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Earnings downgrade ahead
SAIL’s 2QFY11 profit at Rs10.9bn was significantly lower than ours and consensus estimates primarily
on higher than estimated raw-material cost. The management commented that the possibility of timeoverrun
in 2mtpa expansion project at ISP. The benefits from SAIL’s Rs590bn to expand capacity from
1214mtpa to 26mtpa; modernise its plants and improve product mix are unlikely to be realised before
FY14. We forecast a meagre 6.6% CAGR in SAIL’s profit over FY10-13ii. SAIL at PER of 12.8x on FY11ii
and EV/EBIDTA of 8.5x is trading at premium to its peers despite anaemic volume growth. SELL.
Raw material cost surprise negatively: SAIL’s EBIDTA for the quarter at Rs17bn was way below our
estimates. Its per tonne raw-material cost increased 32% QoQ to Rs17,221 much higher than our estimate.
This magnitude of increase in cost is not explained by a 10% increase in coking coal prices, which in case of
SAIL should have been partly offset by lower consumption of expensively priced carry-over quantity of coal.
Further, realisation decline was also higher than peers contributing to negative surprise.
Capex gaining momentum but volume growth anaemic till FY14: SAIL’s capital expenditure in FY10
increased to Rs106bn as compared to Rs52bn in FY09 and has already spent Rs53bn in 1HFY11. Despite the
acceleration all major expansion except ISP unlikely to commission before December 2012. Here as we a
delay due to time-overruns can not be ruled out. A meaningful volume growth and improvement in cost
structure is unlikely before FY14
consensus EPS estimate of Rs19 for FY11. Admittedly, 2HFY11 will be strong as compared to 1H on higher
volumes and lower costs but we see ~20% risk to consensus earnings estimates for FY11 and ~15% to
FY12. At PER of 12.8x on FY11ii, risk reward is unfavourable given meagre volume growth and increasing
risks to near earnings from recent weakness in steel prices. Retains SELL.
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