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Volume growth slipping due to continuous project delays: SAIL continues to
disappoint on the execution of its expansion projects. It announced a delay of 6
months in commissioning of its most advanced 2mtpa expansion at IISCO with
revised schedule of March-2013; 15 months behind the original schedule. Along
with IISCO, company guided a quarter’s delay at 2mtpa expansion at Rourkela
unit (RSP) with revised schedule of FY13 end. Management had guided for
incremental volumes of 1m and 2m tonnes in FY13 and FY14, respectively.
However, we believe that guidance runs at a significant downside risk, given the
high probability of further delays and poor track-record on ramp-up of facilities.
Wage revision concerns overdone: The overall wage increase for nonexecutives
(effective January 1, 2012) like the last agreement, looks unlikely this
time, given the depressed earnings and leveraged balance sheet. In addition to
that, the increase in wage bill last time was exacerbated by sharp increase in
superannuation benefits and perquisites from ~18% to 30% and ~20% to 46% of
revised basic pay (BP), respectively. We expect an overall increase of 25%
(effective hike ~34% in last revision) in wages for non-executives (~50% of total
wage bill) amounting to ~Rs10bn on annualised basis.
Valuation in discomfort zone even on normalised earnings: Assuming 100%
utilisation on the expanded capacity (20mtpa) and normalised EBITDA per tonne
of Rs7000/tonne in FY14, stock trades at EV/EBITDA of 5x FY14E. Valuations look
expensive in the light of the fact that expansions would attain peak capacity
utilisations only by the mid/end of FY15. We maintain our ‘Reduce’ rating with
TP of Rs103.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Volume growth slipping due to continuous project delays: SAIL continues to
disappoint on the execution of its expansion projects. It announced a delay of 6
months in commissioning of its most advanced 2mtpa expansion at IISCO with
revised schedule of March-2013; 15 months behind the original schedule. Along
with IISCO, company guided a quarter’s delay at 2mtpa expansion at Rourkela
unit (RSP) with revised schedule of FY13 end. Management had guided for
incremental volumes of 1m and 2m tonnes in FY13 and FY14, respectively.
However, we believe that guidance runs at a significant downside risk, given the
high probability of further delays and poor track-record on ramp-up of facilities.
Wage revision concerns overdone: The overall wage increase for nonexecutives
(effective January 1, 2012) like the last agreement, looks unlikely this
time, given the depressed earnings and leveraged balance sheet. In addition to
that, the increase in wage bill last time was exacerbated by sharp increase in
superannuation benefits and perquisites from ~18% to 30% and ~20% to 46% of
revised basic pay (BP), respectively. We expect an overall increase of 25%
(effective hike ~34% in last revision) in wages for non-executives (~50% of total
wage bill) amounting to ~Rs10bn on annualised basis.
Valuation in discomfort zone even on normalised earnings: Assuming 100%
utilisation on the expanded capacity (20mtpa) and normalised EBITDA per tonne
of Rs7000/tonne in FY14, stock trades at EV/EBITDA of 5x FY14E. Valuations look
expensive in the light of the fact that expansions would attain peak capacity
utilisations only by the mid/end of FY15. We maintain our ‘Reduce’ rating with
TP of Rs103.
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