SAIL: Sharply lower ASP, higher raw material costs:: JPMorgan

Visit http://indiaer.blogspot.com/ for complete details �� ��


Steel Authority of India Ltd Neutral
SAIL.BO, SAIL IN
Results first cut- Sharply lower ASP, higher raw
material costs drive large earnings miss; net cash
levels drop to Rs10bn





• Results below estimates driven by lower than expected ASPs, higher
raw material costs: SAIL reported Q2FY11 PAT at Rs10.9bn (-7% q/q;
-34% yy/) v/s JPMe of Rs12.6bn and Bloomberg consensus estimates of
Rs13.5bn. EBITDA came in at Rs16.9bn (-8% q/q; -29% yy/) v/s JPMe of
Rs19.6bn and Bloomberg consensus estimates of Rs21.9bn. EBITDA
margins stood at 15.7% v/s JPMe of 19.6%. Sales volumes at 3.17MT
(+37% q/q; +5% y/y) were 13% ahead of our estimates but realizations and
raw material costs were significantly higher than our and street estimates.
Indian steel companies have seen a sharp q/q increase in steel sales in the
Sept quarter, as Chinese imports receded, and lower prices brought back
customers. JSW had reported 33% q/q increase in steel sales. EBITDA/MT
stood at Rs5,346/MT (-33% y/y and q/q). SAIL’s stock price has been weak
over the last 3 days and has declined 7%.
• ASPs lower than expected: ASPs for SAIL were significantly lower than
our estimates, with the company reporting Rs5279/MT decline q/q,
compared to our estimates of Rs3500/MT q/q decline. RM/MT was
Rs1800/MT higher than our estimates. We had expected the company to
benefit from lower volumes of the $300/MT carry forward, however this
does not seem to be the case. Total operating costs/MT stood at
Rs28,743/MT (-9% q/q; +13% y/y) compared to JPMe of Rs28,850/MT.
While steel prices were lower in the Sep quarter, in our view, inferior
product mix too contributed to lower realizations.
• Employee costs inch down q/q: The volatile employee costs came in at
Rs17bn v/s our estimates of Rs17.5bn and Rs20.1bn in Q1. We expect
employee cost volatility to ease over the coming quarters.
• Net cash balance reduces sharply: Net cash balance stood at Rs10.8bn, the
lowest level in the last few years. We believe the sharp reduction in the net
cash balance would have also been driven by the payment of dividends and
continued pick up in capex.
• Key things to watch out in tomorrow’s conference call: Given that
domestic steel demand has again weakened in October (more so for flat
steel) and imports again coming back into the picture, management
commentary on flat product prices would be key. Media reports
(Bloomberg) have indicated that SAIL is likely to take a decision regarding
potential joint ventures with foreign steel companies (Posco has been talked
about as the potential JV partner for a 2MT steel mill), and management
commentary on the same would be watched for.
• Our earnings estimates are under review. The SAIL conference call is at
10AM IST on Friday, Oct 29th