Steel Authority of India (SAIL IN, INR 93, Hold)
Takeaways from our meeting with the management of Steel Authority of India (SAIL) are: (a) No further delay in expansion projects; (b) focus on cutting cost and margin improvement (post expansion EBITDA/t of over USD 160/t); (c) wage hike negotiations to be long drawn; and (d) all capex to be funded in 1:1 D/E ratio. We are partially factoring in these benefits. We retain our estimates and maintain ‘HOLD’ (target price of INR106).
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No further delay in expansion projects
SAIL reiterated that all its projects are now on track to meet the revised timelines and are unlikely to face any delays. It expects sales volume to increase by 0.5mt YoY in FY13 (largely from expansion at Rourkela) and by another 2mt in FY14 (of which, 0.5mt will be from Rourkela and 1.5mt from IISCO). Entire planned capex of INR120bn each in FY13 and FY14 will be funded with D/E ratio of 1:1.
Margin expansion in sight
FY12 EBITDA/t of USD99 (down 26% YoY) was hit with cost related to integration of new capacities (with old ones) and modernizing projects. In FY12, since coke oven batteries were shut at few locations, SAIL had to buy coke from the market which spiked costs by ~INR13bn (impact of ~US20/t). Similarly, the cost of power and fuel and stores and spares were also high. With gradual commissioning of projects in a phased manner, SAIL expects these costs to normalize in H2FY13 and FY14. Post expansion, EBIDTA/t could be over USD160/t, factoring in benefits of better product mix, efficiency from new units and apportioning of high fixed cost with greater volumes.
Outlook and valuations: Optimistic on margins; maintain ‘HOLD’
While the management is optimistic on post expansion margins, conservatively, we retain our forward estimates with EBITDA/t of USD118 for FY13E and USD137 for FY14E. Maintain ‘HOLD/Sector Underperformer’ recommendation/rating with a price target of INR106. At CMP, the stock trades at 6.5x FY14E EV/EBITDA.
Regards,
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