Steel Authority - Weak results, even without one-off costs::Credit Suisse,

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Results were disappointing even after adjusting for one-offs (Rs2.4
bn or US$20/t in staff costs and the rise in energy costs due to
problems in coke oven batteries). Given inflation-linked staff costs,
FY12 estimate has been revised up from Rs76 bn to Rs80 bn.
● SAIL is also now buying 50% of its coking coal on monthly
contracts—as we have been flagging, shorter contracts in the
current environment squeeze steel-maker profitability. Demand is
expected to remain weak in 2Q, and steel price increases are
unlikely. We have therefore cut our EBITDA/t estimates further.
● Further, volume from new capacities has now been pushed out
further. Meaningful growth is now unlikely till FY15 at the earliest,
versus FY14 previously. Capex guidance, on the other hand, is
unchanged. In such a scenario, we are convinced the market is
unlikely to ascribe much value to CWIP.
● We lower our FY12E and FY13E EPS by 9% and 8%, respectively
and revise down our target price from Rs110 to Rs100. We
maintain our UNDERPERFORM rating on SAIL.
Low volumes, high costs lead to large miss
SAIL volumes fell 12% QoQ (2% lower than CS estimates). EBITDA
missed estimates by 30% due to: (1) higher-than-expected personnel
costs due to a one-time charge of Rs2.4 bn, and a Rs1 bn hit from the
rise in inflation-linked pay, (2) higher power costs, as the use of
furnace oil as Coke oven batteries in Bhilai plant had problems, as
well as the higher price of thermal coal. Ex-one offs, EBITDA/t was
lower than our estimates by US$20, and fell ~US$60/t. PAT missed
our estimates by 28%.
Inventory levels have not declined since the last quarter (1 MOS);
sales this quarter were from the previous low-cost inventory and the
full cost of higher coking coal is likely to start having an impact now.
Outlook not encouraging either, demand remains sluggish
SAIL expects demand to remain sluggish in 2Q12, and is hopeful that
once the infrastructure cycle picks up, demand for steel will also pick
up. However, it does not expect any price increases this year.
Key takeaways from conference call
● FY12 Personnel costs: Rs80 bn are estimated at current inflation
levels. We believe inflation will rise further, and thus expect higher
personnel cost. We note that for state-owned companies, salaries
are inflation-adjusted.
● ISP Burnpur. Coke over expected to commission by December
2011, BF by March 2012. Capacity utilisation in the first year is
likely to be ~50%.
● Expansion. Rourkela BF by March 2012. The impact of the entire
capex not likely by FY15—or FY14, as earlier expected.
● Capex. Rs20 bn for 1Q12, FY12 guidance (Rs140 bn) maintained.
● Coking Coal. 2Q12 price for HCC settled at US$315. BHP is
selling to Japanese customers at monthly contracts for 50%
volumes (July contract at ~US$300/t) and SAIL also expects a
similar deal. The YoY increase in imported coking coal cost was
Rs4.2 bn and in indigenous coal was Rs0.6 bn.
● Net debt. At Rs 50 bn in June 2011, with only Rs9.9 bn being long
term. The average cost of debt is 6.4%. SAIL has raised US$500
mn ECB in 2Q12.


Cut in estimates, maintain UNDERPERFORM Rating at TP
Due to a large miss in 1Q12 and higher costs, we cut our FY12E EPS
by 9%. We revise down our target price to Rs100. With 21% downside
to the current price, we maintain our UNDERPERFORM rating.