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UBS Investment Research
Steel Authority of India
Downgrade on muted earnings outlook
Higher raw material costs, employee expenses to impact margins
We estimate SAIL will use 2.7mt of high-cost coal (US$300/t) in FY11 out of total
coking coal use of c14mt. It has used 2.5mt in 9MFY11. We raise our FY11/FY12
employee expense estimates from Rs70/71.4bn to Rs75/77.3bn. However, we do
not expect SAIL’s margins to be under pressure in FY12 (despite high coking coal
prices in Q1 FY12) as SAIL used similar high cost coal and a similar quantity in
FY11). We believe the follow-on public offering (in two tranches in Q4 FY11 and
FY12 as per media reports) is also likely to be an overhang on the stock.
Most capacity expansion to be back-ended; funding to be 1:1 debt to equity
We assume capex of Rs123/140/155bn for FY11/12/13. We estimate crude steel
capacity to increase to 15.8/20/21.4mt in FY12/13/14 from 13.5mt currently. We
do not estimate any capacity expansion in FY11.
Lower earnings estimates on lower volume/ASP & higher cost estimates
We lower our FY11/12/13 EPS estimates from Rs20.2/26.2/24.5 to
Rs11.58/14.10/19.17 (43%/42%/18%) on lower 9M FY11 earnings. We lower
volume assumptions 4%/1%/4% and change our realisation assumptions -6%/-
6%/+1% for FY11/12/13. Our EBITDA estimates are 46%/41%/15% lower due to
lower realisations/volumes and higher coking coal and employee costs. We expect
EBITDA per tonne to decline to US$119/t in FY11 from US$148/t in FY10. It
achieved EBITDA/t of US$109/t in Q3FY11
Valuation: downgrade from Buy to Neutral; lower price target to Rs190
We value SAIL on EV/EBITDA of 7.4x on normalised EBITDA of FY12-13E, a
10% premium to our earlier mid-cycle EV/EBITDA multiple of 6.7x given higher
raw material integration and capacity expansion.
We downgrade our rating for SAIL on lower volume and realisation
assumptions and our higher cost estimates. We estimate SAIL will use 2.7mt of
high cost coal (US$300/t) in FY11 out of total coking coal use of approximately
14mt (it has used 2.5mt in 9M FY11). We estimate it will use 1.7mt of high cost
carryover coal (US$300/t) in FY12. We are also revising upwards our
FY11/FY12 employee expense estimates from Rs70bn/Rs71.4bn to
Rs75bn/77.3bn.
9M FY11 results lower than our estimates
Pre-ex PAT increased 1% QoQ to Rs11,075m in Q3 FY11, whereas EBITDA
increased 9% QoQ to Rs16,261m. EBITDA per tonne was flat QoQ at Rs4,883/t
(US$109/t).
Net sales increased 5% QoQ, despite an 11% increase in volume, due to a 5%
decline in realisations. Staff costs in 9M FY11 were Rs56bn.
The 9M FY11 PAT/EBITDA of Rs33.7bn/Rs48.6bn were much lower than our
earlier full-year FY11 estimates of Rs83bn/Rs120bn. We lower our FY11
PAT/EBITDA estimates to Rs47.8bn/Rs65.4bn
The company is hosting a conference call on 14 January 2011. We will update
with more details post the call.
SAIL valuations
We downgrade our rating from Buy to Neutral as we lower our earnings
estimates (based on lower volumes/realisations) and higher costs. We lower
our price target from Rs240 to Rs190, based on EV of 7.4x normalised
FY12-13E EBITDA. we earlier valued SAIL on 6.7x EV/EBITDA—we now
apply a 10% premium given the high raw material cost environment—SAIL
has 100% captive iron ore and buys 30% of its coal from domestic sources.
We believe SAIL is expensive relative to peers, especially given that there is
a large equity offering in the pipeline, which we think will be an overhang on
the stock. It is trading at 5.0x/4.0x on FY12E/FY13E EV/EBIDTA,
12.3x/9.0x FY12E/FY13E PE and 1.7x/1.5x FY12E/FY13E P/BV.
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