Finding difficult to SAIL:: Macquarie Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �


Steel Authority of India
Finding difficult to SAIL
Event
 3QFY11 results – below expectation: SAIL reported 3Q FY11 results which
were 20% below our estimat`e. SAIL reported EBITDA margin at $110/t,
marginally improving from $106/t it did last quarter but impacted by coking
coal costs. We maintain our Underperform rating and TP and believe that the
overhang of fresh equity dilution will lead to more downside from current
levels.

Impact
 Weak Q3 results: Net Sales at Rs111bn is up 15% YoY driven by 11%
increase in volume, though realisations dipped by $23/t during the quarter.
EBITDA at Rs16.3bn is down 32% YoY, as raw material costs increased
about 28%. PAT at Rs11.1bn was down 34% YoY, exacerbated by a decline
in other income by 25%.
 Earnings at severe risk: We see about 20% risk to our and consensus
earnings estimate for FY11. SAIL has achieved only 50% of our full year
estimate in the first three quarters. While we expect margins to improve in Q4
by around $40-50/t, it will require a 40% jump in volume QoQ and EBITDA of
$270/t to meet consensus estimates.
 Capacity expansion is still a few years away: SAIL has to date expensed
$5.7bn for its capacity expansion program, as compared to a total expense of
$15.5bn for the total expansion. The company expects to reach its increased
capacity by FY14, and we believe that there can be some further delays here.
 Coking coal price strength eating into profits: SAIL’s profitability has also
been impacted severely by coking coal price strength, which is expected to
remain strong. For every 10% increase in coking coal’s price, the company’s
earnings reduce by 11%. Though it is developing its captive coking coal
mine, Tasra, with a targeted capacity of 4mtpa, any benefit from this is still a
few years away.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs168.00 based on a PER methodology.
 Catalyst: Announcement of FPO timeline
Action and recommendation
 Maintain Underperform: SAIL currently looks expensive at 11x PER on
FY12E, with no earnings growth. The stock also has an overhang of the
upcoming equity issuance which will increase the free float by 66%. We
believe it is a bit too early to play the volume expansion story here and
recommend a switch to Jindal Steel and Power (JSP IN, OP, Rs678, TP:
Rs962), which should see a 20%+CAGR in earnings in the next 3 years.