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With imported hard coking coal prices spiking and Coal India raising prices c30%, we expect
SAIL to continue to face cost pressure. IISCO should add 2mt to FY13 volumes, but
remaining expansion is unlikely to raise volumes till FY14. We revisit our model assumptions
and cut FY12/13F EBITDA 18%/21%. Hold
Recent price increases may not be enough to offset cost pressures
The company has raised prices by an average of around Rs4,000/t since December 2010.
However, we believe these hikes may not be enough to offset cost pressures, especially on
raw materials. We think the benchmark coking coal contract price for 1QFY12 – currently
under negotiation – could be US$330/t versus US$225/t in 4QFY11. In addition, SAIL still
has contracts worth 1.7mt of coking coal that it will need to purchase at US$300/t, which will
flow through in FY12. Coal India has also raised its notified coal prices by around 30%
effective 28 February, which will increase not only SAIL’s coking coal costs but also its power
and fuel costs. SAIL also faces its next wage revision in January 2012. With the demand
environment uncertain in Western markets, we remain cautious on further steel price hikes
from current levels and expect SAIL’s margins to continue being squeezed in FY12.
Brownfield story still some time away
The completion timeframe for the company’s brownfield expansion to 20mt of saleable steel
capacity has already encountered significant delays. SAIL now expects the IISCO plant’s 2mt
expansion to be completed by December 2011, which will add to volumes in FY13. The
Bokaro plant’s 0.5mt expansion should also be completed within this period and to start trial
production. The company expects its remaining 5mt capacity expansion to be completed only
by March 2013 and to add to volumes from FY14.
We revise model estimates; maintain Hold with lower target price of Rs142
We reduce our volume assumptions for FY12/13 by 9%/10% to 12.3mt/14.0mt. We increase our
realisation estimates by 8%/7% and blended coking coal price assumptions by 18%/13%. We
now assume coking coal prices at US$259/t for FY12 and US$244/t for FY13. We also increase
our employee expense assumptions by 3%/5%. We continue to value SAIL using a 5.9x
EV/EBITDA approach (Rs73/share) and add the CWIP (Rs69/share) to arrive at a new target
price of Rs142 (from Rs165 previously). We maintain our Hold recommendation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
With imported hard coking coal prices spiking and Coal India raising prices c30%, we expect
SAIL to continue to face cost pressure. IISCO should add 2mt to FY13 volumes, but
remaining expansion is unlikely to raise volumes till FY14. We revisit our model assumptions
and cut FY12/13F EBITDA 18%/21%. Hold
Recent price increases may not be enough to offset cost pressures
The company has raised prices by an average of around Rs4,000/t since December 2010.
However, we believe these hikes may not be enough to offset cost pressures, especially on
raw materials. We think the benchmark coking coal contract price for 1QFY12 – currently
under negotiation – could be US$330/t versus US$225/t in 4QFY11. In addition, SAIL still
has contracts worth 1.7mt of coking coal that it will need to purchase at US$300/t, which will
flow through in FY12. Coal India has also raised its notified coal prices by around 30%
effective 28 February, which will increase not only SAIL’s coking coal costs but also its power
and fuel costs. SAIL also faces its next wage revision in January 2012. With the demand
environment uncertain in Western markets, we remain cautious on further steel price hikes
from current levels and expect SAIL’s margins to continue being squeezed in FY12.
Brownfield story still some time away
The completion timeframe for the company’s brownfield expansion to 20mt of saleable steel
capacity has already encountered significant delays. SAIL now expects the IISCO plant’s 2mt
expansion to be completed by December 2011, which will add to volumes in FY13. The
Bokaro plant’s 0.5mt expansion should also be completed within this period and to start trial
production. The company expects its remaining 5mt capacity expansion to be completed only
by March 2013 and to add to volumes from FY14.
We revise model estimates; maintain Hold with lower target price of Rs142
We reduce our volume assumptions for FY12/13 by 9%/10% to 12.3mt/14.0mt. We increase our
realisation estimates by 8%/7% and blended coking coal price assumptions by 18%/13%. We
now assume coking coal prices at US$259/t for FY12 and US$244/t for FY13. We also increase
our employee expense assumptions by 3%/5%. We continue to value SAIL using a 5.9x
EV/EBITDA approach (Rs73/share) and add the CWIP (Rs69/share) to arrive at a new target
price of Rs142 (from Rs165 previously). We maintain our Hold recommendation.
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