Reduce SAIL - Dolat Capital

We believe that there are headwinds for SAIL given the negative impact of the impending wage hike, inefficient operations, and inordinate delay in expansion plans and weak steel pricing environment .The impending dilution of stake by Govt of India will also keep the stock under pressure. SAIL is currently trading at EV/EBITDA of 9.6xFY13 and 7.9xFY14 EV/ EBTDA multiple and is expensive amongst its global peers. We continue to maintain Reduce on SAIL with a price target of Rs.76 (5.5xFY14 EV/EBITDA, adj for CWIP).

- SAIL currently has inventory of 1.4mn tonne of finished goods and has been steadily accumulating over past couple of quarters. SAIL sales volumes in H1FY13 have declined by 8.1% in H1FY13 despite production growing by 1.4% This is in stark contrast to JSW Steel and Tata Steel which had a sales volume growth of 19% and 2.5%YoY in H1FY13 respectively posing a serious question over SAIL's ability to sell volumes once its capacity is expanded.

- The wage revision for its workmen (85% of employees and 50% of the employee cost) has been due since Jan-2012. SAIL has been providing for an increase of 7.5% in the wages as against the last wage settlement of raise of 23%. We believe the increase in employee costs, which is already highest in terms of employee cost per tonne in the industry, would further erode SAIL's competitiveness in the market.

- SAIL has faced inordinate delays in its expansion plans for expanding its capacity from 12.5mt to 20.3mt. The expansion plans have been delayed by two years with the key IISCO Burnpur plant now expected to commence only in Mar-13 with the incremental volumes only expected in FY14.

Source : Equity Bulls

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