Steel Authority of India Ltd: Not yet out of the woods

India Infoline News Service | Mumbai |

SAIL has underperformed the Sensex by 19.7% over the past one year, on account of concerns over the delays in the company’s expansion projects, lower margins and availability of iron ore.

CMP Rs83.2, Target Rs70.7, Downside 15% 

Steel Authority of India Ltd (SAIL) has underperformed the Sensex by 19.7% over the past one year, on account of concerns over the delays in the company’s expansion projects, lower margins and availability of iron ore. SAIL’s expansion plans have been facing delays in project implementation besides cost escalation. Projects which were earlier expected to be completed by FY12 are now estimated to get over in a phased manner by FY14E. Volume growth over the last five years has remained stagnant due to delay in capacity addition and technical issues at various plants.


We believe these issues would continue over the next one year as benefits of the new capacities would set in only from H2 FY14. We expect sales volume growth to remain flat in FY13 and increase 9% yoy to 12.8mn tons in FY14 as the impact of incremental production from new capacities would be offset by the shutdown of old facilities. The full benefit of new capacities would be witnessed only by FY15, where we expect the company to register a volume growth of 14.6% yoy to 14.7mn tons.


SAIL’s Gua mines have remained closed since June ’11 and its Bolani mines were also shut for a month due to expiry of forest clearance. The company’s margins have been hit over the last two years on the back of high fixed costs, high coking coal costs, increase in consumption of externally purchased coke and degrading product mix. EBIDTA/ton in Q3 FY13 is expected to decline to its lowest level since FY04 as steel prices decline sequentially. 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.


At the CMP, the stock is trading at 7.2x FY14E EV/EBIDTA, higher than its domestic as well as international peers. We assign no value to the company’s CWIP, given the dismal track record of SAIL’s execution capabilities. We value SAIL at 6.5x FY14E EV/EBIDTA and arrive at a fair value of Rs70.7. At the CMP, the stock is 15% above our fair value; Initiate coverage with a SELL rating.


Financial summary
Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenues 466,582 485,804 517,089 623,895
yoy growth (%) 7.5 4.1 6.4 20.7
OPM (%) 13.8 12.3 15.9 19.3
Pre-exceptional PAT 38,674 27,784 36,768 59,104
Reported PAT 35,931 27,784 36,768 59,104
yoy growth (%) (28.3) (22.7) 32.3 60.7
EPS (Rs) 9.4 6.7 8.9 14.3
P/E (x) 8.9 12.4 9.3 5.8
EV/EBITDA (x) 7.2 9.4 7.1 5.0
Debt/Equity (x) 0.5 0.6 0.6 0.6
RoE (%) 9.9 6.7 8.4 12.5
RoCE (%) 10.5 7.9 9.4 13.0
Source: Company, India Infoline Research


BSE 78.70 [1.45] ([1.81]%)
NSE 78.45 [1.80] ([2.24]%)

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