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Steel Authority of India
Cost pressures abound
SAIL reported 1QFY12 EBITDA of US$95/t (-43% yoy and -37% qoq) and 12%
below RBS est. and are at their lowest levels in at least 5 years and could drift
even lower in the coming quarters. Our FY12/13 earnings estimates are 44% and
32% below consensus. Maintain Sell.
Cost pressures escalate; 1QFY12 EBITDA falls to US$95/t
! 1QFY12 production volumes were at 3mt while saleable steel volumes were 2.8mt (+22% yoy
and -11% qoq) in line with our expectation. Average realizations at US$858/t were flat. Net
revenues at Rs108.1bn was up 20% yoy and -9% qoq and 2% above our exp. RM cost at
US$372/t was up by 27% yoy and surprisingly flat qoq, despite the steep rise in coking coal
contract prices for 1Q. We believe a lower proportion of the US$330/t coking coal may have
been used for the quarter during the quarter. Employee expenses rose sharply to Rs22.5bn
(+12% yoy and +10% qoq) hurting margins. Other expenses too moved up sharply to
Rs10.4bn (+30% yoy and +7% qoq). With higher-than-expected costs.
! As a result EBITDA dropped sharply to Rs11.9bn (-31% yoy and -44% qoq) and 12% lower
than our estimate of Rs13.6bn. EBITDA/t was US$95/t (-43% yoy and -37% qoq) versus our
estimate of US$108/t. This the lowest level of margins in at least five years. The steepest fall
in PBIT was at the Bhilai and Bokaro Steel plants where the PBIT fell by 43% and 38% yoy.
Next few quarters to be even more challenging
! RM cost of US$372/t was flat on qoq basis. This was despite the fact that coking coal prices
have surged to US$330/t from US$220/t. The impact of the high coal costs would impact
margins further in the next few quarters. The increase in employee costs by 12% yoy to
$141/t is worrisome and would require a meaningful increase in capacities to reduce its
impact. The company has also noted that pension for non-executives remains to be decided
at a later date though the possible impact has not been quantified.
Two more years for expansion to play out; maintain Sell
! The 2mt IISCO and 0.5mt Bokaro expansions should add some volume in FY13, poststabilisation. However, the bulk of the volumes from the ongoing 20mt expansion would add
to earnings only in FY14/15. Orders worth US$11.8bn have been placed and an amount of
US$5.9bn has already been spent so far on the expansions.
! SAIL is currently facing the double whammy of low output and high fixed costs especially on
account of high employee costs and could take several quarters to get any respite. We
believe that there would be better buying opportunities at lower levels. SAIL is currently
trading at 18.1x/12.8x FY12/13F earnings, well over the peer average. We note that our
FY12/13 net earnings estimates are below consensus by 44% and 32% respectively. Maintain
Sell with TP of Rs120.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steel Authority of India
Cost pressures abound
SAIL reported 1QFY12 EBITDA of US$95/t (-43% yoy and -37% qoq) and 12%
below RBS est. and are at their lowest levels in at least 5 years and could drift
even lower in the coming quarters. Our FY12/13 earnings estimates are 44% and
32% below consensus. Maintain Sell.
Cost pressures escalate; 1QFY12 EBITDA falls to US$95/t
! 1QFY12 production volumes were at 3mt while saleable steel volumes were 2.8mt (+22% yoy
and -11% qoq) in line with our expectation. Average realizations at US$858/t were flat. Net
revenues at Rs108.1bn was up 20% yoy and -9% qoq and 2% above our exp. RM cost at
US$372/t was up by 27% yoy and surprisingly flat qoq, despite the steep rise in coking coal
contract prices for 1Q. We believe a lower proportion of the US$330/t coking coal may have
been used for the quarter during the quarter. Employee expenses rose sharply to Rs22.5bn
(+12% yoy and +10% qoq) hurting margins. Other expenses too moved up sharply to
Rs10.4bn (+30% yoy and +7% qoq). With higher-than-expected costs.
! As a result EBITDA dropped sharply to Rs11.9bn (-31% yoy and -44% qoq) and 12% lower
than our estimate of Rs13.6bn. EBITDA/t was US$95/t (-43% yoy and -37% qoq) versus our
estimate of US$108/t. This the lowest level of margins in at least five years. The steepest fall
in PBIT was at the Bhilai and Bokaro Steel plants where the PBIT fell by 43% and 38% yoy.
Next few quarters to be even more challenging
! RM cost of US$372/t was flat on qoq basis. This was despite the fact that coking coal prices
have surged to US$330/t from US$220/t. The impact of the high coal costs would impact
margins further in the next few quarters. The increase in employee costs by 12% yoy to
$141/t is worrisome and would require a meaningful increase in capacities to reduce its
impact. The company has also noted that pension for non-executives remains to be decided
at a later date though the possible impact has not been quantified.
Two more years for expansion to play out; maintain Sell
! The 2mt IISCO and 0.5mt Bokaro expansions should add some volume in FY13, poststabilisation. However, the bulk of the volumes from the ongoing 20mt expansion would add
to earnings only in FY14/15. Orders worth US$11.8bn have been placed and an amount of
US$5.9bn has already been spent so far on the expansions.
! SAIL is currently facing the double whammy of low output and high fixed costs especially on
account of high employee costs and could take several quarters to get any respite. We
believe that there would be better buying opportunities at lower levels. SAIL is currently
trading at 18.1x/12.8x FY12/13F earnings, well over the peer average. We note that our
FY12/13 net earnings estimates are below consensus by 44% and 32% respectively. Maintain
Sell with TP of Rs120.
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