Reduce SAIL ; TP: Rs108 Q2FY12 Result Update -- Prabhudas Lilladher

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SAIL                Reduce                     CMP: Rs109                        TP: Rs108

Q2FY12 Result Update - Earnings disappoint; outlook remains

Steel Authority of India (SAIL) reported results below our expectation on account of lower-than-expected realisations and higher power and fuel (P&F) cost. We maintain our ‘Reduce’ rating on the stock, primarily on the back of expensive valuations, project execution risk and weak return profile.

n  Earnings below expectation, marred by lower realisations and higher P&F cost: Owing to weaker-than-expected blended realisations (Rs38,565 v/s PLe: Rs39,413) per tonne and in-line volumes (2.8m tonnes), SAIL reported flat revenue QoQ (up 2%) at Rs108bn against our expectation of 2% QoQ (4% YoY) growth. However, pure steel realisations were in line with our expectation at Rs36,200. Hit by lower-than-expected realisations and higher P&F cost (Rs2,015 v/s PLe: Rs1,800 per tonne), EBITDA per tonne stood below our expectation at Rs4,214 (PLe: Rs5,277) with fall of 9% YoY (4% QoQ). Hence, EBITDA fell short of our expectation at Rs11.8bn (PLe: Rs14.8bn), down 15% YoY and 2% QoQ. Adjusted for forex translation of Rs5.1bn, PAT fell by 20% YoY (1% QoQ) to Rs8.4bn (PLe: Rs9.9bn)

n  EPS revised downwards by 9%/6% for FY12/FY13: We revised our EBITDA estimates downwards for FY12 and FY13 by 13% and 8%, respectively, to account for higher P&F cost, stores and spares and royalty cost. However, EPS stands downgraded by lower proportion at 9% and 6% for FY12 and FY13, respectively, due to higher yields on investments and elevated cash levels associated with reduced capex.

n  Outlook and Valuation: Stock continued to languish on account of highly cost-inefficient operations and persistent delays in execution of expansion plans. Even after sharp correction in stock price, stock continues to trade at a significant premium to its peers despite poor operational performance. We maintain ‘Reduce’, with price target of Rs108, P/BV of 1x FY13E.