STEEL AUTHORITY OF INDIA Margins disappoint:: Edelweiss

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􀂃 Revenues 10% above expectations driven by volumes
Steel Authority of India’s (SAIL) reported revenues of INR 106 bn (~11% above
our estimates) were up 5.6% Y-o-Y and 17.4% Q-o-Q. Revenue growth, largely
driven by higher sales volumes of 3 mt for the quarter, beat our assumption of
~2.7 mt. SAIL witnessed volume growth of 29.3% Q-o-Q. Realisation, at INR
35.3k/t, came slightly below our estimates of INR 35.8k/t. This could be due to
value-added proportion dipping from 39% to 36% Q-o-Q.
􀂃 EBITDA in line with estimates; EBITDA/t disappoints
SAIL reported EBITDA of INR 14.9 bn, down ~37.6% Y-o-Y and 14.2% Q-o-Q.
The same was ~6.4% lower than our estimates of INR 15.9 bn, as cost/t was
slightly higher than our estimates (INR 30.4k/t against our assumption of INR
29.8k/t). Benchmark hard coking coal prices for the quarter stood at USD 225/t
against USD 200/t in Q1FY11 and USD 128/t in Q2FY10. EBITDA/t stood at ~INR
5k/t, much lower than our expectation of INR 6k/t. Overall, lower reported
EBITDA also caused net profit to decline to INR 10.9 bn (down 34.5% Y-o-Y and
7.4% Q-o-Q) and was in line with our estimates of INR 11.1 bn.
􀂃 Expansion projects: IISCO delayed by one more quarter
Trial runs are currently on at the 175 ktpa Salem steel plant, and SAIL expects
the plant to be commissioned during Q3FY11. The 2 mtpa IISCO steel plant is
delayed further by a quarter and is now expected to be commissioned by
December 2011. Volumes during H2FY11 will be better than H1FY11 due to
seasonal demand increase and inventory liquidation. Our assumption for FY11
and FY12 stands at 12.5 mt and 13.5 mt, respectively.
􀂃 Outlook and valuations: Volume growth back ended; maintain ‘BUY’
In the near term, steel prices are likely to come under pressure due to seasonal
weakness in the developed world, slow demand in China and rupee appreciation.
However, on a one-year basis, we continue to expect margin expansion for steel
players in FY12 over FY11.
We remain optimistic on SAIL’s long-term volume growth story emanating from
the ongoing modernisation-cum-expansion projects, which will also reduce semis
mix from 5% currently to nil, reducing costs. However, most of this volume
growth will be back ended and will reflect in FY13 and furthermore in FY14.
While we retain our estimates and ‘BUY/Sector Performer’ recommendation
on SAIL with a fair valuation of INR 239/share, our top picks in the steel sector
are Tata Steel and JSW Steel.