>SAIL (ICICI DIRECT)

Sailing through…
Steel Authority of India Ltd (SAIL) surprised us with its Q4FY09 numbers, which were ahead of our and consensus estimates. Though there was YoY de-growth, the company was able to report better-than-expected results. This was despite a fall in realisation on improved product mix, lower employee costs and significant rise in saleable steel volume over the previous quarter supported by an improvement in domestic demand. SAIL reported net profit of at Rs 1486.68 crore and Rs 6174.81 for Q4 and full FY09 (against our expectations of Rs 856.4 crore and Rs 5544.5 crore), respectively. The Q4 net profit figure was down 37% YoY. However, it rose 76% QoQ.

Highlight of the quarter
The topline for Q4FY09 was Rs 12057.8 crore, down 10% YoY but up 35% QoQ. The EBITDA margin grew by 480 bps QoQ but fell by 1010 bps YoY to 17.5%, as higher raw material cost mainly on account of coking coal continued to weigh coupled with lower realisation during H2FY09. For the full year FY09 the EBITDA margin, however, stood at 20.4% due to stronger performance during H1FY09. Special steel production rose 11% YoY to 3.7 million tonnes (MT).

Valuation
At the CMP of Rs 173, the stock is discounting its FY10E earning of Rs 13.3 by 13.1x and FY10E EV/ EBITDA by 5.7x. Based on the good growth prospect of the company in future coupled with higher operational efficiency we assign the stock a multiple of 6.5x on its FY10E EV/EBITDA. This translates to a price of Rs 180/ share, an upside of 4%. We continue to maintain our HOLD rating on the stock.

Strong volume growth offsets fall in realisation
The average realisation per tonne fell again for the second consecutive quarter in Q4FY09 following the global trend. Indian steel prices, however, did not see a significant fall compared global markets. This is because India is better positioned compared to most of its global peers in terms of expected economic recovery. Thus, steel makers that have their major focus on the domestic markets are set to reap the benefit. SAIL, being a PSU, has already shown that. The company, though it saw some drop in realisation, could sell significantly higher quantity (3.6
MT) in Q4FY09 compared to the previous quarter (a QoQ growth of 33%). On a YoY basis, however, saleable steel production declined by 4% to 12.5 MT. Total sales also fell by 8% YoY to 11.32 MT for the full FY09. However, considering the tough situation in FY09 especially from mid-August to December 2008, even this performance seems quite good.

To see full report: SAIL