Wednesday, February 15, 2012


Tough sailing continues, reiterate sell
SAIL reported subdued results as expected with a drop in net sales of ~5% YoY on the back of lower volumes of just 2.6 MT, down ~7% QoQ. EBITDA was propped up by increase in stock in trade (as steel inventories rose to ~1.3MT) which resulted in lower overall expenses and a margin of 14.7%, up 260 bps QoQ. PAT dropped ~43% YoY as MTM forex losses continued on account of rupee depreciation. We see challenges for SAIL in increasing volumes in competitive domestic market and also remain concerned over delays in its long pending expansion plans. We revise our FY13E/14E earnings estimate downwards to factor in lower volumes. Maintain sell.

 Volumes disappoint yet again: Steel sales volume stood at ~2.6MT (our est. ~2.7 MT), lower by ~19% YoY and ~7% QoQ. Sales volumes were affected adversely in the month of November and the company found it hard to push volumes in a competitive domestic steel market with demand from infrastructure and construction remaining low. Realizations improved sequentially as value added products formed a higher portion of sales mix.

 Inventory build up continues, EBITDA cushioned by higher stock in trade: SAIL’s inventory build up continued in Q3FY12 (~0.4 MT addition) with total steel products inventory reaching ~1.3 MT on Dec’11. EBITDA stood at Rs15.8bn (margin of 14.7% vs 12.1% in Q2FY12), propped up mainly by Rs12.5bn addition to stock in trade on account of inventory build up which in turn reduced overall expenses. Power, fuel and other operational costs remained high and SAIL continues to remain the highest cost converter among the large domestic steel players on account of high operational costs.

 Expansion progress remains slow, revise estimates lower: SAIL’s expansion projects continue to progress at a slow pace and capex during 9mFY12 stood at a lower-than-expected Rs7.3bn. The company has guided towards 1MT of additional production in FY13E on the back of expansions at IISCO and Bokaro steel plants during FY13E. We remain concerned on the slow progress of expansion projects and have apprehensions over the ability of the company to sell higher quantities amidst a fiercely competitive domestic market with new capacities brought on-stream by all large domestic steel players before SAIL. We revise our earnings estimate lower factoring in lower steel volumes, flat to subdued realizations and lower coking coal prices. We revise our FY13E/14E EBITDA lower by 2.7%/7.3%.

 Maintain sell: We believe that SAIL has now completely lost the first mover advantage in terms of increasing capacity and remain skeptical on the company’s ability to push volumes in a tough market going forward and simultaneously maintain margin and realizations. We shift our valuation base to FY14E and value the company at 4.5x FY14E EV/EBITDA (discount of 20% to global average) and FY14E expected outstanding CWIP at 0.7x to arrive at a target price of Rs94. Maintain Sell.