SAIL: 2Q FY11 results: below our expectations : Daiwa

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Steel Authority of India (SAIL IN) Rating:2
2Q FY11 results: below our expectations



What has changed?
• The company’s 2Q FY11 results were much lower than our forecasts and those in
the market. The adjusted PAT of Rs11.6bn was 11.2% lower than our forecast, due
mainly to higher-than-expected raw-material costs.
Impact
• Steel Authority of India (SAIL) recorded net sales for 2Q FY11 of Rs108bn, up
by 18.3% QoQ, driven by an increase of 36.6% QoQ in steel-sales volume to
3.2m tonnes, and a decline of 13.2% QoQ in its blended sales realisation to
US$733. The realisation was 6.7% below our forecast of US$786/tonne.
• EBITDA was Rs16.9bn, a figure which included Rs0.7bn of extra provisions
for employee-related benefits. After adjusting for this one-off item, SAIL’s
adjusted EBITDA was Rs17.6bn (down 25.9% YoY, down 15.6% QoQ),
substantially lower than our forecast of Rs20.8bn.
• Adjusted EBITDA of US$120/tonne was also lower than our forecast
US$141/tonne, due mainly to a decline in the sales realisation and a 76.9% QoQ
jump in raw-material costs. The adjusted PAT of Rs11.6bn was 11.2% lower
than our forecast, and was down 30.3% YoY and down 22% QoQ.
• Management expects to file the draft prospectus for SAIL’s follow-on offer by
December 2010 and to raise funds from the market by January 2011. This is likely
to lead to 5% equity dilution from the first tranche and an additional 5% equity
dilution from the second tranche. The government will also participate by offering
additional equity equating to 5% out of its holding in both the tranches.
Valuation
• Our maintained six-month target price of Rs209 is based on a target
EV/EBITDA multiple of 5x on our FY12 EBITDA forecast. SAIL is trading
currently at a 4.8x EV/EBITDA on our FY12 forecast.
Catalysts and action
• We maintain our 2 (Outperform) rating on SAIL. We see the key catalyst for SAIL
as its planned capacity expansion from 14.5m tonnes to 23.5m tonnes by March
2013 and any announcement on this front. The key risk would be a sharp fall in
steel prices and any delay in the commissioning of its capacity-expansion plan.