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Steel Authority of India (SAIL IN; Mkt Cap USD18.8b, CMP Rs203, Neutral)
- SAIL's 2QFY11 PAT declined 7% QoQ to Rs10.9b (down 34% YoY) due to lower steel prices despite higher volumes.
- Net sales increased 18% QoQ to Rs108b. Sales tonnage increased 32% QoQ to 3.03mt due to improved domestic demand and lower pressure from imports during the quarter. Average realization fell by Rs4,046/ton to Rs35,664/ton.
- EBITDA declined 8% QoQ to Rs17b. EBITDA per ton declined by Rs2,419/ton to Rs5,593 (US$121/ton) due to higher raw material costs.
- 3QFY11 coking coal contract was settled at US$205/ton. The management expects domestic coal costs to rise by 5%. The blended cost of coal for the quarter increased 6.5% QoQ to Rs13,039/ton.
- SAIL used 0.68mt of earlier contracted (at US$300/ton) coking coal. Still 2.7mt of carry-over tonnage remain to be used in the next 18 months.
- We expect margins to expand in 2HFY11 due to the dual benefit of steel price improvements and some reduction in raw material costs.
- Project execution still remains slow. Next significant capacity addition i.e. new 2.5mtpa blast furnace at ISP, Burnpur is delayed by 6 months to December 2011. So far, only Rs480b out of Rs700b Capex has been ordered. During the quarter, Rs40b of new ordering and Rs53b of Capex were executed.
- The stock trades at expensive valuations, at a P/E of 13.7x FY12E and EV/EBITDA of 9x FY12E. Maintain Neutral.
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