SAIL: 2Q EBITDA 18% below estimates :: HSBC

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Steel Authority of India
OW: 2Q EBITDA 18% below estimates
 USD117/t sequential drop in realization surprise us; inventory
of 0.5mt still added during the quarter
 Adjusted EBITDA/t falls to financial crisis period numbers—
surprising given SAIL’s captive mining division
 Reiterate OW and INR250 PT, we will revisit our forecasts after
the conference call scheduled on Friday


2QFY11 EBITDA 18% below our estimates
SAIL, in its 2QFY11 results reported EBITDA of INR16.9bn, down 29% y-o-y and 8%
q-o-q; and 18% below our estimates (see exhibit 1). Whereas sales volumes grew c35%
q-o-q, c12% (USD117/t) drop in realizations surprised us, given that steel prices in India have
not fallen as much (see exhibit 2), and JSW Steel reported just a USD73/t drop sequentially.
Adjusted EBITDA/t revisits GFC period numbers
Adjusted for provisions for employee benefits, adjusted EBITDA/t stood at USD122/t, similar
to levels witnessed during the financial crisis period (4QFY09-1QFY10), (see exhibit 3),
which we found surprising given that SAIL has captive raw materials (100% captive iron ore;
c30% captive coking coal); higher iron ore costs would be unlikely to have reduced margins.
Per tonnage raw material appears to be a bit confusing as well given the huge increase in
finished goods inventory in 1QFY11 (see exhibit 4).
We will revisit our forecasts post conference call scheduled for 10/29
We have argued in the past that it is unfair to include SAIL’s investments in new facilities into
net debt for EV/EBITDA valuations when EBITDA will likely accrue post FY12 (see Exhibit
5). Also, we note that SAIL EBITDA’s standard deviation (barring this quarter’s shock) has
been lower than consolidated TATA (see Exhibit 6), which justifies some premium in
valuation multiples for SAIL. Given disappointment in 2QFY11 results, we will revisit our
forecasts after the conference call scheduled for 29 October. Our primary valuation of SAIL is
based on 2012e EV/EBITDA of 7.5x.