Avoid SAIL OFS - Expensive valuation - Angel Broking

The Government of India is divesting 5.8% stake in SAIL via an OFS. The issue comprises of an offer for sale of 24.03cr equity shares of face value of Rs. 10 each. SAIL has fixed the OFS floor price at Rs. 63 per share (at a 1.4% discount to its closing price as on March 21, 2013).

Slow progress on capacity continues: SAIL is increasing its saleable steel production capacity from 12.4mn tonne to 20.2mn tonne by FY2015 at a capex of Rs. 72,000cr. We expect robust profitability from these plants, with captive iron ore backing the upcoming steel expansion. Also, we expect SAIL's older loss-making plants to be modernized as part of its modernization program. However, the company has reported delays in its expansion projects over the last few quarters. Going forward, we do not rule out further delays and cost over-runs in its expansion plans.

Sales volumes continue to disappoint: SAIL reported disappointing sales volumes for 9MFY2013 in the midst of lower steel demand. Lower-than-expected volumes reflect lower demand in India as well as lack of focus on marketing by SAIL, in our view. Given the slowdown in steel demand in India, and rising imports from FTA countries (which attract lower import duty), we remain skeptical over SAIL's sales volume growth during FY2014.

Outlook and valuation: We expect SAIL's operational and financial performance to remain weak during FY2014 due to its: 1) inability to maintain/raise sales volumes amidst slower steel demand in India; 2) higher fixed costs, and 3) delays/cost overruns in its brownfield expansion projects. SAIL is on the verge of expanding its saleable steel production capacity from 12.5mn tonne to 24.0mn tonne by FY2015. However, we believe that there is still time to play the volume growth story of SAIL. Moreover, it is expensively valued at the offer-for-sale (OFS) floor price of Rs. 63 (7.2x FY2015E EV/EBITDA). Hence, we recommend investors to Avoid subscribing to SAIL OFS.

Source : Equity Bulls

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