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Raw material cost push impacts growth…
SAIL’s Q3FY11 results came below our estimates. The topline almost
came in line with our estimates at | 11312 crore against the expected |
11749 crore (up ~14% YoY and ~7% QoQ) aided by saleable steel
volume growth at ~ 13% QoQ at ~3.3 million tonnes (MT). EBITDA
margins remained under pressure (down ~ 240 bps QoQ and ~1020 bps
YoY) due to a rise in contractual coking coal prices by ~ 60% YoY and
higher power cost due to rise in fuel prices. PAT margins also remained
muted QoQ and declined considerably (down ~ 33% YoY) due to lower
forex gains (declined ~ |120 crore QoQ). We believe the delay in
capacity expansion would affect the volume growth, going ahead. We
expect margins to remain under pressure as raw material prices are
expected to harden from the present levels, and, hence will impact
margins. Hence, we have revised our target price to |168 per share
taking into consideration the above-mentioned factors.
ƒ Higher raw material and wage cost dents margins
Contractual coking coal costs rose from $128/tonne fob to
$205/tonne for Q3FY11, thereby impacting the EBITDA margins to
the tune of ~1020 bps YoY. Also, wage cost for Q3FY11 rose ~8%
QoQ due to higher provision in wages by ~ | 269 crore.
ƒ Muted blended realisation restricts topline growth
Topline growth was arrested due to average blended realisations
dropping ~ 4% QoQ to ~ | 34800/tonne against ~ | 36082/tonne in
Q2FY11. The fall in blended realisation could be attributed to sale of
defective rails (~40,000 tonnes) at lower realisations, thereby
leading to a dip in blended realisations.
Valuation
At the CMP of | 161, the stock is trading at FY12E PE of 12.3x and FY12E
EV/EBITDA of 8.1x. Factoring in the present concerns and expected cost
pressures, we have valued the stock at 5.5x FY12E EV/EBITDA to arrive at
a target price of | 168. We have assigned an ADD rating to the stock.
Result Analysis
A surge in royalty charges (| 230/tonne in Q3FY11 against | 60/tonne in
Q3FY10), higher coking coal contractual rates and power cost have led to
a decline in EBITDA margins by ~ 1020 bps YoY. We, however, believe
that, going forward, raw material prices will harden, thus leading to
pressure on margins.
Other Concall Highlights
• The finished steel inventory as on December 31, 2010 stood at ~1
MT.
• During the quarter, the company liquidated ~0.2 MT of inventory
due to higher sales (inventory at the end of September 30, 2010
stood at ~1.2 MT).
• The carry over quantity of coking coal for FY12 is ~1.7 MT
• During the quarter, the company utilised coking coal procured in
Q2FY11, the cost of which was $225/tonne (fob). Hence, in
Q4FY11, we expect the cost of raw materials to be lower as the
coking coal procured in Q3FY11 (fob cost of $205) will be carried
over.
• As on December 31, 2010, cash and deposits stood at | 13,496
crore and borrowings were | 14903 crore. Of this, long-term loans
were ~ | 10000 crore and short-term loans were ~ | 4903 crore.
• The company has undertaken capex of | 2688 crore in Q3FY11
(total capex for nine months stood at | 8002 crore).
Outlook & Earnings Revision
Going forward, margins will remain under pressure due to raw material
cost push and softening steel prices. Also, execution delays for capacity
expansion that has been lined up can affect the volume growth. We have
revised down our EPS estimate for FY12E by ~17%.
Valuations
At the CMP of | 161, the stock is trading at FY12E P/E of 10.1x and FY12E
EV/EBITDA of 7.1x. Factoring in the present concerns and expected raw
material cost pressures, we have valued the stock at 5.5x FY12E
EV/EBITDA to arrive at a target price of | 168. We maintain our ADD rating
on the stock
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Raw material cost push impacts growth…
SAIL’s Q3FY11 results came below our estimates. The topline almost
came in line with our estimates at | 11312 crore against the expected |
11749 crore (up ~14% YoY and ~7% QoQ) aided by saleable steel
volume growth at ~ 13% QoQ at ~3.3 million tonnes (MT). EBITDA
margins remained under pressure (down ~ 240 bps QoQ and ~1020 bps
YoY) due to a rise in contractual coking coal prices by ~ 60% YoY and
higher power cost due to rise in fuel prices. PAT margins also remained
muted QoQ and declined considerably (down ~ 33% YoY) due to lower
forex gains (declined ~ |120 crore QoQ). We believe the delay in
capacity expansion would affect the volume growth, going ahead. We
expect margins to remain under pressure as raw material prices are
expected to harden from the present levels, and, hence will impact
margins. Hence, we have revised our target price to |168 per share
taking into consideration the above-mentioned factors.
ƒ Higher raw material and wage cost dents margins
Contractual coking coal costs rose from $128/tonne fob to
$205/tonne for Q3FY11, thereby impacting the EBITDA margins to
the tune of ~1020 bps YoY. Also, wage cost for Q3FY11 rose ~8%
QoQ due to higher provision in wages by ~ | 269 crore.
ƒ Muted blended realisation restricts topline growth
Topline growth was arrested due to average blended realisations
dropping ~ 4% QoQ to ~ | 34800/tonne against ~ | 36082/tonne in
Q2FY11. The fall in blended realisation could be attributed to sale of
defective rails (~40,000 tonnes) at lower realisations, thereby
leading to a dip in blended realisations.
Valuation
At the CMP of | 161, the stock is trading at FY12E PE of 12.3x and FY12E
EV/EBITDA of 8.1x. Factoring in the present concerns and expected cost
pressures, we have valued the stock at 5.5x FY12E EV/EBITDA to arrive at
a target price of | 168. We have assigned an ADD rating to the stock.
Result Analysis
A surge in royalty charges (| 230/tonne in Q3FY11 against | 60/tonne in
Q3FY10), higher coking coal contractual rates and power cost have led to
a decline in EBITDA margins by ~ 1020 bps YoY. We, however, believe
that, going forward, raw material prices will harden, thus leading to
pressure on margins.
Other Concall Highlights
• The finished steel inventory as on December 31, 2010 stood at ~1
MT.
• During the quarter, the company liquidated ~0.2 MT of inventory
due to higher sales (inventory at the end of September 30, 2010
stood at ~1.2 MT).
• The carry over quantity of coking coal for FY12 is ~1.7 MT
• During the quarter, the company utilised coking coal procured in
Q2FY11, the cost of which was $225/tonne (fob). Hence, in
Q4FY11, we expect the cost of raw materials to be lower as the
coking coal procured in Q3FY11 (fob cost of $205) will be carried
over.
• As on December 31, 2010, cash and deposits stood at | 13,496
crore and borrowings were | 14903 crore. Of this, long-term loans
were ~ | 10000 crore and short-term loans were ~ | 4903 crore.
• The company has undertaken capex of | 2688 crore in Q3FY11
(total capex for nine months stood at | 8002 crore).
Outlook & Earnings Revision
Going forward, margins will remain under pressure due to raw material
cost push and softening steel prices. Also, execution delays for capacity
expansion that has been lined up can affect the volume growth. We have
revised down our EPS estimate for FY12E by ~17%.
Valuations
At the CMP of | 161, the stock is trading at FY12E P/E of 10.1x and FY12E
EV/EBITDA of 7.1x. Factoring in the present concerns and expected raw
material cost pressures, we have valued the stock at 5.5x FY12E
EV/EBITDA to arrive at a target price of | 168. We maintain our ADD rating
on the stock
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