Standard Chartered Research: SAIL- OUTPERFORM

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Steel Authority of India Limited
OUTPERFORM


Summary
In 3Q FY11, Sail’s net profit rose 1.6% qoq (down 33.9% yoy) and EBITDA was up 9.0% qoq (down 32.2% yoy). The
reasons for the weak yoy performance: increase in coking coal prices and employee costs. Given the weak results,
we cut FY11E EPS by 9.3% to Rs13.7. However, given the increase in steel prices in Jan ’11, we believe our FY12
earnings estimates will be met. Maintain OUTPERFORM and price target of Rs241.
Results: Key points
Volume up 10.5% yoy – Volume rose 10.5% yoy and 7.3% qoq. The volume numbers compare
well with the industry given steel demand dropped 5% yoy in Nov ’10 and 3.2% yoy in Dec ’10.
However, on a nine-month basis (ending Dec ’10), volume was slightly lower than the same
period last year. In the same period, industry grew 8.8% yoy.
Realization was up 4.0% yoy – Realisation was marginally better than in the previous quarter on
a yoy basis. However, sequentially, it declined 2.0%. In Oct ’10, the company reduced prices by
Rs1,000/tonne (c.US$22/tonne) given keen competition from CIS countries and China, which
were ready to supply HRC at US$610-630/tonne.  
Due to the improvement in volume and realisation compared with last year, net sales improved by
14.9% yoy. Due to the sequential decline in realisation, net sales increased by only 5.1% qoq.


Raw material costs significantly higher on a yoy basis – Due to the increase in coking coal
prices, raw material cost/tonne increased 33.7% yoy. In value terms, the increase in raw material
cost on account of increase in coking coal price was Rs11,000m compared to last year. On a qoq
basis, raw material cost/tonne was 5.1% lower. For 3Q FY11, the company contracted imported
coking coal at US$205-206/tonne, whereas for 4Q FY11 imported coking coal contracts are being
signed at US$225/tonne. Stock at the end of the 3QFY11 had a significant amount of coking coal
procured at US$205/tonne, which could mitigate costs this quarter.
Inventory was down from 1.2m tonnes to 1.0m tonnes on a qoq basis on account of higher sales.


Employee cost higher by 18.6% yoy – Sail’s employee costs rose 18.6% yoy. On a qoq basis,
the cost was 9.6% higher. In the nine-month period ending Dec ’10, there was an additional
provision of Rs2,927m for employee-related benefits compared with the same period an year ago.
Moreover, in the same period, there was a provision of Rs15,721m for implementation of revised
salaries and wages as per the Sixth Pay Commission recommendations.


Other income lower than our estimates – While we expected other income of Rs6,000m, the
reported number was Rs4,407m. The difference was due to the decrease in forex gains.
Other expenditure higher because of royalty – Other expenditure increased 17.5% yoy and
18.6% qoq primarily because of increased royalty payments. Royalty payments were higher by
approximately Rs750m qoq. During the nine-month period ending Dec ’10, royalty payments
were Rs2,600m higher compared to the same period last year.
Change in earning estimates – We are lowering our FY11 EPS estimates by 9.3% to Rs13.7/sh
to account for the weakness in the latest quarterly results. However, given the increase in steel
prices in Jan ’11, we believe our FY12 earnings estimates will be met. Maintain OUTPERFORM
and price target of Rs241.