Friday, June 1, 2012

>SAIL: Q4FY12 Result update

Operational struggle continues, reiterate sell

SAIL’s operational performance remained below expectations with Q4FY12 EBITDA at Rs18.7bn and margin of 13.7% (lower by 100bps QoQ). Reported PAT at Rs15.8bn included exceptional gain of Rs7.2bn on account of entry tax write-back for Bhilai steel plant and forex fluctuations. Adj. PAT stood at Rs10.8bn (~5% lower than our expectation of Rs11.4bn). Realisations improved 4.5% QoQ but costs remained higher as other expenses and raw material costs went up sequentially. Also, a decrease in stock in trade was seen which we believe would have been due to old high cost inventory sales during Q4FY12. Expansion progress still remains slow and incremental volumes from IISCO and Bokaro are not expected before H2FY13E. We revise our volume and EBITDA estimates lower for FY13E/14E. Maintain sell.

 Volumes and realisations improve: Steel sales volume stood at ~3.2MT (our est. ~3.1 MT), higher by ~2.2% YoY and ~22% QoQ. Sales volumes improved after a dismal Q3FY12 but remained lower than production of 3.3 MT as the company continues to find it hard to push volumes in a competitive domestic steel market. Realizations improved by 4.5% sequentially as steel prices improved in the domestic market (especially for longs).

 Inventory remains high, EBITDA lower on high costs: SAIL’s inventory remains high with total steel products inventory reaching ~1.4 MT as on Mar’12. EBITDA stood at Rs18.7bn (margin of 13.7%), lower sequentially on account of ~Rs6.3bn reduction to stock in trade on account of previous high cost inventory sales during the quarter. 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 projects to start coming on-stream from FY13E: SAIL’s expansion projects continue to progress at a slow pace and capex during FY12 stood at a lowerthan- expected Rs11bn (against guidance of Rs12.5bn). The company has guided towards Rs14.5bn capex for FY13E towards modernization and expansion activities and expects commissioning of IISCO and Bokaro expansions during FY13E. SAIL has seen its interest earning cash investments drop by Rs11bn during FY12 on account of substantial debt repayments and capex from internal accruals. This is expected to reduce other income for SAIl from FY13E onwards and also increase debt funding going ahead. We remain concerned on the slow progress of expansion projects and have apprehensions over the ability of the company to sell higher quantities in a competitive domestic market with new capacities brought on-stream by all large domestic steel players well before SAIL. We revise our earnings estimate lower factoring in lower steel volumes, higher blended realizations and higher other expenses. We revise our FY13E/14E EBITDA lower by 3.6%/5.7%.

 Maintain sell: We maintain our bearish stance on SAIL on account of reduced competitive capability and high operational cost. We remain skeptical on the company’s ability to push volumes in a competitive market going forward and simultaneously maintain margin and realizations. We value the company at 5x FY14E EV/EBITDA (discount of 10% to global average) and FY14E expected outstanding CWIP at 0.6x to arrive at a target price of Rs88. Maintain Sell.