>Steel Authority of India (CITI)

Initiating at Buy: Safety in Challenging Times

•Target price Rs116 — We initiate on SAIL at Buy (1M) despite EPS degrowth and our conservative steel outlook because SAIL 1) is better geared to current and expected prices; 2) has a strong balance sheet (net cash); 3) has a 97% domestic exposure (better growth); 4) it offers relative value on EV/EBITDA.

•Best play on current/forecast prices — We see absolute share price return at current steel prices and relatively better returns (vs peers) if prices weaken. However if there is a meaningful sudden upturn in the steel cycle, stocks with higher indebtedness (JSW Steel and Tata Steel) would offer more upside.

•Preferred steel pick — Our target price is at 5x March 10 EV/EBITDA, higher than SAIL's 3-year avg but lower than peaks of 8-10x. This is at a discount to JSW Steel's target multiple of 5.5x as SAIL offers lower volume growth and a PSU-tag, although both offer largely domestic exposure. It is at a meaningful
premium to Tata Steel's 4x target multiple and high international exposure. SAIL trades at a discount to global peers − now at 5.4x CY09 EV/EBITDA.

•Steady growth; strong balance sheet — We expect sales volumes to grow by 7% in FY10 and 9% in FY11. Saleable steel capacity should grow from 13m tpa to 23m tpa by 2012. Of the three domestic steel majors, SAIL is the only one with a net cash position (Rs32/share as of Dec 2008). SAIL's net debt/equity ratio was -0.5x as of March 2008 versus 1.7x for TSL and 1.5x for JSTL.

•Risk factors — 1) Further steel price declines; 2) Delays in access to captive iron ore; 3) FX rate changes; 4) Lower volume growth; and 5) Govt. ownership.

To see full report: SAIL