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For 2QFY2011, SAIL’s net revenue came in at `10,603cr, above our estimate of
Rs9,110cr. Net profit at `1,090cr was also above our estimate of `994cr. The
deviation in top-line was mainly due to higher sales volumes of 3mn tonnes as
compared to our estimate of 2.64mn tonnes.
Costs headwind continues: For 2QFY2011, net revenue increased by 6.6% yoy
and 17.4% qoq to `10,603cr. While sales volume grew 2.7% yoy and 26.3% qoq
to 3mn tonnes, realisations increased 3.8% yoy to `34,993/tonne, though down
7.0% qoq. Despite top-line growing, EBITDA declined 29% yoy and 8% qoq to
`1,695cr as EBITDA margins contracted by 803bp yoy and 443bp qoq to 16% on
account of: a) higher coking coal cost during the quarter, and b) an additional
provision of `70.1cr towards employee-related benefits. Net interest income
declined 49.3% yoy and 8.6% qoq to `223cr, whereas depreciation expense
increased 11% yoy and 5.2% qoq to `369cr. Thus, higher costs resulted in net
income decreasing by 34.5% yoy and 7.4% qoq to `1,090cr.
Outlook and Valuation: At the CMP, the stock is trading at 9.0x FY2011E and
7.4x FY2012E EV/EBITDA, respectively. Going ahead, we believe that SAIL will
benefit from the strong domestic demand. Nonetheless, as benefits of capacity
expansion are expected only post FY2012 we maintain our Neutral view on the
stock. Further, news flow related to follow-on public offer in the near future could
direct the stock price movement from current levels.
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