Steel Authority of India Ltd --As project commissioning pick up pace, so do communications; August production highlights; P/BV near GFC lows:: JPMorgan

SAIL announced August crude steel production growth of 7% y/y with YTD
FY13 production growth of 3% y/y. We view the higher production and
pick up in communication by the company positively as it gets closer to the
commissioning of its projects (ISP and RSP over the next 6 months). The
Aug production release also highlights the improvement in productivity
parameters that had adversely impacted costs for the company during last
year (Operating cost/MT in FY12 increased 17% y/y).

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 August production data shows improvement in parameters: Aug
crude steel production at 1.16MT highlights a significant improvement.
Based on JPC data for July of SAIL, Aug crude steel production is up
3% m/m and is the highest monthly production since Mar-12. The
company indicated that continued focus on techno-economic parameters
to improve SAIL’s cost competitiveness has helped production. Blast
furnace productivity in Aug was up ~9% y/y and concast production as a
% of crude steel also improved by 4%. In our view, the commissioning
of coke oven batteries, sinter plant, and other units in ISP and RSP
should help drive continued improvement in productivity and lead to
significant cost reduction for SAIL in 2HFY13.
 Lower coking coal costs to further help 2HFY13 margins: While
there are concerns on steel demand, we believe that seasonal
improvement in the 2HFY13 should help drive volume growth for the
steel. Further, coking coal prices continued to remain depressed and steel
companies have indicated that quarterly contract price for Oct-Dec
quarter is ~$169-170/MT. Assuming INR remains at current levels, we
believe that the decline in coking coal costs should benefit SAIL’s
margins from Nov onwards (assuming 1-1.5months of inventory).
 Commissioning of projects key to re-rating: The commissioning
process of the multi-billion dollar capex has commenced, with the start
of coke oven battery at IISCO. Over the next few quarters, we believe
investor focus should shift to how quickly the facilities stabilize. SAIL's
volume increase from capacity expansion is still a few quarters away and
hence the real stress would emerge if the domestic demand does not
improve by FY14E.
 P/BV valuation at GFC lows: SAIL is trading at 0.68x FY14 P/BV,
which is lower than the GFC lows with absolute stock price close to GFC
levels as stock have declined sharply over the last month. As highlighted
in our recent note (link), similar valuation in Nov-Dec-11 was followed
by a rebound. Iron ore price stabilization should also help SAIL’s stock
price to rebound.