>STEEL AUTHORITY OF INDIA LIMITED (CITI)

Sell: PAT Declines 35%; Better Outlook But Stock Expensive

■ 1QFY10 marginally better — SAIL's reported PAT came in at Rs13.3bn, down 28% yoy. Adjusting for the wage provision write back, recurring PAT was Rs11.9bn, down 35% yoy (4% above our estimate). EBITDA margin (incl other income) was 25% vs 29% last year (20% in 4QFY09). The fall in profits was on account of lower realizations despite an overall reduction in per tonne costs.

■ Volumes grow in line with industry — Sales rose 5% to 2.8m tonnes and output rose 4% to 3.1m tonnes. SAIL focused its efforts on special steels/value added products (+21% yoy) and better productivity norms in 1Q. Overall capacity utilisation was 111%. SAIL's volume growth in 1Q (+5%) is low vs Tata Steel (+22%) and JSW Steel (+62%) as most of SAIL's expansions are likely by FY12.

■ Weaker realizations — Avg realizations fell 20% yoy to ~Rs32,600/t, but flat qoq. Going forward, flat product prices could improve on strong demand. However, long product prices (35% of volumes) are weakening due to sluggish seasonal demand and are only likely to recover post the monsoons in 3QFY10.

■ Overall costs decline — Overall costs per tonne fell 13% yoy with declines across all heads. Raw materials were the exception with costs rising 13% yoy due to high cost coking coal inventory. Input costs should fall in the coming quarters on lower cost imported coking coal and increased captive coal output.

■ Sell — While SAIL would benefit from an improved price environment, we believe that the positives are already priced in and it is expensive relative to history. The stock has run up 127% YTD, outperforming the Sensex by 67%.

To see full report: SAIL