Higher but manageable inventory levels – MrAnil Kumar Chaudhary, Chairman, SAIL

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Higher but manageable inventory levels – MrAnil Kumar Chaudhary, Chairman, SAIL

Excerpts of an interview with Mr. Anil Kumar Chaudhary, Chairman,SAIL broadcasted on CNBC TV18on 24^th April 2020:

• As with most industries, steel industry is also facing issues in running facilities. Steel is a continuous process industry and has to continue to run albeit at a lower level.
• Domestic orders have dried up. SAIL is dependent on export orders for now. As a result of continuous production and lower sales, there is a buildup of inventory.
• Chaudhary believes that the current inventory level is high but manageable. Higher inventory is not unprecedented for steel industry. Current inventory for SAIL is close to 2 mn ton.
• Inventory level was also high during the slowdown in July- October 2019. 31^st October 2019 also had high inventory like current levels. But as of 31^st Jan 2020, the inventory levels reduced to 1^st April 2019 level.Mr. Chaudhary expects that similar performance will repeat if everything goes well and lockdown lifts on 3^rd May 2020.
• Chaudhary is confident that after lifting of lockdown there will be substantial demand from construction and infrastructure sectors. That should take care of SAIL’s high inventory levels. Other sectors such as automobiles or engineering may take time to revive.
• For SAIL specifically, they have not seen issues in logistics. In lockdown, railways have become more efficient and even portsare able to handle exports.
• Cash flow is a bit strained due to lower sales and continued fixed costs. Quite a few debtors have been due for repayments and SAIL has been getting those payments.
• After lockdown, road transport has to be restored. Government is also really concerned about current state of affairs and they also want to ensure that the supply chains are restored as fast as possible.
• SAIL has close to 70,000 employees.SAIL has to be able to ramp up production in time to bring down per ton cost of production. SAIL continues to incur fixed costs of about Rs 15,000 mnper month, major expense due to employee cost.
• Chaudhary is confident that some government measures are going to help such as waiver of certain charges from power companies in some states. Interest cost in % terms has also come down.

Consensus Estimate: (Source: market screener website and investing.com)

• The closing price ofSAIL was ₹ 30.1/- as of 29-April-2020. It traded at 8.4x/ 4.1x the consensus EPS estimate of ₹ 3.6/ 7.3 for FY21E/ FY22E respectively.
• Consensus target price of ₹ 35.1/- implies a PE multiple of 4.8x on FY22E EPS of ₹ 7.3/-.

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