SAIL-MoS Budget gives reasons for delays; Most timelines NOT pushed out further, benefits only in FY15E:: JPMorgan

India’s Ministry of Steel (MoS) has released its FY14 Outcome Budget, laying out
the progress of various projects under its various subsidiaries. For SAIL, while
most of the projects have not been pushed out further, spending is NOT picking
up in projects like BSP expansion. For the first time, the MoS has given out
reasons for delays, though in most cases the delay has been blamed at the sub
contractor. From here, the key IISCO expansion seems to be on its way and in our
view, visibility on its full commissioning (some time later this year) should re rate
the stock as market moves to giving some value to the sunk capex.

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 Update on overall spending: Against earlier estimated spending of Rs145bn,
FY13E revised spending would be at Rs120bn. SAIL has cumulatively spent
Rs414bn on the expansion program (with IISCO spending alone at
Rs140bn). Projected spending stands at Rs130bn for FY14E.
 Sub contractors blamed for delays: For the first time, detailed reasons for the
delays associated with the projects has been given out. Most of the delays have
been blamed on the various sub contractors associated with the capex program.
Of the key projects, progress is very slow on Bhilai Steel (BSP), with spending
only at Rs370mn in FY13E v/s Rs44.65bn estimated earlier.
 Update on IISCO: The much delayed IISCO project has started the
commissioning process with the coke oven battery heating having started. In
our view the benefits of IISCO are likely only in FY15E as the plant gets
gradually stabilized over the coming quarters.
 The next big commissioning is RSP: After IISCO, we expect RSP to come
online (hot metal capacity increase to 4.5MT from 2.1MT). The sinter plant has
been completed, while the heating of the coke oven battery has commenced.
 Sharply higher saleable steel volume for FY14E, but lower PAT: The
Budget document expects saleable steel production of 13.5MT for FY14E (+5%
y/y), but net profit of Rs15bn (--32% y/y) v/s JPMe PAT Rs41bn. Historically,
the PAT estimates in the budget document have been conservative.
 Steel environment (demand and prices) locally remains tough, but stock can
re-rate if markets become convinced on project delivery: Admittedly
operating environment improvement is likely only once Government spending
starts (more likely in H2FY14E). At 0.6x P/B, SAIL offers attractive risk
reward, though investors may likely wait for project commissioning to come
through before re rating the stock and giving a value to sunk investments. We
remain OW on SAIL. Key risks include sharp increase in coking coal costs and
collapse in long product steel demand from current levels