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Volume miss; costs disappoint
SAIL’s 1Q net profit dropped a sharp 29% YoY and was 21% below estimates
mainly due to lower volumes and higher costs. EBITDA/t declined to just
US$105. Management said that demand was weak in 1Q and will likely remain
so in 2Q. We believe that margins will remain under pressure in coming
quarters given sluggish demand and high coking coal prices. ISP plant
expansion has been delayed by another 3-6m and we expect delays in other
expansion projects as well. We maintain U-PF given weak earnings profile
over FY12-13, expensive valuations and FPO overhang.
Lower volumes and higher costs lead to disappointing 1Q results
SAIL’s 1Q net profit at Rs8.4bn was down 29% YoY and 21% below our estimates.
The miss was mainly due to lower volumes of 2.8mt – 5% below estimates. ASPs
were up 3% QoQ and inline with expectations. While RM costs/ton was a tad
below estimates, staff costs (includes Rs2.4bn one-time) and manufacturing costs
rose sharply QoQ. Hence, EBITDA at Rs13bn was down 29% YoY and 22% below
estimates. EBITDA/t was at US$105, down 36% QoQ. Below EBITDA items were
broadly inline and net profit missed estimates by 21%.
Margins will remain under pressure in the near-term
Management said that steel demand was sluggish in 1Q and has been even
weaker in Jul. Prices have been stable in the last 3m and will at best be flat in the
near-term. We believe that margins will remain under pressure in 2Q given weak
demand and full impact of higher coking coal prices. 2H margins may be slightly
better as – (1) coking coal prices start to decline; (2) volumes are seasonally
higher; and 3) staff costs come off from high 1Q levels. Overall, we see SAIL’s
earnings declining YoY in FY12. FY13 may be a slightly better year with some
volume growth from ISP expansion and end of carry-over coking coal volumes (at
US$300/t). However, SAIL will revise wages for non-executives in Jan-12, which
will impact FY13 costs and will eat into part of the benefits.
ISP delayed by 3-6m; risks of further delays & cost overruns in projects
The ISP plant expansion, SAIL’s first project to be commissioned, is delayed by a
further 3-6m and saleable steel production will now start in 2QFY13 (1QFY13
previously). ISP has seen cumulative delays of ~1 year in the last 9m. While SAIL
is maintaining its end-FY13 target for other projects, we see high risk of delays of
at least 6-12m. Recent news flow suggests that capex at ISP has gone up by
Rs20bn (~14%). We see risk of such cost overruns in other projects as well.
Maintain U-PF
We maintain U-PF given anaemic earnings growth over FY12-13, expensive
valuations and FPO overhang in the near-term. SAIL has underperformed
substantially in CY11 but is still trading at an expensive 6.8x FY13 EV/Ebitda. We
maintain estimates and our target price of Rs110 at 6x FY13 EV/EBITDA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Volume miss; costs disappoint
SAIL’s 1Q net profit dropped a sharp 29% YoY and was 21% below estimates
mainly due to lower volumes and higher costs. EBITDA/t declined to just
US$105. Management said that demand was weak in 1Q and will likely remain
so in 2Q. We believe that margins will remain under pressure in coming
quarters given sluggish demand and high coking coal prices. ISP plant
expansion has been delayed by another 3-6m and we expect delays in other
expansion projects as well. We maintain U-PF given weak earnings profile
over FY12-13, expensive valuations and FPO overhang.
Lower volumes and higher costs lead to disappointing 1Q results
SAIL’s 1Q net profit at Rs8.4bn was down 29% YoY and 21% below our estimates.
The miss was mainly due to lower volumes of 2.8mt – 5% below estimates. ASPs
were up 3% QoQ and inline with expectations. While RM costs/ton was a tad
below estimates, staff costs (includes Rs2.4bn one-time) and manufacturing costs
rose sharply QoQ. Hence, EBITDA at Rs13bn was down 29% YoY and 22% below
estimates. EBITDA/t was at US$105, down 36% QoQ. Below EBITDA items were
broadly inline and net profit missed estimates by 21%.
Margins will remain under pressure in the near-term
Management said that steel demand was sluggish in 1Q and has been even
weaker in Jul. Prices have been stable in the last 3m and will at best be flat in the
near-term. We believe that margins will remain under pressure in 2Q given weak
demand and full impact of higher coking coal prices. 2H margins may be slightly
better as – (1) coking coal prices start to decline; (2) volumes are seasonally
higher; and 3) staff costs come off from high 1Q levels. Overall, we see SAIL’s
earnings declining YoY in FY12. FY13 may be a slightly better year with some
volume growth from ISP expansion and end of carry-over coking coal volumes (at
US$300/t). However, SAIL will revise wages for non-executives in Jan-12, which
will impact FY13 costs and will eat into part of the benefits.
ISP delayed by 3-6m; risks of further delays & cost overruns in projects
The ISP plant expansion, SAIL’s first project to be commissioned, is delayed by a
further 3-6m and saleable steel production will now start in 2QFY13 (1QFY13
previously). ISP has seen cumulative delays of ~1 year in the last 9m. While SAIL
is maintaining its end-FY13 target for other projects, we see high risk of delays of
at least 6-12m. Recent news flow suggests that capex at ISP has gone up by
Rs20bn (~14%). We see risk of such cost overruns in other projects as well.
Maintain U-PF
We maintain U-PF given anaemic earnings growth over FY12-13, expensive
valuations and FPO overhang in the near-term. SAIL has underperformed
substantially in CY11 but is still trading at an expensive 6.8x FY13 EV/Ebitda. We
maintain estimates and our target price of Rs110 at 6x FY13 EV/EBITDA.
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