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Margin pressures to continue
SAIL’s earnings will be under pressure in FY12 thanks to weakening domestic
demand and rising coking coal prices with no relief on the price front. The ISP
plant expansion by end-FY12 will boost volume growth in FY13 but the wage
settlement for workers in Jan 2012 will eat into part of the benefits. We cut
FY12-13 EPS by 20-23%. Stock has underperformed but still looks expensive
even on FY13 earnings. We see a high risk of SAIL’s expansions getting
delayed and believe that it is too early to assign value to FY14-15 earnings.
Continued delays in the FPO are also impacting the stock. U-PF stays.
FY12 set to be another weak year for SAIL
We believe that SAIL is unlikely to offer any meaningful volume growth in FY12
given weakening domestic demand in both long and flat steel. Domestic steel
prices rose by ~US$110-120/t over Jan-Mar – inline with regional prices – but
have come off by US$40-50/t since then. We anticipate more price cuts in 2Q
given weakening global prices. The impact of US$330/t coking coal will flow
through for half of 1Q since SAIL has inventories from 4Q at US$225/t but will
fully impact costs in 2Q. Platts has reported that Anglo has reached agreement
with several north Asia customers for its 3QCY11 HCC price at US$315/t FOB, a
similar price with its Europe settlement in May. We don’t see any relief for SAIL on
coking coal in 2QFY12 either. We expect SAIL’s EBITDA/t to decline YoY in FY12.
FY13 will be better than FY12 but not by much
The 2mtpa expansion in the ISP plant by end-FY12 will drive 15% volume growth
in FY12. The end of carry-over coking coal volumes (at US$300/t) will also
improve FY13 costs. However, SAIL will revise wages for non-executives in Jan
2012, which will impact FY13 costs and will eat into part of the benefits from the
volume growth. Nonetheless, we see SAIL delivering 14% EPS growth in FY13.
Too early to assign value on a post expansion basis given risk of delays
Given the spate of execution delays in metal sector projects by private sector
companies, we are sceptical of SAIL completing its expansions on time by Mar-13
and anticipate 6-12m delays. Given the risk of delays and continued macro
uncertainties in the near-term, we believe that it is too early to assign any value
to SAIL based on its eventual capacity. We are also not in favour of excluding the
debt component of CWIP from total debt while valuing such companies.
Cutting FY12-13 EPS by 20-23%; maintain U-PF
SAIL’s stock has underperformed substantially but at 7.0x FY13 EV/EBITDA,
valuations are still expensive. The FPO delays are also impacting stock
performance. Our new estimates are 22-24% below consensus. We maintain U-PF
with a target price of Rs110 at 6x FY13 EV/EBITDA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margin pressures to continue
SAIL’s earnings will be under pressure in FY12 thanks to weakening domestic
demand and rising coking coal prices with no relief on the price front. The ISP
plant expansion by end-FY12 will boost volume growth in FY13 but the wage
settlement for workers in Jan 2012 will eat into part of the benefits. We cut
FY12-13 EPS by 20-23%. Stock has underperformed but still looks expensive
even on FY13 earnings. We see a high risk of SAIL’s expansions getting
delayed and believe that it is too early to assign value to FY14-15 earnings.
Continued delays in the FPO are also impacting the stock. U-PF stays.
FY12 set to be another weak year for SAIL
We believe that SAIL is unlikely to offer any meaningful volume growth in FY12
given weakening domestic demand in both long and flat steel. Domestic steel
prices rose by ~US$110-120/t over Jan-Mar – inline with regional prices – but
have come off by US$40-50/t since then. We anticipate more price cuts in 2Q
given weakening global prices. The impact of US$330/t coking coal will flow
through for half of 1Q since SAIL has inventories from 4Q at US$225/t but will
fully impact costs in 2Q. Platts has reported that Anglo has reached agreement
with several north Asia customers for its 3QCY11 HCC price at US$315/t FOB, a
similar price with its Europe settlement in May. We don’t see any relief for SAIL on
coking coal in 2QFY12 either. We expect SAIL’s EBITDA/t to decline YoY in FY12.
FY13 will be better than FY12 but not by much
The 2mtpa expansion in the ISP plant by end-FY12 will drive 15% volume growth
in FY12. The end of carry-over coking coal volumes (at US$300/t) will also
improve FY13 costs. However, SAIL will revise wages for non-executives in Jan
2012, which will impact FY13 costs and will eat into part of the benefits from the
volume growth. Nonetheless, we see SAIL delivering 14% EPS growth in FY13.
Too early to assign value on a post expansion basis given risk of delays
Given the spate of execution delays in metal sector projects by private sector
companies, we are sceptical of SAIL completing its expansions on time by Mar-13
and anticipate 6-12m delays. Given the risk of delays and continued macro
uncertainties in the near-term, we believe that it is too early to assign any value
to SAIL based on its eventual capacity. We are also not in favour of excluding the
debt component of CWIP from total debt while valuing such companies.
Cutting FY12-13 EPS by 20-23%; maintain U-PF
SAIL’s stock has underperformed substantially but at 7.0x FY13 EV/EBITDA,
valuations are still expensive. The FPO delays are also impacting stock
performance. Our new estimates are 22-24% below consensus. We maintain U-PF
with a target price of Rs110 at 6x FY13 EV/EBITDA.
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