Thursday, August 9, 2012

>SAIL: Expansion projects to start coming on-stream from H2FY13E

Concerns over pushing volumes comes to the fore

SAIL’s steel sales volumes stood at a dismal 2.5 MT in a competitive domestic market and operational performance remained lacklustre with EBITDA at Rs15.1bn and margin of 14.1% (higher QoQ mainly on account of huge negative expense of stock in trade which was led by 0.5 MT inventory increase). Adj. PAT stood at Rs8.7bn (adjusted for forex loss of Rs2.57bn). Realisations showed a marginal increase sequentially on account of better value added product mix on a lower base. Progress of expansion projects also remains slow and inventory build up might delay commissioning further in our view. We continue to believe that SAIL’s competitive strength remains low among large domestic steel producers and see higher risk to volumes and realizations even if there are no further delays in various expansions. We have revised our volume estimates lower for FY13E/14E but pegged EBITDA estimates marginally higher on account of stable realizations and lower coking coal costs. Due to sustained correction in stock price we upgrade our rating to Neutral with a target price of Rs90.

Volumes plummet and realisations improve: Steel sales volume stood at a dismal 2.5MT (our est. ~2.8 MT), lower by ~9% YoY and ~22% QoQ. Sales volumes remained lower than production of ~3 MT as the company continued to find it hard to push volumes in a competitive domestic steel market. Realizations improved by 0.8% sequentially despite pressure on steel prices globally due to rupee depreciation and better value added product mix on a lower base.

Inventory remains high, EBITDA higher due to stock in trade: SAIL’s inventory stood at ~1.4 MT as on Mar’12 and rose further by 0.5 MT in Q1FY13. EBITDA stood at Rs15.2bn (margin of 14.1%), higher sequentially on account of lower overall expenses due to inventory addition creating a high negative stock in trade expense. Power, fuel and other operational costs remained high and SAIL continued to remain the highest cost converter among the large domestic steel players on account of high operational costs. Inventory sales going forward could hit margin in the coming few quarters.

Expansion projects to start coming on-stream from H2FY13E: SAIL’s expansion projects continued to progress at a slow pace and capex during Q1FY13 stood at Rs20bn. The company lowered its capex guidance to ~Rs120bn for FY13E (earlier ~Rs145bn) towards modernization and expansion activities and expects commissioning of blast furnaces of IISCO and Bokaro expansions during H2FY13E. Interest costs for SAIL has remained lower due to non-capitalization of expansion projects as of now but is expected to pick up in FY14E. 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 (trend clearly visible from dismal Q1FY13 sales volume) with new capacities brought on-stream by all large domestic steel players well before SAIL. We further downgrade our volume estimates for SAIL for FY13E/14E to 12MT/13.7MT. However, with reduced costs on coking coal front and realizations in domestic market supported by weak rupee, we have revised our realizations and cost assumptions lower. We revise our FY13E/14E EBITDA higher by 3.0%/4.2%.
Valuations, upgrade to Neutral due to continuous stock price fall: We have remained bearish on SAIL since long on account of reduced competitive capability and high operational cost structure in a tough environment. We remain skeptical on the company’s ability to push volumes in a competitive market going forward and simultaneously improve margin and realizations significantly despite lower raw material costs. We value the company at 5x FY14E EV/EBITDA (discount of 10% to global average) and FY14E expected outstanding CWIP at 0.5x to arrive at a target price of Rs90. We upgrade the stock to Neutral from Sell on account of valuations coming down on continued correction in stock price.