Sell SAIL - Elara Capital

• Steel Authority of India
• Rating : Sell
• Target Price : INR180
• Downside : 12%
• CMP : INR204 (as on 30 July 2010)

Rough SAILing ahead

Lower than expected volume sales drag performance

SAIL reported lower than expected numbers due to inventory pile ups. The revenues declined 23.6% QoQ despite higher realizations on the back of 32.4% decline in volume sales. EBITDA for the quarter declined 20.2% QoQ on the back of lower volume sales and higher production costs led by increase in employee expenses. The company has made an additional provision for employee expenses to the tune of INR 2,990mn. The management has guided that the annual employee expense for the FY11 will be to the tune of INR 80bn. PAT for the quarter declined 43.6% QoQ hampered by lower EBITDA and lower other income.

Highlights of the quarter

- Volume sales stood at 2.3mn tonnnes as compared to 3.4mn tonnes in Q4FY10 and 2.8mn tonnes in Q1FY10. SAIL produced 3mn tonnes during the quarter.

- Realizations for Q1FY11 stood at INR 39,710/tonne as compared to INR 35,162 in Q4FY10 and INR 32,924 in Q1FY10.

- EBITDA/tonne for the quarter stood at INR 8,012 in Q1FY11 as compared to INR 8,301 in Q4FY10 and INR 6,747 in Q1FY10.

- Employee cost per tonne increased to INR6,706/tonne as compared to INR4,818/tonne in Q4FY10 and INR2,818/tonne in Q1FY10.

Valuations & recommendation

SAIL continues to have a strong balance sheet position, but the ongoing and delayed capex will eventually lead to dilution as well as debt burden. It also lacks volume growth in the visible future. The brownfield expansion, which will double the steel manufacturing capacity is still some time away and continues to be at unattractive capital cost per tonne. Hence, we believe, the return ratios for SAIL will deteriorate until the volume growth creeps in. We maintain our SELL recommendation on SAIL with an unchanged target price of INR180.

Source : Equity Bulls

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