Sanjay Jain Pavas Pethia

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1 BSE Sensex S&P CNX 19,561 5,923 Bloomberg SAIL IN Equity Shares (m) 4,130.4 M.Cap. (INR b)/(usd b) 334.6/ Week Range (INR) 116/76 1,6,12 Rel. Perf. (%) -11/-17/-38 Financials & Valuation (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP Adj. EPS (INR) EPS Gr(%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV EV/EBITDA (x) Div. Yield (%) QFY13 Results Update Sector: Metals Steel Authority of India CMP: INR81 TP: INR39 Sell Adjusted PAT declined 2% QoQ to INR4.8b, in line with estimates. EBITDA increased 3% QoQ to INR11.4b, in line with estimates. EBITDA per ton declined 1% QoQ to USD76/ton v/s est of USD75/t. Sales volume increased 6% QoQ to 2.75m tons, while production decreased 4% QoQ to 3.06mt. There has been an increase in inventories by INR7.1b during the quarter. This is the third subsequent quarter when SAIL witnessed an increase in inventories, implying poor demand. Average realization declined 7% QoQ to INR38,800/t, which was 2% higher than our est of INR37,905/t. Raw material cost per ton declined 4% QoQ, while power and fuel cost declined 16% QoQ. Forex loss on INR depreciation against USD was INR307m. Interest cost increased 19% QoQ to INR2.2b, while net debt rose by INR27b QoQ to INR174.3b. Board has declared an interim dividend of INR1.6/share v/s INR1.2/share interim dividend in FY12. SAIL spent INR18.6b in 3QFY13 and INR65.5b in 9MFY13 towards various projects. It plans to spend INR b in FY13. Major facilities at ISP and RSP are at advanced stages of completion and are expected to begin operation in 4QFY13. However, we remain concerned on volume ramp-up due to poor demand and intense competition from private players who recently added capacity. We have cut volume estimates by 1.2mt each in FY14E and FY15E to 12.3mt and 13.6mt due to lower guidance by the management. Thus, our FY14E and FY15E EPS have been cut by 28% and 36% respectively. Stock is trading at rich FY15E EV/EBITDA of 9x and PE of 18.5x. We value SAIL at INR39 (5x FY15E EV/EBITDA, 58% discount to CWIP). Maintain Sell. Sanjay Jain Pavas Pethia Investors are advised to refer through disclosures made at the end of the Research Report. 1

2 In-line; EBITDA/t flat QoQ at USD76; power costs decline; Inventories up for 3rd quarter in row Adjusted PAT declined 2% QoQ to INR4.8b, in line with estimates. EBITDA increased 3% QoQ to INR11.4b, in line with estimates. EBITDA per ton declined 1% QoQ to USD76/ton v/s est of USD75/t. Sales volume increased 6% QoQ to 2.75m tons, while production decreased 4% QoQ to 3.06mt. There has been an increase in inventories by INR7.1b during the quarter. This is the third subsequent quarter when SAIL witnessed an increase in inventories, implying poor demand. Average realization declined 7% QoQ to INR38,800/t, which was 2% higher than our est of INR37,905/t. Raw material cost per ton declined 4% QoQ, while power and fuel cost fell 16% QoQ. Forex loss on INR depreciation against USD was INR307m. Interest cost increased 19% QoQ to INR2.2b, while net debt rose by INR27b QoQ to INR174.3b. Board declared an interim dividend of INR1.6/share v/s INR1.2/share interim dividend in FY12. Valuation rich; volume growth may disappoint due to poor demand and intense competition; maintain Sell SAIL spent INR18.6b in 3QFY13 and INR65.5b in 9MFY13 towards various projects. It is guiding for INR105b-110b capex for FY13 (against earlier guidance of INR120b). Major facilities at ISP and RSP are at advanced stages of completion and are expected to begin operation in 4QFY13. However, we remain concerned on volume ramp-up due to poor demand and intense competition from private players who recently added capacity. Further, RSP's finished products from new capacity, like plates, have seen significant slowdown in demand due to delay in investment in India. 2

3 We have cut volume estimates by 1.2mt each in FY14E and FY15E to 12.3mt and 13.6mt due to lower guidance by the management. Thus, our FY14E and FY15E EPS have been cut by 28% and 36% respectively. Stock is trading at rich FY15E EV/EBITDA of 9x and PE of 18.5x. We value SAIL at INR39 (5x FY15E EV/EBITDA, 58% discount to CWIP). Maintain Sell. SAIL 3QFY13: Concall highlights Net sales realization declined by 5.5% QoQ (-6% YoY). Long products realizations declined 7% QoQ to INR37,340/t (-3% YoY), while flat product realizations declined 4.3% QoQ to INR33,400/t (-8.1% YoY). Interim dividend increased to INR1.6/share from INR1.2/share last year, in line with other PSUs as government is trying to lower its deficit. D/E increased QoQ to 0.56x from 0.51x. Currently, SAIL has INR56b of cash deposit, which is likely to be maintained, going forward. Total projected capex for FY13 is INR105b-110b (against earlier guidance of INR120b). It spent INR75b (INR9.5b in January and INR65.5b in 9MFY13) in the first 10 months of FY13. Finished steel inventory increased from 927kt at FY12-end to 1.6mt (65:35 ratio between flat and long) of finished steel. Both flat and long products' demand remains weak. New wage revision is due from Jan 1, 2012, for which a provision of INR5b (15% of basic and DA) is made so far. Wage bill should go up by INR6-7b per annum after the revision. Coke oven battery at ISP and Rourkela will be operational in 4QFY13. Expect m tons of additional volumes in FY14 due to capacity expansion. Coking coal prices declined from USD288/t in FY12 to USD170/t in 4QFY13 (USD160/t in 3QFY13, USD225/t in 2QFY13). Although negotiations are still on, Coal India's coking coal prices should decline by INR1,000/t to INR6,500/t in FY14. Power and fuel cost fell due to lower furnace oil consumption and technical improvements. 70% of Bolani mine is operational. It intends to increase capacity from 4mtpa to 10mtpa. 3

4 SAIL: an investment profile Company description Steel Authority of India Ltd (SAIL), a public sector undertaking (PSU), is the largest steel producer in India, with ~20% market share. Its current capacity of 13mtpa is vertically integrated from mines to finished steel and is spread across four plants in the mineral-rich belt of Chhattisgarh, Orissa and Jharkhand. SAIL is totally selfsufficient in iron ore (captive mines). However, it has to depend on purchase of coking coal and a large share is imported. It has a wide range of products and is a large producer of special steel. Key investment arguments INR720b capex would raise the capacity of saleable steel volumes from 12mtpa currently to 20mtpa through de-bottlenecking and brown field expansions. Many long term positive developments have occurred in terms of raw material security -- receipt of mining lease for Rowghat mines, renewal of 800m tons of iron ore reserves at Chiria/Gua etc. Key investment risks Unexpected fall in steel prices and slow execution of projects would adversely impact earnings. Recent developments Board declared an interim dividend of INR1.6/share v/s INR1.2/share interim dividend in FY12. Valuation and view Stock is trading at rich FY15E EV/EBITDA of 9x and PE of 18.5x. We value SAIL at INR39 (5x FY15E EV/ EBITDA, 58% discount to CWIP). Maintain Sell. Sector view We believe that steel prices would continue to remain weak on account of subdued global demand and lower raw material prices. Indian steel demand has also slowed down mainly due to lack of infrastructure/construction related activities. This coupled with an increase in steel capacity due to recent commissioning of projects by major players has created a challenging environment for Indian steel industry. Non-integrated players such as JSW face additional challenges on cheaper iron ore sourcing. We believe that both steel prices and margins shall continue to remain under pressure. Comparative valuations SAIL JSW - Ispat Tata Steel P/E (x) FY13E FY14E P/BV (x) FY13E FY14E EV/Sales (x) FY13E FY14E EV/EBITDA (x) FY13E FY14E EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Sell Stock performance (1 year) Shareholding Pattern (%) Dec-12 Sep-12 Dec-11 Promoter Domestic Inst Foreign Others

5 Financials and valuation 5

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