Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key takeaways from FY11 annual report: 1) increase in leverage, 2) poor free cash generation, 3)
resource integration remains a concern, 4) expansion drive delayed by several years, 5) margin
outlook remains bleak. However, recent short-term pricing buoyancy benefits SAIL the most.
Maintain Sell with TP of Rs120.
Sales mix - No exports
The company continued its focus on the domestic market with exports at 0.3Mt, contributing
only 2% of revenues for the year. Out of the total sale value, flat products was 49%, long
products 39%, Other mild steel 2%, alloy and special steels 5% while secondary products like
scrap and pig iron made up the rest.
Resource integration - Lack of coking coal to hurt
During FY11, 1.1Mt of coking coal was produced captively, 2.5Mt was sourced through Coal
India and the balance 10Mt was imported. About 35% of limestone and 41% of dolomite
consumption was met internally. Almost all the thermal coal requirements were met through
Coal India while iron ore integration (production of 24.4Mt) continued at 100%.
Various clearances for iron ore mining were obtained during the year including the forest
clearance for Chiria mines, which will help the company continue at full iron ore integration.
However, the company has flagged the lack of coking coal resources and the negative impact
on margins due to high international coking coal prices.
Capital works-in-progress at Rs222.2bn (Rs51/share)
Capital expenditure during FY11 was Rs112.3bn. Orders have been placed for Rs527.5bn
and Rs250.6bn has been spent till June 2011 towards the brownfield expansion plans. Capex
planned for FY12 is Rs143.3bn with Rs20.1bn having been spent in 1QFY12. Total CWIP as
on March 31, 2013 now stands at Rs51/share.
SAIL has witness massive delay in its expansion drive from 12mt to 21mt. The first increase
in capacity to 14mt would now happen only in FY13 as compared to earlier expectation of
FY12. Also, the expansion is already cost overrun at its Burnpur facility by Rs20 raising
overall costs to Rs180bn.
Company moves from cash of Rs59bn to net debt of Rs26bn
SAIL has raised Rs36bn as new loans during the year and have utilised existing cash
balances of Rs29bn toward its capacity expansion programs.
Employee costs remain high despite headcount rationalization
Total manpower at SAIL reduced by 6156 during the year to 1,10,794. This drove productivity
to 241 t/man/year in FY11 from 226 t/man/year in FY10. However, we note that FY11
employee cost at US$143/t at SAIL is significantly higher compared to peers Tata Steel India
(US$91/t) and JSW Steel (US$19/t). Though this will improve as the expansion to saleable
steel capacity to 20Mt gets completed, most of the incremental capacity is not expected to be
added before FY14/15.
Higher working capital hurting operating cash flows.
Cash flows were impacted by higher working capital needs. Cash from operation dropped
from Rs48bn to Rs21.6bn in FY11. Net working capital increased by Rs32.6bn, making up
60% of the net cash flows from operations before working capital. Capex was Rs106.7bn and
net borrowings were Rs36.4bn for the year. Cash and cash equivalents were Rs166.9bn
while debt was Rs211.7bn. The company replaced term loans from banks of Rs45.5bn with
foreign currency loans during the year to reduce the interest cost.
Outlook - Short-term pricing buoyancy to help
EBITDA fell to US$95/t in 1QFY12, the lowest level in atleast 5 years due to escalation of cost
pressures. We believe the next few quarters could be even more challenging with the steel
demand environment soft and peak coking coal price of over US$300/t yet to flow through.
The company's capacity expansion plans also continues to get delayed with bulk of the
incremental volumes to get added only over FY14-15.
However, we note that domestic markets have witnessed a pricing buoyancy in the last few
weeks owing to shortfall in supplies from JSW Steel. This would benefit SAIL as it is mostly a
spot seller and hence can adjust pricing for most of its customers at a very short interval.
We have a Sell rating on SAIL with TP of Rs120.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key takeaways from FY11 annual report: 1) increase in leverage, 2) poor free cash generation, 3)
resource integration remains a concern, 4) expansion drive delayed by several years, 5) margin
outlook remains bleak. However, recent short-term pricing buoyancy benefits SAIL the most.
Maintain Sell with TP of Rs120.
Sales mix - No exports
The company continued its focus on the domestic market with exports at 0.3Mt, contributing
only 2% of revenues for the year. Out of the total sale value, flat products was 49%, long
products 39%, Other mild steel 2%, alloy and special steels 5% while secondary products like
scrap and pig iron made up the rest.
Resource integration - Lack of coking coal to hurt
During FY11, 1.1Mt of coking coal was produced captively, 2.5Mt was sourced through Coal
India and the balance 10Mt was imported. About 35% of limestone and 41% of dolomite
consumption was met internally. Almost all the thermal coal requirements were met through
Coal India while iron ore integration (production of 24.4Mt) continued at 100%.
Various clearances for iron ore mining were obtained during the year including the forest
clearance for Chiria mines, which will help the company continue at full iron ore integration.
However, the company has flagged the lack of coking coal resources and the negative impact
on margins due to high international coking coal prices.
Capital works-in-progress at Rs222.2bn (Rs51/share)
Capital expenditure during FY11 was Rs112.3bn. Orders have been placed for Rs527.5bn
and Rs250.6bn has been spent till June 2011 towards the brownfield expansion plans. Capex
planned for FY12 is Rs143.3bn with Rs20.1bn having been spent in 1QFY12. Total CWIP as
on March 31, 2013 now stands at Rs51/share.
SAIL has witness massive delay in its expansion drive from 12mt to 21mt. The first increase
in capacity to 14mt would now happen only in FY13 as compared to earlier expectation of
FY12. Also, the expansion is already cost overrun at its Burnpur facility by Rs20 raising
overall costs to Rs180bn.
Company moves from cash of Rs59bn to net debt of Rs26bn
SAIL has raised Rs36bn as new loans during the year and have utilised existing cash
balances of Rs29bn toward its capacity expansion programs.
Employee costs remain high despite headcount rationalization
Total manpower at SAIL reduced by 6156 during the year to 1,10,794. This drove productivity
to 241 t/man/year in FY11 from 226 t/man/year in FY10. However, we note that FY11
employee cost at US$143/t at SAIL is significantly higher compared to peers Tata Steel India
(US$91/t) and JSW Steel (US$19/t). Though this will improve as the expansion to saleable
steel capacity to 20Mt gets completed, most of the incremental capacity is not expected to be
added before FY14/15.
Higher working capital hurting operating cash flows.
Cash flows were impacted by higher working capital needs. Cash from operation dropped
from Rs48bn to Rs21.6bn in FY11. Net working capital increased by Rs32.6bn, making up
60% of the net cash flows from operations before working capital. Capex was Rs106.7bn and
net borrowings were Rs36.4bn for the year. Cash and cash equivalents were Rs166.9bn
while debt was Rs211.7bn. The company replaced term loans from banks of Rs45.5bn with
foreign currency loans during the year to reduce the interest cost.
Outlook - Short-term pricing buoyancy to help
EBITDA fell to US$95/t in 1QFY12, the lowest level in atleast 5 years due to escalation of cost
pressures. We believe the next few quarters could be even more challenging with the steel
demand environment soft and peak coking coal price of over US$300/t yet to flow through.
The company's capacity expansion plans also continues to get delayed with bulk of the
incremental volumes to get added only over FY14-15.
However, we note that domestic markets have witnessed a pricing buoyancy in the last few
weeks owing to shortfall in supplies from JSW Steel. This would benefit SAIL as it is mostly a
spot seller and hence can adjust pricing for most of its customers at a very short interval.
We have a Sell rating on SAIL with TP of Rs120.
No comments:
Post a Comment