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Steel Authority of India – 3QFY2011 Result Update
Angel Broking maintain Accumulate on Steel Authority of India with a Target Price of Rs182.
SAIL reported net sales of `11,143cr, in line with our estimate of `10,825cr.
However, net profit came in at `1,107cr, below our estimate of `1,200cr.
Realisation dip – A negative surprise: During 3QFY2011, the company’s sales
volume grew by robust 10.5% yoy and 7.3% qoq to 3.25mn tonnes, aided by
7.2% yoy growth in value-added sales. However, the sequential drop in
realisations (down 2.0% to `34,287/tonne) came as a negative surprise despite
the ~`500/tonne qoq increase in steel prices. Management indicated that the dip
in realisations was on account of liquidation of defective rails inventory to the
extent of 35–40kt during the quarter. Despite lower realisations, EBITDA/tonne
grew by 2.4% qoq to US $123; however, it was down 34.5% yoy as raw-material
cost increased by 33.7% yoy to `15,695/tonne. Consequently, EBITDA margin
contracted by 1,047bp yoy and remained flat sequentially. As a result, EBITDA
declined by 30.4% yoy to `1,796cr (up 6.0% qoq), which resulted in a 33.9% yoy
decline in net profit to `1,676cr (up 1.6% qoq).
Outlook and valuation: At the CMP, the stock is trading at 8.6x FY2011E and
6.7x FY2012E EV/EBITDA, respectively. Going ahead, we believe SAIL will benefit
from strong domestic demand. Nonetheless, as benefits of capacity expansion are
expected only post FY2012, we maintain Accumulate on the stock with a revised
Target Price of `182 (`198). Further, news flow related to the follow-on public
offer in the near future could direct the stock price movement from current levels.
Conference call – Key takeaways
SAIL has recently hiked steel prices by `1,000/tonne. The company had made
a similar hike in steel prices in December 2010 as well.
During the quarter, the company liquidated 35–40kt of the total defective rails
inventory of 100kt. The finished steel inventory level stood at 1mn tonnes in
3QFY2011 as compared to 1.2mn tonnes in 2QFY2011.
Management indicated that royalty rate on iron ore on ad valorem basis
increased to `230/tonne in 3QFY2011 as against `64/tonne in 3QFY2010
and `200/tonne in 2QFY2011. As a result, the negative impact of royalty on
iron ore was `75cr during the quarter.
The company consumed 0.68mn tonnes of rolled-over, high-cost
(US $300/tonne) coking coal inventory in 3QFY2011 as compared to around
0.7mn tonne in 2QFY2011. Management indicated that it will consume
2.6–2.7mn tonnes in FY2011 and 1.7mn tonnes in FY2012 of high cost
coking coal. Currently, imported coking coal inventory stands at 1mn tonnes.
During the quarter, interest expense was substantially lower by 46.2% yoy and
45.7% qoq as the company’s loan portfolio shifted towards long-term loans.
Interest income also fell by 35.3% yoy and 21.7% qoq on account of reduction
in deposit amount. Deposits have fallen to `13,000cr as of December 2010
as against `22,000cr last year.
As of December 2010, SAIL’s cash balance stood at `13,496cr and
borrowings stood at `14,176cr, of which long-term borrowings were
`10,000cr.
Result highlights
Net revenue in line with our estimates
During the quarter, saleable steel production increased by 5.0% yoy and 8.0% qoq
to 3.33mn tonnes, while saleable sales volume increased by 10.5% yoy and 7.3%
qoq to 3.25mn tonnes. However, realisation declined by 2.0% qoq to
`34,287/tonne, though up 4.0% yoy. Thus, net revenue grew by 14.9% yoy and
5.1% qoq to `11,143cr, driven by higher volumes.
EBITDA margin contracted due to higher coking coal cost
Despite growth in the top line, EBITDA declined by 30.4% yoy to `1,796cr, as
EBITDA margins contracted by 1,047bp yoy to 16.1%. However, EBITDA was up
6.0% qoq as EBITDA margins remained flat sequentially.
During the quarter, raw-material cost increased by 33.7% yoy to `15,695/tonne
mainly on account of higher coking coal cost. The negative impact on account of
imported coking coal was `1,093cr. Royalty, which is included in other expenses,
increased to `230/tonne in 3QFY2011 compared to `200/tonne in 2QFY2011.
Net interest income declined by 31.2% yoy and 10.0% qoq to `201cr during the
quarter, whereas depreciation expense increased by 11.9% yoy and 2.8% qoq to
`379cr. Therefore, higher cost resulted in net income decreasing by 33.9% yoy to
`1,107cr, but up 1.6% qoq.
Investment rationale
Volume growth unexciting in the near term
Owing to SAIL’s ongoing capacity expansion plan, steel capacity is expected to
double by FY2013–14. The expansion plan along with development of
raw-material mines will cost the company `70,000cr. SAIL’s order placements for
its expansion plan are nearing completion. The company has already placed
orders worth `50,000cr.
While the company’s ISP plant is expected to be commissioned in 3QFY2012,
most of the company’s additional capacity is expected to come on stream post
FY2012. Thus, we expect a muted sales volume CAGR of 5.3% over FY2010–12.
Product mix to improve
Post the expansion and modernisation of the steel plants, SAIL will benefit from the
improvement in its product mix. Management plans to reduce sale of semis to nil
post the expansion of its steel capacity. Semis constituted 19.7% of the company’s
product mix in FY2010. Moreover, contribution of structural steel is expected to
improve to 15% from the current 4.5%.
Outlook and valuation
At the CMP, the stock is trading at 8.6x FY2011E and 6.7x FY2012E EV/EBITDA,
respectively. Going ahead, we believe SAIL will benefit from strong domestic
demand. However, we maintain Accumulate on the stock with a revised Target
Price of `182 (`198), as benefits of capacity expansion are expected only post
FY2012. Further, news flow related to the follow-on public offer in the near term
could direct the stock price movement from current levels.
We have lowered our sales volume estimates by 1.6% for FY2011E and 2.9% for
FY2012E. However, we are raising our price assumption by 3.9% for FY2011E and
8.7% for FY2012E. EBITDA margin has been lowered to factor in the higher
raw-material cost.
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