Steel Authority of India – Waiting for value to emerge: RBS

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Steel Authority of India – Waiting for value to emerge


3QFY11 results showed the ongoing effects of high raw material costs, as we expected,
though production volumes of 3.3mt were robust. We revisit our volume and operating cost
estimates and cut our FY11-13F earnings by 9-13%. We reduce our target price to Rs165
(from Rs191). Maintain Hold.
As expected, margin pressure continues
SAIL’s 3QFY11 saleable steel production volumes were robust at 3.3mt (3mt in 2QFY11)
and net revenues were Rs111.4bn (+5% qoq and +15% yoy). However, margins remained
under pressure, with high raw material costs at Rs50.6bn. Employee expenses came in at
Rs18.6bn (+10% qoq and +19% yoy). EBITDA was Rs16.2bn (+9% qoq and -32% yoy)
versus our estimate of Rs17.8bn. PAT was Rs11.1bn (+2% qoq and -34% yoy). Though price
hikes of about 3% in the new year are positive, we expect margins to remain under pressure
in the coming quarters, with coking coal prices close to US$270/t due to weather-related
supply issues in Australia.

We revisit our key assumptions
The 2mt IISCO expansion and 1.4mt Bokaro Steel expansion are expected by management
to come on-stream by December 2011. 6mt from the remaining plants is expected to come
on-line by end-FY13, according to the company, though we factor in the possibility of delays.
We cut our FY12 and FY13 volume estimates by 5% and 4% respectively to 13.6mt and
15.7mt. We increase our operating cost assumptions by 2-5% for FY11-13 on a per tonne
basis. Our EBITDA estimates for FY11, FY12 and FY13 consequently reduce by 6%,12%
and 9% respectively.


Target price cut to Rs165; Maintain Hold
The stock has corrected more than 20% since October 2010 (vs the index down 7% during this
period) and we believe it is nearing fair value. Progress on capacity expansion plans (20mt
saleable steel by FY13) is the key potential long-term driver for SAIL.  However, we believe
headwinds in the form of high coking coal costs will continue to weigh on earnings near term. We
retain our blended coking coal costs at US$219/t and US$215/t for FY12 and FY13 respectively.
We value SAIL at 5.9x (current peer average) FY12F EV/EBITDA and add CWIP at 1x book
value (Rs76/share)