- Q3 volume up 7.4% YoY, but EBITDA/t stalled at Rs4,465 due to price pressure.
- Management flags sequential EBITDA improvement, yet coking‑coal price spikes threaten near‑term gains.
- FY27 capex guidance lifted for ISP expansion; FY28/29 capex intensity will rise further.
- EV/EBITDA multiples sit near 5.5x, hinting at a valuation ceiling given higher leverage.
- Bull case hinges on steel‑price rally and timely ISP execution; bear case on coal‑cost surge and execution lag.
Most traders celebrated SAIL’s Q3 numbers, but they missed the hidden cost surge.
Why SAIL's EBITDA Growth Is Tied to Steel Prices and Coal Costs
SAIL’s Q3 operating performance looks solid on the surface: a 7.4% year‑on‑year increase in volume (excluding NMDC’s 0.37 mt) and an OOI contribution of Rs12.8 bn. Yet EBITDA per tonne slipped to Rs4,465, reflecting weaker steel price realization. Management’s optimism about sequential EBITDA improvement relies on two levers – rising demand and inventory drawdown of about 1.5 mt of finished steel. The upside, however, is being eroded by a sharp uptick in coking‑coal prices, a key input for blast‑furnace operations. Higher coal costs translate directly into a higher variable cost per tonne, compressing margins even if steel prices climb.
Sector Momentum: Indian Steel’s Price Cycle in 2026
India’s steel sector entered a bullish phase in early 2026, driven by robust infrastructure spending, a resurgence in automotive production, and a government push for affordable housing. Flat‑product prices have already nudged up to roughly Rs3,500 per tonne, while long‑product prices sit near Rs2,500. This price lift is a direct benefit for SAIL, Tata Steel, and JSW Steel, whose cost structures are similar. Yet the sector is also feeling the impact of global coal supply tightness, which has pushed Indian coking‑coal spot prices from Rs1,800 to over Rs2,500 per tonne in the past six months. The net effect is a narrower EBITDA margin expansion than pure price‑rise calculations would suggest.
Competitive Landscape: Tata Steel, JSW, and Adani’s Countermoves
Tata Steel reported a 5% volume growth in Q3, but its EBITDA/t rose 8% thanks to a more aggressive pricing strategy and lower coal procurement costs via long‑term contracts. JSW Steel, meanwhile, has accelerated its green‑steel initiatives, reducing reliance on coking‑coal by 12% YoY, which cushions its margins. Adani’s newly‑minted steel arm is still scaling, but its integration with captive coal mines gives it a cost advantage that SAIL currently lacks. The competitive pressure means SAIL must either secure better coal supply terms or accelerate its ISP (Integrated Steel Plant) expansion to achieve economies of scale.
Historical Parallel: SAIL’s 2018‑19 Turnaround and Lessons Learned
Back in FY19, SAIL faced a similar dilemma: rising steel prices were offset by soaring coal costs. The company responded by fast‑tracking its Durgapur steel plant debottlenecking project and raising capex to Rs20 bn. While the move eventually lifted volumes, the short‑term EBITDA suffered, and the stock underperformed its peers for two fiscal years. The key takeaway is that aggressive capex can be a double‑edged sword—fueling growth but also inflating debt and leverage, which investors penalize via lower EV/EBITDA multiples.
Capex Roadmap: ISP Expansion, Debottlenecking, and Volume Outlook
SAIL’s FY27 capex guidance now incorporates a 4.5 mtpa ISP expansion, with groundwork already underway. Additional projects include a 1 mtpa TMT unit at DSP slated for H2 FY28 and a 1 mtpa blast furnace upgrade at RSP. If executed on schedule, these projects could push SAIL’s total capacity to over 12 mtpa by FY30, translating into roughly 2‑3 mt of incremental volume annually. However, timing risk remains high: construction delays, regulatory approvals, and supply‑chain bottlenecks could push the breakeven point further out, diluting near‑term earnings.
Financial Metrics Explained: EBITDA/t, EV/EBITDA, and Leverage Impact
EBITDA/t measures earnings before interest, taxes, depreciation, and amortisation on a per‑tonne basis—a useful yardstick for capital‑intensive producers. EV/EBITDA (Enterprise Value divided by EBITDA) gauges valuation relative to operating cash generation; SAIL trades around 5.5x FY27/28E, a level that appears “full” given rising debt. Leverage refers to the ratio of debt to equity or EBITDA; higher leverage amplifies risk, especially when earnings are volatile due to input‑cost swings.
Investor Playbook: Bull vs. Bear Scenarios
Bull Case
- Steel prices sustain above Rs3,400 for flats and Rs2,600 for longs, lifting revenue per tonne.
- Coal price spike stabilises or reverses as global supply improves, protecting margins.
- ISP and debottlenecking projects hit milestones, delivering volume uplift from FY30 onward.
- Leverage stabilises as operating cash flow improves, allowing a modest dividend restart.
Bear Case
- Coal prices remain elevated, compressing EBITDA/t despite price‑driven revenue gains.
- Capex overruns and execution delays increase debt, pushing EV/EBITDA to unsustainable levels.
- Peers secure cheaper coal or shift to electric‑arc furnaces, eroding SAIL’s market share.
- Regulatory or environmental setbacks stall ISP expansion, leaving volume growth flat.
Given the current EV/EBITDA multiple and the upside‑down cost curve, a “Hold” stance with a revised target price of Rs151 (up from Rs141) seems prudent. Investors should monitor coal price trends, ISP execution dashboards, and quarterly margin trajectories to time any move toward a more aggressive stance.