Steel Authority of India - back ended volumes; visit note; Buy: Edelweiss

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n  Delay in upcoming IISCO and Salem steel plants

The IISCO (Burnpur) steel plant of 2 mtpa has been delayed from June 2011 to December 2011, due to the hard rock formations encountered at the convertor area. Other ancillary facilities like coke oven, blast furnace and sinter plant are on track for completion in June 2011 and may cater to the inefficient plants of Durgapur and Bokaro. The Salem steel plant of 175 ktpa, which was initially scheduled for August 2010, has got delayed due to non-availability of power from the Tamil Nadu state government. However, the same has now been resorted and the plant is expected to be commissioned during Q3FY11.

n  Potential JV with Posco to decide scope of Bokaro expansion

Bokaro expansion includes enhancement of the exiting blast furnace by 1.2 mtpa (completed), steel melting (SMS) by 0.2 mtpa and a new CRM of 1.2 mtpa by December 2011. The new CRM may be fed by the potential JV with POSCO for 2 mtpa HR. However, if the JV plan is dropped, SAIL might set up an SMS at Bokaro or source slabs from Durgapur steel plant. A final decision on the JV is expected in the next two months.

n  Incremental volume of 0.5 mt and 2.5 mt in FY12 and FY13

SAIL is targeting volume growth of 4-5% during FY11-13 through debottlenecking of the existing capacities (FY10 production of 12.6 mt). In addition, commissioning of the IISCO steel plant will add ~0.5 mt and 2.0 mt in FY12 and FY13, respectively. Also, Bokaro steel plant will potentially add 0.5 mt in FY13. Hence, volume growth will be largely back ended (FY13 onwards).

n  Outlook and valuations: Volume growth back ended; maintain ‘BUY’

The ongoing expansion-cum-modernisation plans could increase operating efficiencies, improve product mix and maintain scale. However, most of this will start taking shape only in FY13 and furthermore FY14 onwards. We remain positive on the long-term volume growth story and maintain our ‘BUY/Sector Performer’ recommendation on the stock.