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We resume coverage of SAIL with a new Sept-12 PT of Rs155 based on 5.5x
FY13E EV/EBITDA (adj. for CWIP). SAIL has declined sharply over the last
six months on continued earnings disappointments (mainly on coking coal costs),
and project delays, in our view. At 1.0x FY13E P/B and CWIP accounting for
40% of current market cap, we believe valuations are attractive, but IISCO project
commissioning (March-12E) is the key catalyst for re-rating, in our view.
Severe correction on cost issues, project delays over done in our view: SAIL
has declined significantly (down 42% over the last year) on earnings miss and
project delays, in our view. We believe the earnings miss have been caused by
essentially four factors- a) one-time coking coal cost impact, as SAIL’s
imported costs were higher than contract prices due to some legacy $300/MT
contracts; b) increased employee costs, given inflation and provisions; c) one
time production issues in key plant at Bhilai and d) pressure on commodity
grade steel in the domestic market. In our view, from here on coking coal costs
should be more in sync with global contracts as the legacy contracts taper off
the domestic steel market sees costs pressure for non integrated companies
(from iron ore) and production comes on line at Bhilai. We estimate
EBITDA/MT at $138/169/T for FY12/13E v/s $106/T in Q1FY12.
Compelling medium term story: We remain confident about SAIL’s margin
expansion over the next three years from a) efficiency and productivity gains; b)
product mix improvements; and c) volume increase as large projects across
multiple plants are commissioned. We believe current valuations at 3.7x FY13E
EV/EBITDA essentially imply little value to the $5bn CWIP currently in place.
Leverage for a company implementing a +$11bn capex program remains
comfortable (currently at 0.17x, we expect it to peak at 0.28x in FY13E).
…However, investors would need to be patient: Given the project delays, we
believe the key timeline remains the Dec-March period when the IISCO steel
plant (ISP) would be commissioned. Post ISP, other key projects include
expansions at Rourkela, Bokaro and Bhilai, which we believe are likely to start
adding to earnings only in FY14E.
Risks to our view: A sharp decline in iron ore prices, which could negate
SAIL’s cost advantage and a sharp wage bill increase in FY13E. Upside risks
include earlier-than-forecasted project commissioning.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We resume coverage of SAIL with a new Sept-12 PT of Rs155 based on 5.5x
FY13E EV/EBITDA (adj. for CWIP). SAIL has declined sharply over the last
six months on continued earnings disappointments (mainly on coking coal costs),
and project delays, in our view. At 1.0x FY13E P/B and CWIP accounting for
40% of current market cap, we believe valuations are attractive, but IISCO project
commissioning (March-12E) is the key catalyst for re-rating, in our view.
Severe correction on cost issues, project delays over done in our view: SAIL
has declined significantly (down 42% over the last year) on earnings miss and
project delays, in our view. We believe the earnings miss have been caused by
essentially four factors- a) one-time coking coal cost impact, as SAIL’s
imported costs were higher than contract prices due to some legacy $300/MT
contracts; b) increased employee costs, given inflation and provisions; c) one
time production issues in key plant at Bhilai and d) pressure on commodity
grade steel in the domestic market. In our view, from here on coking coal costs
should be more in sync with global contracts as the legacy contracts taper off
the domestic steel market sees costs pressure for non integrated companies
(from iron ore) and production comes on line at Bhilai. We estimate
EBITDA/MT at $138/169/T for FY12/13E v/s $106/T in Q1FY12.
Compelling medium term story: We remain confident about SAIL’s margin
expansion over the next three years from a) efficiency and productivity gains; b)
product mix improvements; and c) volume increase as large projects across
multiple plants are commissioned. We believe current valuations at 3.7x FY13E
EV/EBITDA essentially imply little value to the $5bn CWIP currently in place.
Leverage for a company implementing a +$11bn capex program remains
comfortable (currently at 0.17x, we expect it to peak at 0.28x in FY13E).
…However, investors would need to be patient: Given the project delays, we
believe the key timeline remains the Dec-March period when the IISCO steel
plant (ISP) would be commissioned. Post ISP, other key projects include
expansions at Rourkela, Bokaro and Bhilai, which we believe are likely to start
adding to earnings only in FY14E.
Risks to our view: A sharp decline in iron ore prices, which could negate
SAIL’s cost advantage and a sharp wage bill increase in FY13E. Upside risks
include earlier-than-forecasted project commissioning.
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