SAIL - 4QFY2013 Result Update - Angel Broking

Steel Authority of India (SAIL) reported disappointing 4QFY2013 profitability performance due to lower realizations and higher costs. We recommend a Reduce rating on the stock.

Lower volumes and realizations drag top-line: During 4QFY2013, SAIL's net sales declined by 9.2% yoy to Rs. 12,162cr (above our estimate of Rs. 11,640cr), mainly due to lower realizations and volumes. The company's realizations stood at Rs. 38,008/tonne, compared to Rs. 40,598/tonne in 4QFY2012. Its volumes also declined 3.0% yoy to 3.2mn tonne.

Higher staff costs and lower other operating income dent company's EBITDA: The staff costs for the company increased 35.9% yoy to Rs. 2,473cr and the other operating income declined by 43.0% yoy to Rs. 168cr. The EBITDA, therefore, decreased by 51.2% yoy to Rs. 914cr and EBITDA margin contracted by 645bp yoy to 7.5%.

Higher tax rate and interest expenses drag bottom-line further down: The company reported a net interest expense of Rs. 14cr in 4QFY2013 compared to a net interest income of Rs. 86cr in 4QFY2012. The tax rate for the company also increased to 39.7% in 4QFY2013 compared to 31.5% in 4QFY2012 and hence the adjusted net profit declined by 49.5% yoy to Rs. 430cr (significantly lower than our estimate of Rs. 725cr) for 4QFY2013.

Outlook and valuation: We expect SAIL's operational and financial performance to be impacted by 1) its inability to maintain/raise sales volumes amidst slower demand growth; 2) higher employee costs, and 3) delays/cost overruns in its brownfield expansion projects. SAIL is on the verge of expanding its saleable steel production capacity from 12.4mn tonne to 20.2mn tonne by FY2015. However, the current rich valuation of 5.1x FY2015E EV/EBITDA discounts its anticipated volume growth over FY2013-FY2016. Hence, valuing the stock at 6.5x FY2015 EV/EBITDA, we derive a target price of Rs. 53 and recommend a Reduce rating on the stock.

Source : Equity Bulls

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