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SAIL (3-UNDERWEIGHT; PT RS85; -1%): NO CATALYST IN SIGHT
SAIL’s modernization-cum expansion projects would yield meaningful upside only in
FY14E, in our view. In the near term, the highest conversion cost places the company at
a relative disadvantage compared to peers. Conversion cost would in fact increase
further, due to an expected 5% CAGR in employee expenses over FY11-13E, on the back
of upcoming wage negotiations. SAIL’s earnings would also be most impacted if the
MMDR bill is implemented. Although the FPO has been delayed for the moment, it will
also continue to be an overhang on the stock. We initiate coverage with a
3-Underweight rating and Rs85 PT, representing 1% potential downside.
Volume growth muted over next 12-15 months: We expect the next main expansion (2mn
tonnes at ISP) and Bokaro (3.1mn tonnes) to be completed only by March 2012, while other
steel expansions – Bhilai (2.1mn tonnes) and Rourkela (2mn tonnes) – are scheduled for
commissioning by March 2013. In the near term, we expect volume growth to remain
muted.
Conversion cost to get worse before improving: We expect SAIL’s wage costs to increase
at a CAGR of 5% over FY11-13E, on the back of: 1) an increase in inflation-linked wage
component; and 2) provisioning for wage hikes for non-executives (66% of wage costs),
due to wage revisions due in Jan 2012. Moreover, until the modernisation plans become
reality, SAIL’s blended realisations will continue to remain at a discount to its peers, due to
what we view as an inferior product mix.
Cost and time overruns coupled with rising leverage may derate the multiple: Ongoing
expansion at SAIL has led to increased leverage and its balance sheet turning into net debt
(Rs93bn) from net cash of Rs51bn in FY10. We expect the cost and time overruns in the
proposed expansion plan to result in the shrinking of its valuation premium, which SAIL has
enjoyed over its peers. Moreover, higher capital charges on commissioning of projects
would lead to muted growth in profitability. We expect SAIL’s EPS to register a CAGR of
7.3% over FY11-FY14E.
Initiate with 3-Underweight and Rs85 PT: Lack of medium-term volume growth as
compared to its peers will continue to disadvantage SAIL, in our view. Moreover, a rising
employee and conversion cost burden with the expected increase in interest costs will
further deteriorate profitability and valuations. We value SAIL at 6x FY13E EV/EBITDA to
arrive at our Rs85 PT. We initiate coverage with a 3-Underweight rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SAIL (3-UNDERWEIGHT; PT RS85; -1%): NO CATALYST IN SIGHT
SAIL’s modernization-cum expansion projects would yield meaningful upside only in
FY14E, in our view. In the near term, the highest conversion cost places the company at
a relative disadvantage compared to peers. Conversion cost would in fact increase
further, due to an expected 5% CAGR in employee expenses over FY11-13E, on the back
of upcoming wage negotiations. SAIL’s earnings would also be most impacted if the
MMDR bill is implemented. Although the FPO has been delayed for the moment, it will
also continue to be an overhang on the stock. We initiate coverage with a
3-Underweight rating and Rs85 PT, representing 1% potential downside.
Volume growth muted over next 12-15 months: We expect the next main expansion (2mn
tonnes at ISP) and Bokaro (3.1mn tonnes) to be completed only by March 2012, while other
steel expansions – Bhilai (2.1mn tonnes) and Rourkela (2mn tonnes) – are scheduled for
commissioning by March 2013. In the near term, we expect volume growth to remain
muted.
Conversion cost to get worse before improving: We expect SAIL’s wage costs to increase
at a CAGR of 5% over FY11-13E, on the back of: 1) an increase in inflation-linked wage
component; and 2) provisioning for wage hikes for non-executives (66% of wage costs),
due to wage revisions due in Jan 2012. Moreover, until the modernisation plans become
reality, SAIL’s blended realisations will continue to remain at a discount to its peers, due to
what we view as an inferior product mix.
Cost and time overruns coupled with rising leverage may derate the multiple: Ongoing
expansion at SAIL has led to increased leverage and its balance sheet turning into net debt
(Rs93bn) from net cash of Rs51bn in FY10. We expect the cost and time overruns in the
proposed expansion plan to result in the shrinking of its valuation premium, which SAIL has
enjoyed over its peers. Moreover, higher capital charges on commissioning of projects
would lead to muted growth in profitability. We expect SAIL’s EPS to register a CAGR of
7.3% over FY11-FY14E.
Initiate with 3-Underweight and Rs85 PT: Lack of medium-term volume growth as
compared to its peers will continue to disadvantage SAIL, in our view. Moreover, a rising
employee and conversion cost burden with the expected increase in interest costs will
further deteriorate profitability and valuations. We value SAIL at 6x FY13E EV/EBITDA to
arrive at our Rs85 PT. We initiate coverage with a 3-Underweight rating.
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