>SAIL (KR CHOKSEY)

INVESTMENT RATIONALE

Higher sales driven by volumes– SAIL reported Q4FY09 revenue of Rs 11,852 crores, a decline of 12% y-o-y on account of lower realization but an upside of 34% q-o-q led by higher sales volumes. Company has also changed it product portfolio to have higher proportion of value added products

Operating performance –Company has posted an improvement of 87% in its EBITDA of Rs 2,109.71 crores as compared to Rs 1,128.69 crore in the previous quarter. In the first three quarters of FY09 company had already made sufficient employee wage related provisions arising due to sixth pay commission revisions and so employee cost was lower in Q4 FY09. This is reflected in the operating margin which has increased by 505 bps q-o-q. However operating margins have decline on y-o-y basis on account of higher cost of raw material mainly coking coal. Till March 31, 2009; company has made cumulative wage provisions of Rs 5,287 crores towards employee wage cost on account of 6th pay commission revisions

Key Developments
• For the FY 09 as a whole semis component in sales of steel reduced by 1% to 12%. Going forward company expect to completely eliminate it in FY10.

• Average capacity utilization of saleable steel for the FY 09 was 113%.

• Finished steel inventory for the company as of 31 March stood at 1 million tonnes

• The company has a roughly 4.5 million tonnes of carry over coal quantity booked at $300, it is negotiating with suppliers to lift this quantity over next 3 years.

• The company has closing inventory of 1 million tonne of coking coal, 0.5 million tonees in storage and rest 0.5 million tones in transit.

Cash and cash equivalents
Cash balance of company stands at approximately Rs 18000 crores, if we remove short term borrowings of around 3500 crores, net cash position is Rs 14500. This results in to cash per share of Rs 35.

Valuations
At current price of Rs 152.35 the stock is trading at P/E of 11.71x FY10E EPS of Rs.13 and it is trading at TTM EV/EBITDA of 7.56x.

We recommend a “BUY” on the stock with a 12 month target price of Rs.192.

To see full report: SAIL