Expansion remains the key
Momentum back after sharp correction
After correcting 20-25% during April-August, SAIL’s stock price has
turned up mainly on strong steel prices, in our view. The stock first
corrected on concerns about the government divesting its stake at a
discount and then on softening steel prices and delayed expansion
plans. With steel prices strengthening again, we think valuations look
attractive.
Upside from the extensive modernisation programme …
SAIL is undertaking a major modernisation plan for existing plants that
should not only improve the product mix but also enhance its cost
structure. SAIL is going for higher coal injection in blast furnaces and
100% continuous casting which will likely reduce energy costs. The
company is also setting up new coke oven batteries and sinter plants
to increase efficiency and start the usage of captive iron ore fines.
… and capacity expansion
SAIL plans to increase production capacity from 13mn tonnes now to
25mn tonnes by FY13-14F, according to management. The expansion
should lead to significant operating leverage as employee costs per
tonne for the company, the highest in the industry, will likely fall in line
with the industry standard. However, the company has indicated that
significant production from expansion will start only in FY14.
Maintain BUY with revised price target of INR264
We maintain BUY on the stock with a price target of INR264 (from
INR260), implying 16% potential upside. We lower earnings for FY11
from INR18.9 to INR16.9 on account of higher employee costs and
lower deliveries. However, FY12 earnings are largely flat as volumes
should pick up and we think the company will benefit from lower
coking coal prices.
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