary

Company data Stock data High Low Price performance 1M 3M 12M

Source: Bloomberg, Company, Kotak Institutional Equities estimates

Financial and operational snapshot.......................................................3

Initiate with BUY: Well-positioned to benefit from strong steel up-cycle .4

Expansion projects to drive volume growth and operating leverage........8

Deleveraging to continue with strong cashflows ................................. 17

Appendix 1: Management profile and contingent liabilities .................. 23

Appendix II: Indian steel industry—To sustain high utilization............... 24

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

FINANCIAL AND OPERATIONAL SNAPSHOT

2017 2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

Exhibit 2: Condensed financials for SAIL

2017 2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

INITIATE WITH BUY: WELL-POSITIONED TO BENEFIT FROM STRONG STEEL UP-CYCLE

Fair Value of Rs170/share at 5X EV/EBITDA

Exhibit 3: Our Fair Value of Rs170/share is based on 5X EV/EBITDA March 2023E

EBITDA Multiple Value Value

Source: Company, Kotak Institutional Equities estimates

SAIL - P/B - 2Y FWD SAIL - EV/IC - 2Y FWD

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 6: Metals valuation matrix

Source: Kotak Institutional Equities estimates

SAIL - EV (Rs bn)

Source: Company, Kotak Institutional Equities estimates

Bull and bear case scenarios

For our bull case scenario, we assume

 Higher volumes at 18 mn tons, closer to the management’s FY2022E guidance of 18.4

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Exhibit 8: We estimate ~92% upside in our bull case scenario analysis

Units Bear Case Base Case Bull Case Comments

Source: Kotak Institutional Equities estimates

Exhibit 9: SAIL’s earnings remain acutely sensitive to changes in HRC prices

EBITDA Fair Value

Source: Kotak Institutional Equities estimates

77 61 116 170 242 333 77 8 6,548 126,336 166,124 219,174 28 5,48 8

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

 Higher capex led by government push.

 Cash outflows from contingent liabilities.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

EXPANSION PROJECTS TO DRIVE VOLUME GROWTH AND OPERATING LEVERAGE

SAIL’s expansion plans set to deliver volume growth

 Enhanced margins with a better product mix

 Cost benefits from modernized capacities and operating leverage

Steel deliveries (mn tons)

Source: Kotak Institutional Equities estimates, Company

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exisiting capacity Post expansion

Source: Kotak Institutional Equities estimates, Company

Description Amount (Rs bn)

Source: Kotak Institutional Equities estimates, Company

Annual capex (Rs bn)

Source: Kotak Institutional Equities estimates, Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

Steel deliveries (mn tons)