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SAIL:: Disappointing 3Q results
SAIL’s 3Q net profit missed our estimates by 30% due to slightly lower ASPs,
higher coal costs & other expenditure and lower financial income. SAIL’s
margins are likely to expand in the next two quarters as steel prices
overshoot ahead of cost push but will decline in 2HCY11 when steel and raw
material prices cool off again. We cut FY11-13 EPS estimates by 18-26%
factoring in higher steel and raw material price forecasts of CLSA’s regional
team. SAIL offers strong growth over FY14-15 but we risk of delays in its
expansion projects and expect underperformance on a 12m view. U-PF stays.
Weak 3Q results – 30% below estimates
SAIL’s 3Q EBITDA came in 26% lower than estimates due to slightly lower ASPs,
higher raw material costs and higher other expenditure. SAIL used higher-priced
coking coal inventory at US$225/t during 3Q instead of the US$209/t contract
price prevalent during the quarter. The sharp 19% QoQ rise in other expenditure
despite only 7% higher volumes puzzles us. EBITDA per ton came in at US$121 –
flat QoQ. Financial income dipped 22% QoQ as older higher-rate deposits got
rolled over at lower rates.
Volatile margins ahead
With spot iron ore prices staying over US$180/t and coking coal prices surging
above US$300/t due to the Queensland floods, steel-makers will see substantial
cost push by 1QFY12. Steel buyers are stocking up ahead of this to avoid paying
more later, but this itself is pushing up steel prices in every region. Indian steel
prices have gone up by US$25/t in Jan and we expect similar hikes in Feb and
Mar. We believe that steel prices will overshoot in 1HCY11 but will subsequently
drop in 2H as buyers start de-stocking and raw material prices cool off. We believe
that SAIL’s margins will rise over the next two quarters but will decline post that.
Cutting estimates 18-26%; maintain U-PF
We estimate an EBITDA per ton of US$167 for SAIL in FY12 versus US$149 in
FY11. Any coking coal purchases in the spot market due to insufficient contractual
coal supply and/or sharper hike by Coal India (30% of SAIL’s coking coal supply)
will mean lower margins in FY12. In FY13, we believe that margins will improve to
US$198/t due to the absence of carry-over coking coal volumes at US$300/t and
operating leverage benefits post the ISP plant expansion. Despite this, our FY11-
13 estimates drop 18-26% and at 6x FY13 EV/EBITDA, we can justify a value of
only Rs152 for SAIL’s stock. If SAIL’s projects get commissioned on time by end-
FY13, FY14 and FY15 will be strong volume and EBITDA growth years for SAIL.
However, the 6m delay in the ISP plant has weakened our conviction levels on
timely commissioning of the other expansions and we see risk of delays. U-PF.
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