Steel Authority of India Ltd (SAIL) has plunged 36% since the start of 2013 on account of concerns over the delays in the company’s expansion projects, lower margins and the Government’s plan to divest its stake. We believe that most of the negatives are already factored in the stock price and the downward trajectory in earnings would end in FY13. Earnings would improve over the next two years on the back of marginal increase in volumes and expansion in margins. The Government plans to sell 5.82% stake through the Offer For Sale (OFS) route and expects to rake in a minimum of Rs15.64bn at the base price of Rs63/share. At the OFS base price of Rs63, the stock would trade at 6x FY14 EV/EBIDTA, quite lower than its historical 5 year average of 8.7x. We value SAIL at 6.5x FY14E EV/EBIDTA and arrive at a fair value of Rs72, providing an upside of 14% from OFS floor price. We advice investors to subscribe to the issue at the floor price of Rs63.
The expansion projects are estimated to be commissioned in a phased manner from FY14E. Volume growth which has remained stagnant over the last five years is expected to be strong from H2 FY14. Over the next six months we expect benefits of the new capacities would set in. We expect sales volume growth of 9% yoy in FY14 to 12.8mn tons as the impact of incremental production from new capacities would more than offset the production loss due to shutdown of old facilities. The full benefits of new capacities would be witnessed by FY15, where we expect the company to register a volume growth of 14.6% yoy to 14.7mn tons.
SAIL’s margins over the last two years have shrunk sharply on account of high coking coal costs, shutdown of its coke oven batteries and inferior product mix. However, we expect EBIDTA/ton to improve as the coke oven batteries have resumed operations, coking prices have declined and realizations have improved marginally qoq. A combination of the above factor would lead to a 40% qoq expansion in EBIDTA/ton in Q4 FY13. We expect EBIDTA/ton to increase in FY14 to Rs6,281/ton from Rs5,061/ton in FY13. In FY15, a jump in volumes and estimate of higher steel prices would push EBIDTA/ton to Rs8,202/ton.
|Y/e 31 Mar (Rs m)||FY12||FY13E||FY14E||FY15E|
|yoy growth (%)||7.5||0.7||10.1||20.3|
|yoy growth (%)||35,931||27,624||37,833||61,642|
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