SAIL

Faces Headwinds Despite Ambitious Expansion Plans

Steel Authority of India Ltd (

) is facing challenges, with its shares underperforming over the past year despite a massive planned expansion. The company's stock is down 11%, reflecting concerns about potential domestic oversupply and its cost disadvantages compared to private peers. → Ambitious Capacity Expansion: SAIL has a goal to increase its production capacity from the current 20 mtpa to 35 mtpa by FY31. This expansion will require a significant investment of ₹1 trillion, with peak spending of ₹10,000-15,000 crore expected in FY28-29. → Operational and Financial Challenges: The company's start to FY26 was weak, with its sales volume guidance trimmed to 18.5 mt (excluding NMDC Steel), a modest 3% increase from FY25. SAIL has a significant cost disadvantage, with its employee cost per tonne at ₹6,512, much higher than JSW Steel and Tata Steel. This high fixed cost structure poses a challenge in a competitive market. In Q1 FY26, its EBITDA per tonne was ₹6,206, substantially lower than JSW Steel's ₹11,324, making it vulnerable to earnings pressure in an oversupply scenario. → Mitigating Factors and Outlook: The company is receiving some protection from safeguard duties on steel imports, which helped improve its net sales realization by 3% sequentially in Q1. The Directorate General of Trade Remedies’ recommendation to impose a final safeguard duty for three years is expected to strengthen sales in the second half of FY26. SAIL also benefits from having its own captive iron ore sources, which cover all of its requirements. The stock is trading at a reasonable valuation, with a FY26 EV/EBITDA of 6.9x. However, its future performance will heavily depend on its ability to successfully execute its capex plans and improve its cost structure.