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Steel Authority of India
Things are looking down
We expect strong downwards earnings momentum in the coming quarters driven
by high coking coal prices, as the cooling in prices is taking much longer than we
expected. With no new capacity to be added this year, the wait for volume growth
continues. We cut our FY12/13F EPS by 31%/2%. Downgrade to Sell.
Bloated fixed costs and high coking coal prices to continue to hurt
SAILís cost structure is very heavy on employee costs (US$$144/t for FY11). It has also had
to deal with coking coal contract prices which hit US$330 in 1Q and which are likely to be
settled at US$315 in 2Q and US$300t in 3Q. The combination is likely to hit earnings sharply
in the coming quarters, in our view. Workers at BHP Billitonís Queensland coking coal mines
have threatened to go on strike next week over wages and this does not help the outlook
either. SAIL imports close to 10mt of its coking coal requirements and a US$100/t increase
would impact FY12F earnings by US$1bn. To neutralise this, steel prices would have to rise
by about US$80/t from FY11ís average levels. We expect near-term pricing to come under
pressure from surplus flat steel capacity and slowing demand, due to higher interest rates.
We raise our FY12 blended coking coal price forecasts from US$259 to US$294/t and expect
EBITDA/t to fall to US$81/t in FY12F from US$129/t in FY11.
Two more years for volume kicker
SAIL is expanding operations at all its current locations. It has spent Rs293bn so far and
plans to spend a further Rs306bn over the next two years. With the expansion being carried
out on a debt/equity ratio of 1:1, even with surplus cash, debt has been steadily increasing,
leaving SAIL looking like a mini bank, in our view. Debt was Rs201bn at end-FY11, while
cash and investments totalled Rs171bn. While the 2mt IISCO and 0.5mt Bokaro expansions
should add some volume in FY13, post-stabilisation, we expect to see most of the volume
kicker from the expansion to 20mt only over FY14-15.
Earnings for FY12F/13F cut by 31%/2%. Downgrade to Sell
We cut earnings FY12F/13F by 31%/2% mainly to factor in higher coking coal prices. Our
volume and FY13 assumptions are largely unchanged. We note that our FY12/13 earnings
are 52%/44% below Bloomberg consensus. We continue to value SAIL on 5.9x FY12F
EBITDA, adding CWIP (net of debt) of Rs60/share, but our SOTP target price falls to Rs120
as a result of our lower earnings expectation. Sell
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steel Authority of India
Things are looking down
We expect strong downwards earnings momentum in the coming quarters driven
by high coking coal prices, as the cooling in prices is taking much longer than we
expected. With no new capacity to be added this year, the wait for volume growth
continues. We cut our FY12/13F EPS by 31%/2%. Downgrade to Sell.
Bloated fixed costs and high coking coal prices to continue to hurt
SAILís cost structure is very heavy on employee costs (US$$144/t for FY11). It has also had
to deal with coking coal contract prices which hit US$330 in 1Q and which are likely to be
settled at US$315 in 2Q and US$300t in 3Q. The combination is likely to hit earnings sharply
in the coming quarters, in our view. Workers at BHP Billitonís Queensland coking coal mines
have threatened to go on strike next week over wages and this does not help the outlook
either. SAIL imports close to 10mt of its coking coal requirements and a US$100/t increase
would impact FY12F earnings by US$1bn. To neutralise this, steel prices would have to rise
by about US$80/t from FY11ís average levels. We expect near-term pricing to come under
pressure from surplus flat steel capacity and slowing demand, due to higher interest rates.
We raise our FY12 blended coking coal price forecasts from US$259 to US$294/t and expect
EBITDA/t to fall to US$81/t in FY12F from US$129/t in FY11.
Two more years for volume kicker
SAIL is expanding operations at all its current locations. It has spent Rs293bn so far and
plans to spend a further Rs306bn over the next two years. With the expansion being carried
out on a debt/equity ratio of 1:1, even with surplus cash, debt has been steadily increasing,
leaving SAIL looking like a mini bank, in our view. Debt was Rs201bn at end-FY11, while
cash and investments totalled Rs171bn. While the 2mt IISCO and 0.5mt Bokaro expansions
should add some volume in FY13, post-stabilisation, we expect to see most of the volume
kicker from the expansion to 20mt only over FY14-15.
Earnings for FY12F/13F cut by 31%/2%. Downgrade to Sell
We cut earnings FY12F/13F by 31%/2% mainly to factor in higher coking coal prices. Our
volume and FY13 assumptions are largely unchanged. We note that our FY12/13 earnings
are 52%/44% below Bloomberg consensus. We continue to value SAIL on 5.9x FY12F
EBITDA, adding CWIP (net of debt) of Rs60/share, but our SOTP target price falls to Rs120
as a result of our lower earnings expectation. Sell
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