Steel Authority of India Ltd: Not out of the woods (ARA)

India Infoline News Service | Mumbai |

SAIL in its FY13 annual report has stressed upon the progress of its current expansion-cum-modernisation program.

CMP Rs48.4, Target Rs46, Downside 6%
 

SAIL in its FY13 annual report has stressed upon the progress of its current expansion-cum-modernisation program. The company sees FY14 as a year of transformation, wherein most of the capacities would be commissioned thereby boosting its earnings. Earnings in FY13 declined mainly due to an adverse impact of higher usage of external inputs like BF coke, pellets and purchased power combined with lower sales volume and a marginal decline in realisations. Margins were further under pressure due to wage revision provision for non-executives and high actuarial valuation. SAIL has incurred Rs44bn worth of capex and has given orders for Rs58.2bn out of the capex of Rs61.7bn and expects to commission Rs15bn worth of projects in FY14. We expect earnings to remain depressed due to subdued domestic demand and higher costs involved in commissioning of new plants. We believe commercial production from the new plants would be delayed and volumes would jump only from H2 FY15. We maintain our Market Performer rating on the stock with a price target of Rs46.


Earnings growth to remain in single digit

The company’s margins have been hit on account of high fixed costs, increase in consumption of externally purchased coke and degrading product mix. Though we expect margins to improve going ahead, we believe it would remain below its 5-year historical average. Earnings growth would further decline on account of rising interest costs and depreciation. We expect earnings to increase 4.9% yoy to Rs24.4bn in FY14 and 8.2% in FY15.


Underperformance to continue in near term

SAIL has underperformed the Sensex by 48% and the BSE Metal Index by 23% over the past one year. We believe this would continue in the near term on account of delays in the commissioning of new plants, muted margins and subdued demand environment in the domestic market. At the CMP, the stock is trading at 6.2x FY15 EV/EBIDTA, higher than its domestic as well as international peers. We value SAIL at 6x FY15E EV/EBIDTA and arrive at a fair value of Rs46 and maintain our Market Performer rating.


Financial summary
Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
FY15E
Revenues
466,616
450,872
503,278
555,589
yoy growth (%)
7.5
(3.4)
11.6
10.4
Operating profit
64,090
50,803
64,388
74,639
OPM (%)
13.7
11.3
12.8
13.4
Pre-exceptional PAT
38,681
25,178
24,434
26,426
Reported PAT
35,938
23,294
24,434
26,426
yoy growth (%)
(28.3)
(35.2)
4.9
8.2
EPS (Rs)
9.4
6.1
5.9
6.4
P/E (x)
5.2
7.9
8.2
7.6
EV/EBITDA (x)
5.0
7.9
7.1
6.2
Debt/Equity (x)
0.5
0.6
0.6
0.6
RoE (%)
9.9
6.1
5.8
6.0
RoCE (%)
10.5
7.0
6.7
7.0
Source: Company, India Infoline Research
BSE 81.20 [0.55] ([0.67]%)
NSE 81.30 [0.40] ([0.49]%)

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