Steel Authority of India (SAIL)- Volume woes; visit note; Hold :: Edelweiss

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Steel Authority of India (SAIL IN, INR 87, Hold)

We met the management of SAIL recently. Company expects steel volume to remain flat YoY in FY12 at ~12mt and increase to 13mt in FY13. For coking coal, it expects contract prices for Q4FY12 to decline to USD235/t and the high cost carry-over quantity of USD330/t to exhaust in FY12. Wage revision, for 50% of the employee costs, will be effected from Jan 2012. We have lowered our steel volumes to align them with the management guidance. With marginal change to our earnings estimate, we maintain ‘HOLD’ with a revised target price of INR98/share (from INR 107/share earlier).

FY12 steel volume to remain flat at ~12mt; FY13 at 13mt

Management expects FY12 steel volume to remain flat YoY at ~12mt, due to shutdowns taken for integration of the expansion projects and demand challenges. Estimate volume for FY13 to increase to ~13mt.

Hard coking coal prices to decline to USD235/t in Q4

The company expects contract coking coal prices to decline to USD235/t in Q4FY12. The carry-over quantity of high-cost coking coal of USD330/t will exhaust in FY12. 

Staff costs: Wage revision w.e.f. Jan 2012

The next wage revision for non-executives (comprising ~50% of the employee cost) is due in January, 2012. The company is not guiding for a potential revision.  The increase in the previous round (effective January, 2007) was ~22%. Negotiations could potentially take 1.5 years, but the company will start providing from Q4FY12.

Outlook & valuations: Subdued earnings; maintain ‘HOLD’

Factoring lower volumes, our FY13E EBITDA is being revised downwards by ~9.6%. However, due to increase in other income, our FY13 EPS is being revised down only by 4%. We are lowering our target price from INR107 to INR98; maintain ‘HOLD/Sector Underperformer’ recommendation/rating on the stock.