Maintain Neutral on SAIL - Motilal Oswal

Steel Authority of India (SAIL IN; Mkt Cap USD15.8b, CMP Rs173, Neutral)

SAIL's 3QFY11 PAT declined 34% YoY (increased 2% QoQ) to Rs11b due to pricing pressure, although volumes and costs were in line with our expectations.

Net sales increased 5% QoQ to Rs113b. Sales tonnage increased 7% QoQ to 3.25m tons on sale of reject rails.

EBITDA increased 6% QoQ. EBITDA per ton increased by 3% QoQ to US$123/ton due to rupee appreciation. In rupee terms, EBITDA/ton declined by Rs68.

We expect some margin improvement in 4QFY11 due to higher steel prices although raw material costs will inch up on higher quarterly contract prices.

In 3Q, SAIL spent Rs26.9b on ongoing capacity expansion; for 9MFY11 capital expenditure stands at Rs80b. Management had set a target of Rs125b for FY11.

SAIL is likely to finish FY11 with only marginal volume growth of 1%. We are cutting FY11E EPS by 16% to Rs12.3 and FY12E EPS by 10% to Rs13.9 to factor in lower than expected 3Q performance. Further, we are lowering margins for 4Q to US$162/ton, a significant improvement QoQ due to increase in steel prices. The stock is trading at an EV of 8.3x FY12E EBITDA and at 12.4x FY12E EPS. Maintain Neutral.

Source : Equity Bulls

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