Steel Authority of India - Subdued profitability ::Macquarie Research,

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Steel Authority of India
Subdued profitability
Event
 4QFY11 results – below expectation: SAIL reported 4Q FY11 results which
were well below our estimate. We have reduced our estimates by 7-13% to
account for lower than expected production and realisation. We maintain
Neutral rating but reduce target price to Rs150 from Rs173. We believe delay
in its expansion and overhang of equity dilution can delay the re-rating.

Impact

 Weak Q4 results: Net Sales at Rs119bn is flat YoY, though saw an increase
of 7% QoQ. EBITDA at Rs21.2bn is down 25% YoY as raw material costs and
employee costs have increased by $95/t over last year. PAT at Rs15bn was
down 28% YoY, due to increase in interest expense and depreciation.
 Margins still have downside risks: SAIL reported EBITDA per ton of
US$143/t in Q4 FY11. We are estimating US$167/t for FY12, which seems to
be on higher side given the sharp increase in coking coal costs. We are
building in some improvement in SAIL’s product mix to enhance realisation.
 Expansions might get delayed: SAIL management has been quoted in
media suggesting steel production for FY12 at 12.6mnt from earlier 14mnt.
This does indicate some slippage in commissioning. In fact, out of US$15.5bn
capex, US$10bn still remains to be deployed.
 Capex requirements to eat into cash balances: SAIL reported cash
balances of Rs174bn for FY11, with a debt of Rs201bn and capex incurred at
Rs112.8bn. However, we estimate that SAIL still has another $10bn of capex
remaining for its projects and will continue to leverage itself and reduce its
other income, which contributed 44% to its bottom line in FY11.
 Chiria environmental clearance - long term positive: SAIL has been
accorded environmental clearance for its iron ore deposits in Chiria. This does
give strong visibility for its future expansion and self dependence.
Earnings and target price revision
 We are reducing our estimates by 13% and 7% respectively for FY12 and
FY13 and are introducing estimates for FY14.
Price catalyst
 12-month price target: Rs150.00 based on a PER methodology.
 Catalyst: Announcement of FPO timeline
Action and recommendation
 Maintain Neutral: SAIL currently looks expensive at 11x PER on FY12E, with
subdued earnings. The stock also has an overhang of the upcoming equity
issuance which will increase the free float by 66%. We believe it is a bit too
early to play the volume expansion story here and recommend to switch to
Jindal Steel and Power (JSP IN, OP, Rs655, TP: Rs938), which, we believe,
will see a 20%+CAGR in earnings in the next 3 years.