>STEEL AUTHORITY OF INDIA LIMITED (ICICI SECURITIES)

UPSIDE LIMITED

Steel Authority of India’s (SAIL) Q1FY10 results were below estimates after normalising for employee expenses. Reported PAT was down 11% QoQ to Rs132.6bn. Revenues declined 22% QoQ to Rs91.5bn (I-Sec: Rs92.5bn). EBITDA decreased 23% QoQ to Rs9.4bn (I-Sec: Rs9.9bn), adjusting for low employee wage provision in Q1FY10. Providing for extraordinaries, PAT decreased 11% QoQ and 71% YoY to Rs6.4bn (I-Sec: Rs7.7bn). At Rs180/share, the stock is trading at FY10E cash-adjusted P/E and EV/E of 12.6x and 7.4x respectively. Reiterate HOLD with target price of Rs183/share.

■ Profitability back on track in Durgapur & Bokaro plants. Saleable steel volume rose 4% YoY to 2.8mnte. But realisations dragged with five integrated steel plants (ISPs, excluding Durgapur) posting QoQ dip of Rs573-6,900/te (largest being IISCO). SAIL has been able to save Rs5.7bn YoY in costs via improved blast furnace productivity, increased yield and +21% YoY rise in production of value added products. Renegotiation of coking coal contract (from April) to ~US$150/te from US$300/te boosted margins. Bokaro and Durgapur benefited the most with US$143/te and US$171/te cost savings QoQ. Significant cost savings were realised
in IISCO as Q1FY10 was EBITDA-accretive for the plant, with no price rise.

■ Coal prices reduce; raw material secure. SAIL has 5mnte roll-over coking coal to be consumed in three years. Due to high-cost coking coal inventory in Q1FY10, the average cost was US$185/te (to reduce to US$150/te in Q2FY10E). Domestic coal price is still being negotiated. The dispute for Chiria mines is over since the Jharkhand Government has accepted SAIL as the owner. SAIL has obtained forest clearance for Rowghat mines (that supply to Bhilai; 732mnte reserve).

■ Employee cost surprises. SAIL’s Q1FY10 employee cost was Rs1bn, with Rs2bn as provisioning reversal (initially provided in 30-42% wage revision recommended by the Rao Committee). The management has guided for Rs68bn employee cost in FY10. If realised, this can led to an EPS upgrade. Also, the workforce was reduced by 5,000 to 119,000 in Q1FY10. The five-year employee target is 100,000.

■ Capex plans & volume accretion. SAIL plans to increase its saleable steel capacity to 20.3mnte (13mnte at present) at Rs370bn by FY12. Additional Rs70bn will be spent on increasing value-added production and Rs158bn for sustenance capex and technological upgradation. SAIL plans to spend Rs100bn in FY10, with Rs25bn already spent in Q1FY10 (50% debt funded). SAIL’s current D/E is at 0.3:1.

To see full report: SAIL