Steel Authority of India Ltd (Q4 FY13) - Market Performer - IIFL

CMP Rs57, Target Rs61, Upside 7.8%

- SAIL in Q4 FY13 reported a weak set of numbers on account of a sudden jump in its raw material and employee costs. The company reported its decade low EBIDTA/ton during the quarter. Operating profit was half of our estimate and the consensus estimate. The disappointment in PAT was somewhat lowered by a qoq sharp drop in depreciation.

- SAIL reported a 9.9% decline in its topline to Rs123.3bn, lower than our estimate of 129bn. The underperformance was due to lower realizations and marginally lower volumes. Realisations declined by Rs500/ton qoq against our estimate of an increase in Rs500/ton. We believe that the share of semis of total sales continued to remain high during the quarter. Steel sales volume of 3.24mn tons was 1.3% higher on a yoy basis. However, steel production was lower by 6.1% yoy to 3.1mn tons.

- Operating profit of Rs9bn was lower by 51.7% yoy and 20.6% qoq and quite lower than our estimate of Rs19.2bn. The underperformance was due to a sudden jump in its raw material and employee costs coupled with lower realisations. The company reported its decade low EBIDTA/ton during the quarter. Except power and fuel costs all other costs per ton of steel increased on a qoq basis. Raw material costs per ton of steel sold increased from Rs16,605/ton in Q3 FY13 to Rs17,450/ton. We are negatively surprised by the increase in costs as coking coal prices have been lower on a qoq basis. Staff costs too increased by 18.8% qoq to Rs24.7bn due to year end provisions. Other expenditure too increased despite the fact that volumes were higher on a qoq basis. EBIDTA/ton slipped by 32.4% qoq and 52.3% yoy to Rs2,790/ton, its decade low quarterly EBIDTA/ton.

- PAT declined 20.4% qoq and 51.9% yoy to Rs4.3bn which was sharply lower than our estimate of Rs10bn. The decline in PAT was largely due to weaker operating profit. The company's depreciation surprisingly declined by 52.2% qoq due to a change in depreciation policy for its mines. Other income was lower by 5.4% qoq and 3.1% yoy to Rs2.1bn and is expected to decline further as cash levels continue to deplete.

- In FY13, projects which were commissioned included New Sinter Plant at RSP, Air Separation Unit-4 Oxygen Plant-II at BSP, Skin Pass Mill at BSL, Raw Material Handling Plant at ISP, Sinter Plant at ISP, Coke oven Battery No.11 at ISP, Burnpur, Coke Dry Cooling Plant at ISP, By-product Plant at ISP, Wire Rod Mill & RHF at ISP. In April 2013 itself, projects worth Rs21.bn have already been commissioned. Rourkela steel plant (RSP) and IISCO steel plant (ISP) made significant progress in the expansion projects. The company aims to increase saleable steel production by 1mn ton in FY14. ISP and RSP will contribute roughly 0.4mn tons and 0.6mn tons respectively.

- Steel Authority of India Ltd (SAIL) has plunged since the start of 2013 on account of concerns over the delays in the company's expansion projects, lower margins and the Government's plan to divest its stake. We believe that most of the negatives are already factored in the stock price and the downward trajectory in earnings would end in FY13. Earnings would improve over the next two years on the back of marginal increase in volumes and expansion in margins. After a poor set of numbers in this quarter, we lower our estimates for steel realisations and increase costs in FY14. We value SAIL at 6x FY15E EV/EBIDTA and arrive at a fair value of Rs61. We downgrade the stock from Buy to Market Performer with a revised 9-month price target of Rs61.

Source : Equity Bulls

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