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STEEL AUTHORITY OF INDIA
Disappointing performance
Revenues 6.5% above expectations, driven by volumes
Steel Authority of India’s (SAIL) reported revenues of INR 111.4 bn (6.5% above
our estimates) were up 14.9% Y-o-Y and 5.1% Q-o-Q. Revenue growth was
driven by sales volume of ~3.3 mt, higher than our assumption of 3.0 mt.
Volume growth was at 9.3% Q-o-Q.
Significant negative surprise on realisations and costs
Blended realisation, at ~INR 34k/t, came significantly below our estimate of INR
36k/t. The spread of SAIL’s realisations over HRC prices declined to INR 3,830/t
in Q2FY11 from INR 4,980/t in Q1FY11 and further to INR 2,100/t in Q3FY11,
signifying sharp deterioration in product mix and/or sales at discounted prices.
Q-o-Q decline in realisations of INR 1,056/t is a negative surprise considering
Indian HRC prices have increased by INR 500/t Q-o-Q. Decline in input costs per
tonne, at INR 365/t, was also below expectations.
Expansion projects delayed; net cash gradually turning into net debt
SAIL’s IISCO expansion of 2 mtpa has been delayed and is now likely to
complete by December 2011. At the same time, debt has increased to INR 141.8
bn as at Q3FY11 end from INR 134.2 bn as at Q2FY11 end. With cash generation
slowing due to margin pressure, we see net cash of INR 59 bn as on March 31,
2010, turning into net debt by this quarter end, which is earlier than expected.
Outlook and valuations: Negative surprise; downgrade to ‘HOLD/SU’
With significant disappointment both in realisations and raw material costs, we
cut our FY11E EBITDA and PAT estimates by ~25%. We also increase raw
material costs for FY12, leading to ~10% cut in EBITDA and PAT estimates for
FY12. Our fair valuation stands reduced at INR 200/share from INR 239/share.
Overall, we see risk of underperformance by SAIL in terms of margins, going
forward. We downgrade the stock to ‘HOLD/Sector Underperformer’ from
‘BUY/Sector Performer’.
Company Description
Steel Authority of India (SAIL) is the largest steel-maker in India (fifteenth-largest in the
world), and is one of the Government of India’s ‘Navratna’ companies with saleable steel
capacity of 13 mt. The company has the distinction of being India’s largest producer of
iron ore and of having the country’s second largest mines network.
Ranked amongst the top ten public sector companies in India in terms of turnover, it
produces both carbon and special steel for the construction, engineering, power, railway,
automotive, and defense industries and benefits from 100% self-sufficiency in iron ore.
The company enjoys a near-monopoly position in the lucrative market for rails and heavy
plates in India.
Its units are located near iron ore and non-coking coal reserves, primarily in the eastern
and central parts of the country. SAIL has merged Indian Iron and Steel Company, an
ailing subsidiary, with itself and is awaiting the allocation of Chiria iron ore mines, which
is currently being opposed by the Jharkhand government.
Investment Theme
SAIL’s product mix has been improving gradually with reduction in semis and some
improvement in production of value-added products. SAIL’s costs such as employee,
stores & spares and power costs have been consistently reducing since Q2FY09. This,
coupled with the healthy balance sheet, mitigates the issue of lower volume growth.
Key Risks
Higher than anticipated increase in staff, raw material and other operating costs
Deterioration in product mix
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