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UBS Investment Research
Steel Authority of India
D owngrade to Sell – lacks triggers
Event: Capacity expansions delays, high costs, soft demand an overhang
We believe SAIL’s earnings have peaked out and lacks positive triggers in the next
12-18 months. With 1) capacity expansions getting delayed (delay in 2mt IISCO
and 0.8mt Bokaro commissioning) 2) Raw material costs remaining high 3) Steel
industry outlook not positive (soft domestic demand and significant overcapacity
globally) we believe there is likely to be downside risks to earnings & stock price.
Impact: Lower FY12/13 earnings led by lower volumes; higher costs
We lower our earnings estimates for SAIL by 48%/55% for FY12/13 led by 1)
lower sales volumes – we reduce FY12/13 volume est by 12%/18% to 12.2/12.9mt
due to delays in capacity expansion. We increase operating expenses (employee
expenses, coal) which lowers our FY12/13E EBITDA/t estimates to US$89/110
from US$150/193. We are 41%/45% lower than consensus earnings for FY12/13.
Action: Downgrade to Sell; View stock strength as an opportunity to exit;
We downgrade SAIL to a Sell and lower price target to Rs100 (from Rs190).
Lower earnings coupled with high CWIP (will increase by US$3.3bn to US$8.3bn
by FY12end) will lower ROE to 7.8%/8.7% in FY12/13 from 22%/14% in
FY10/11. We don’t like the cost structure of SAIL - benefit of iron ore integration
is lost by the inefficiency in the steel business. FPO likely to remain an overhang.
Valuation: Downgrade to Sell from Neutral with a PT of Rs100
We value SAIL on 6.5x normalised FY12-FY13E EBITDA (earlier 7.4x) in line
with its historical avg & value CWIP at 50% discount (significant CWIP of
cUS$8.3bn-FY12)
Valuation
We value SAIL on 6.5x normalised FY12-FY13E EBITDA (earlier 7.4x) in line
with its historical average (average since FY02) and value CWIP at 50% of
book value (given significant investment in CWIP of cUS$8.3bn by FY12 end).
Given SAIL’s EBITDA/t estimate in FY12/13 of cUS$89/110 (vs capex of
cUS$1bn per mt) implying an ROCE of < 10%, we believe it is fair to value the
CWIP at a large discount. Hence, we value CWIP at 50% of its estimated book
value (at the end of FY12 end).
Given SAIL will not get any significant benefit of capacity expansions in the
next 12-18 months, we don’t see a reason why SAIL would trade above its
historical valuation multiple.
Price target derivation
Rs m
Target EV/EBITDA 6.5
Target EBITDA - Normalised FY12-FY13 56,372
Target EV 366,421
Net debt 148,873
50% of CWIP 186,383
Target Market cap 403,931
Target price (Rs) 98*
Source: UBS estimates *Rounded off to Rs100
Steel Authority of India
Steel Authority of India (SAIL), 85.8% owned by the government of India, is
India's largest steel producer, with sales of 12.6mt of steel in FY07 from its
factories in Bhilai, Bokaro, Durgapur, Rourkela, and IISCO's plant in Burnpur.
SAIL benefits from backward integration of captive iron ore mines, but is
dependent on coal purchases from Coal India and coking coal imports for its
energy needs. SAIL improved its energy consumption and manpower usage
benchmarks over FY04-07. It plans to expand and produce 24mt of hot metal by
2010.
Statement of Risk
Our earnings estimates and ratings are subject to fluctuations based on global
and domestic steel prices and the prices of key raw materials. SAIL is dependent
on coking coal imports and is subject it to global price fluctuations. SAIL carries
the additional risk from being a public sector unit.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Steel Authority of India
D owngrade to Sell – lacks triggers
Event: Capacity expansions delays, high costs, soft demand an overhang
We believe SAIL’s earnings have peaked out and lacks positive triggers in the next
12-18 months. With 1) capacity expansions getting delayed (delay in 2mt IISCO
and 0.8mt Bokaro commissioning) 2) Raw material costs remaining high 3) Steel
industry outlook not positive (soft domestic demand and significant overcapacity
globally) we believe there is likely to be downside risks to earnings & stock price.
Impact: Lower FY12/13 earnings led by lower volumes; higher costs
We lower our earnings estimates for SAIL by 48%/55% for FY12/13 led by 1)
lower sales volumes – we reduce FY12/13 volume est by 12%/18% to 12.2/12.9mt
due to delays in capacity expansion. We increase operating expenses (employee
expenses, coal) which lowers our FY12/13E EBITDA/t estimates to US$89/110
from US$150/193. We are 41%/45% lower than consensus earnings for FY12/13.
Action: Downgrade to Sell; View stock strength as an opportunity to exit;
We downgrade SAIL to a Sell and lower price target to Rs100 (from Rs190).
Lower earnings coupled with high CWIP (will increase by US$3.3bn to US$8.3bn
by FY12end) will lower ROE to 7.8%/8.7% in FY12/13 from 22%/14% in
FY10/11. We don’t like the cost structure of SAIL - benefit of iron ore integration
is lost by the inefficiency in the steel business. FPO likely to remain an overhang.
Valuation: Downgrade to Sell from Neutral with a PT of Rs100
We value SAIL on 6.5x normalised FY12-FY13E EBITDA (earlier 7.4x) in line
with its historical avg & value CWIP at 50% discount (significant CWIP of
cUS$8.3bn-FY12)
Valuation
We value SAIL on 6.5x normalised FY12-FY13E EBITDA (earlier 7.4x) in line
with its historical average (average since FY02) and value CWIP at 50% of
book value (given significant investment in CWIP of cUS$8.3bn by FY12 end).
Given SAIL’s EBITDA/t estimate in FY12/13 of cUS$89/110 (vs capex of
cUS$1bn per mt) implying an ROCE of < 10%, we believe it is fair to value the
CWIP at a large discount. Hence, we value CWIP at 50% of its estimated book
value (at the end of FY12 end).
Given SAIL will not get any significant benefit of capacity expansions in the
next 12-18 months, we don’t see a reason why SAIL would trade above its
historical valuation multiple.
Price target derivation
Rs m
Target EV/EBITDA 6.5
Target EBITDA - Normalised FY12-FY13 56,372
Target EV 366,421
Net debt 148,873
50% of CWIP 186,383
Target Market cap 403,931
Target price (Rs) 98*
Source: UBS estimates *Rounded off to Rs100
Steel Authority of India
Steel Authority of India (SAIL), 85.8% owned by the government of India, is
India's largest steel producer, with sales of 12.6mt of steel in FY07 from its
factories in Bhilai, Bokaro, Durgapur, Rourkela, and IISCO's plant in Burnpur.
SAIL benefits from backward integration of captive iron ore mines, but is
dependent on coal purchases from Coal India and coking coal imports for its
energy needs. SAIL improved its energy consumption and manpower usage
benchmarks over FY04-07. It plans to expand and produce 24mt of hot metal by
2010.
Statement of Risk
Our earnings estimates and ratings are subject to fluctuations based on global
and domestic steel prices and the prices of key raw materials. SAIL is dependent
on coking coal imports and is subject it to global price fluctuations. SAIL carries
the additional risk from being a public sector unit.
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