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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● We present key takeaways from FY11 annual report.
● Delay in FPO for expansion capex is already hurting: the shortterm debt is 40% of total debt, up from 26% in FY10. Overreliance on debt/internal accruals for large expansions was the
reason for SAIL coming closer to bankruptcy the last two times.
● CWIP as of March 2011 was Rs55/share; we expect this to come
down to Rs50/share by March 2012 as Burnpur commissioning
offsets the continuing capex. However, it could continue to impact
EV negatively, as timelines for full commissioning get pushed out.
● Even though P/B is close to 1x now, given steady declines in
ROCEs (from >20% in 2005-10 to 10% now), comparable to
the ’90s, multiples should also mirror that. SAIL had then traded
well below 1x P/B for long periods. The personnel cost rise has
led to a lower EBITDA/T, and costs are expected to rise more.
● Indian steel demand growth has been steadily slowing; AprilAugust growth was only 1.3% YoY. We believe the industry may
see low single-digit growth over the medium term. Maintain our
target price of Rs100 and UNDERPERFORM rating.
We present key takeaways from FY11 annual report
● Delay in FPO already hurting: The last two times SAIL
attempted large modernization/expansion, it came close to
bankruptcy due to significant delays, cost overruns and an overreliance on debt funding/internal accruals. In the current
expansion about US$1.7 bn was to come from equity raising,
which was a lower risk. But it now seems such a sale is unlikely.
And delays are already hurting: the short-term debt was 40% of
total debt, up from 26% in FY10. Foreign currency loans were
26% of total debt, from 10% in FY10.
● Working capital increased by Rs600 mn: WC as days of sales
increased from 71x to 91x, together with general inflation in raw
material and steel prices. As we value steel names on EV/EBITDA
it erodes market cap.
● CWIP as of March 2011 was Rs55/share; we expect this to come
down to Rs50/share by March 2012 as Burnpur commissioning
offsets the continuing capex. However, this will continue to impact
EV negatively, as timelines for full commissioning get pushed out.
● SAIL’s dealership network was expanded to 2,653, up 145 YoY.
This is a trend seen across steel companies, and SAIL in fact is
lagging behind the others despite a serious top-down push.
● Stage-1 Forest clearance and final environment clearance for
Chiria mines have been obtained.
Is SAIL a value buy?
With P/B close to 1x now, and given the large CWIP (50% of market
cap), some may view the stock is inexpensive. That is still not a view
we take: the stock may be at its lowest multiples in a decade (Fig. 1),
but given steady declines in ROCEs (from >20% in 2005-10 to 10%
now, Fig. 2), a trend seen for the entire industry, and comparable to
what we saw in the ’90s, we believe multiples should also mirror that.
SAIL had then traded well below 1x P/B for long periods. Over the
years, the rise in personnel costs has led to a lower EBITDA/T, and
costs are expected to rise more.
Indian steel demand growth has been steadily slowing; April-August
growth was only 1.3% YoY versus 10% growth in production YoY. We
think the Indian steel industry downcycle will continue for longer.
We maintain our target price of Rs100, and think any spikes in the
stock price should be used as an opportunity to exit the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● We present key takeaways from FY11 annual report.
● Delay in FPO for expansion capex is already hurting: the shortterm debt is 40% of total debt, up from 26% in FY10. Overreliance on debt/internal accruals for large expansions was the
reason for SAIL coming closer to bankruptcy the last two times.
● CWIP as of March 2011 was Rs55/share; we expect this to come
down to Rs50/share by March 2012 as Burnpur commissioning
offsets the continuing capex. However, it could continue to impact
EV negatively, as timelines for full commissioning get pushed out.
● Even though P/B is close to 1x now, given steady declines in
ROCEs (from >20% in 2005-10 to 10% now), comparable to
the ’90s, multiples should also mirror that. SAIL had then traded
well below 1x P/B for long periods. The personnel cost rise has
led to a lower EBITDA/T, and costs are expected to rise more.
● Indian steel demand growth has been steadily slowing; AprilAugust growth was only 1.3% YoY. We believe the industry may
see low single-digit growth over the medium term. Maintain our
target price of Rs100 and UNDERPERFORM rating.
We present key takeaways from FY11 annual report
● Delay in FPO already hurting: The last two times SAIL
attempted large modernization/expansion, it came close to
bankruptcy due to significant delays, cost overruns and an overreliance on debt funding/internal accruals. In the current
expansion about US$1.7 bn was to come from equity raising,
which was a lower risk. But it now seems such a sale is unlikely.
And delays are already hurting: the short-term debt was 40% of
total debt, up from 26% in FY10. Foreign currency loans were
26% of total debt, from 10% in FY10.
● Working capital increased by Rs600 mn: WC as days of sales
increased from 71x to 91x, together with general inflation in raw
material and steel prices. As we value steel names on EV/EBITDA
it erodes market cap.
● CWIP as of March 2011 was Rs55/share; we expect this to come
down to Rs50/share by March 2012 as Burnpur commissioning
offsets the continuing capex. However, this will continue to impact
EV negatively, as timelines for full commissioning get pushed out.
● SAIL’s dealership network was expanded to 2,653, up 145 YoY.
This is a trend seen across steel companies, and SAIL in fact is
lagging behind the others despite a serious top-down push.
● Stage-1 Forest clearance and final environment clearance for
Chiria mines have been obtained.
Is SAIL a value buy?
With P/B close to 1x now, and given the large CWIP (50% of market
cap), some may view the stock is inexpensive. That is still not a view
we take: the stock may be at its lowest multiples in a decade (Fig. 1),
but given steady declines in ROCEs (from >20% in 2005-10 to 10%
now, Fig. 2), a trend seen for the entire industry, and comparable to
what we saw in the ’90s, we believe multiples should also mirror that.
SAIL had then traded well below 1x P/B for long periods. Over the
years, the rise in personnel costs has led to a lower EBITDA/T, and
costs are expected to rise more.
Indian steel demand growth has been steadily slowing; April-August
growth was only 1.3% YoY versus 10% growth in production YoY. We
think the Indian steel industry downcycle will continue for longer.
We maintain our target price of Rs100, and think any spikes in the
stock price should be used as an opportunity to exit the stock.
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