SAIL - Q3FY13 Result Update - Kotak

Below expectations results but worst is likely behind us. See remarkable improvement ahead. Maintain BUY

- Q3 steel sales volumes increased 6% Q/Q and Y/Y to 2.76mt (0.09mt below our estimates) while Q3 average realizations fell sharply by 7.1% Q/Q (4% more than our estimates) and 6.3% Y/Y to Rs38660/t. Q3 EBITDA increased 2.6% Q/Q to Rs11.38bn while EBITDA margins improved 40bps Q/Q to 10.67%.

- International steel prices have been rising sharply since Jan 2013 but domestic steel price rise has been marginal driven by remarkably weak demand from automobiles and consumer durable sector. We are hopeful that Indian steel prices would inch up higher in next few months as domestic demand improves on monetary stimulus by the central bank and improved industry macro in SE Asia.

- Disappointments - Significant fall in realizations in Q3, slower than expected rise in domestic steel prices since Jan 13 and delay in commissioning on IISCO BF by 6 months are disappointments and has led to cut in our estimates for FY14 and in turn adversely affected our valuation.

- Financials changes - We have raised our saleable steel volume estimates for FY13 by 0.1mt to 11.2mt and cut volume estimates for FY14 by 0.4mt to 12.5mt, factoring in 6 months delay in commissioning of IISCO BF. We have also cut average sales realizations estimates for FY13 and FY14 by 2% each. Our EPS estimates for FY13 and FY14 is cut by 5.3% and 11.3% respectively to Rs6.9 and Rs9.8 respectively.

- Valuation changes - We continue to value SAIL on 1Yr FWD EV/EBITDA multiple adjusted for CWIP. We are raising our valuation multiple from 6.5x to 7x while we are assigning 40% value (vs. 50% earlier) to FY14 end CWIP. We maintain BUY on SAIL with a revised TP of Rs102/share vs. Rs112/share earlier.

Source : Equity Bulls

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