>SAIL (CENTRUM)

Revenue visibility improving

We upgrade SAIL to Buy (from Hold) on improved revenue visibility over the mid-term. The management estimates 10% volume growth in FY10 and plans to restart two idle blast furnaces (1.6mt total capacity) to meet the renewed demand from infrastructure, automobile and white goods sectors. The company’s plan to hike prices of long products too would boost revenues.

■ Upgrade to Buy: We upgrade SAIL to Buy (from Hold) on improved revenue visibility over the mid-term. At CMP, the stock trades at 12x FY10E and 10.2x FY11E earnings and 6x FY10E and 4.8x FY11E EV/EBIDTA. We value the stock at 6.0x FY11E EV/EBIDTA, which gives us
a target price of Rs205 (Rs176 earlier).

■ Domestic steel consumption to rise in tandem with GDP growth: Highlighting the strong correlation between steel consumption and GDP growth, the management estimates domestic steel consumption to register 7% growth in FY10 and 10% in FY11. Consumption during August 2009 increased 4% to 4.4mt, though production dipped 1% to 4.73mt.

■ Company to increase production: SAIL plans to restart two idle blast furnaces (total capacity of 1.6mt) to meet the incremental demand from construction, automobile and consumer durable sectors.

■ Gearing up to hike prices of long products: The company intends to increase prices of long products from Q3FY10 onwards. Improving domestic demand coupled with likely increase in prices would be positive triggers for the stock.

■ Estimates revised: We have cut our earnings estimates for FY10 by 0.7% to Rs14.2 to factor in higher employee costs. However, for FY11 we raise estimate by 2.3% to Rs16.7.

■ Capex delayed by two more years: SAIL’s Rs500bn capex to double capacity to 26mt would be further delayed by two years to 2014, primarily due to global economic stress and softer demand. The company expects to add about 7mt of new capacity during phase 1 of the capex (between June-July 2010 and 2012).

To see full report: SAIL