BSE SENSEX S&P CNX 16,439 4,990 4QFY12 Results Update Sector: Metals Steel Authority of India CMP: INR93 TP: INR99 Sell Bloomberg SAIL IN Equity Shares (m) 4,130.4 52-Week Range (INR) 151/73 1,6,12 Rel. Perf. (%) 2/8/-25 M.Cap. (INR b) 384.1 M.Cap. (USD b) 6.9 Consolidated SAIL's 4QFY12 adjusted PAT declined 23% YoY to INR10.7b in-line with estimate of INR11b. Reported PAT of INR15.8b included EO income on account of write back of INR5.1b entry tax. Net sales grew 13% YoY to INR137b. Sales volumes grew 2.1% YoY to 3.2m tons. Realization was largely flat QoQ i.e. up only 0.7% to INR42,787/ton. EBITDA per ton at USD130 was on expected lines. EBITDA declined 6% YoY to INR20.9b. Provisioning for wages was lower at INR18.2b (v/s INR22.5b in 1QFY12 and est of INR22b) as no provisions for non-executive wage hike and/or pension liability were made. This was offset by higher other operating expenditure. Interest expense declined sharply by 33% QoQ to INR1.2b (v/s est of INR2.2b) due to reduction in short-term loans. Total debt declined INR38b QoQ to INR161b. SAIL is now focusing on using its cash reserves to pay off shortterm borrowings. Cash declined INR22.5b QoQ to INR64.2b. As a result, net debt declined 15.7b QoQ to INR97b although cash profit during the quarter was not sufficient for meeting INR37b CapEx. There was some release of working capital. We maintain bearish view on steel prices due to demand slowdown in China, Europe and India. SAIL is trading at expensive FY13 valuations of 7xEV/EBITDA. On P/BV, the stock is trading 1x but the RoE will fall to 9.8%. We value the stock at INR99 based on SOTP (FY14 EV/EBITDA of 6.5x and 50% discount to CWIP). Maintain Sell. Sanjay Jain (SanjayJain@MotilalOswal.com); +91 22 3982 5412 Pavas Pethia (Pavas.Pethia@MotilalOswal.com); +91 22 3982 5413
Quarterly trend in costs Realization flat at INR42,787/ton; EBITDA per ton at USD130 SAIL s 4QFY12 adjusted PAT declined 23% YoY to INR10.7b in-line with estimate of INR11b. Reported PAT of INR15.8b included EO income on account of write back of INR5.1b entry tax. Net sales grew 13% YoY to INR137b. Sales volumes grew 2.1% YoY to 3.2m tons. Realization was largely flat QoQ i.e. up only 0.7% to INR42,787/ton. EBITDA per ton at USD130 was on expected lines. EBITDA declined 6% YoY to INR20.9b. Provisioning for wages was lower at INR18.2b (v/s INR22.5b in 1QFY12 and est of INR22b) as no provisions for non-executive wage hike and/or pension liability were made. This was offset by higher other operating expenditure. Interest expense declined sharply by 33% QoQ to INR1.2b due to reduction in short-term loans. Total debt declined INR38b QoQ to INR161b. SAIL is now focusing on using its cash reserves to pay off short-term borrowings. Cash declined INR22.5b QoQ to INR64.2b. As a result, net debt declined 15.7b QoQ to INR97b although cash profit during the quarter was not sufficient for meeting INR37b CapEx. There was some release of working capital. 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 Remarks Net Sales Realization (INR/ton) 39,368 35,664 34,809 38,693 40,689 39,289 42,476 42,787 Increased 0.7% QoQ Volumes (m tons) Sales 2.3 3.0 3.3 3.1 2.8 2.9 2.6 3.2 Increased 2% YoY Production 3.0 3.1 3.3 3.4 3.0 3.1 3.0 3.3 Declined 4% YoY Expenditure (INR m) Inc(-)/Dec in stock & captive cons. -18,693 1,317-1,619-1,731-2,799-4,548-12,571 6,337 Consumption of Raw Materials 47,035 48,806 52,628 53,906 52,299 61,191 64,589 60,187 Forex fluctuation included Staff cost 20,117 17,004 18,635 20,518 22,512 19,808 18,646 18,206 Provisioning for non-executive pension not provided Consumption of stores & spares 5,734 6,076 5,808 6,307 6,178 6,521 6,572 7,229 Power & Fuel 8,784 8,766 8,876 9,478 10,171 11,237 11,285 11,556 Other Expenditure 9,928 9,145 10,843 10,720 10,423 9,579 10,769 12,557 Other expenditure will remain high Costs (INR/ton of production) Inc(-)/Dec in stock & captive cons. -6,202 425-486 -504-920 -1,467-4,190 1,920 Consumption of Raw Materials 15,605 15,744 15,804 15,693 17,181 19,739 21,530 18,239 Staff cost 6,675 5,485 5,596 5,973 7,395 6,390 6,215 5,517 Consumption of stores & spares 1,902 1,960 1,744 1,836 2,029 2,104 2,191 2,191 Power & Fuel 2,914 2,828 2,665 2,759 3,341 3,625 3,762 3,502 Persisting at high levels Other Expenditure 3,294 2,950 3,256 3,121 3,424 3,090 3,590 3,805 EBITDA per ton of sales volumes 7,943 5,593 5,525 7,052 4,769 2,872 4,288 6,515 Up 52% QoQ to USD130 Source: Company/MOSL Project update; INR110b were spent in FY12 and INR120b capex expected in FY13 Capex during FY12 was INR110b (a little lower than guidance of INR126b) and INR37b during 4QFY12. So far, a total of INR403.22b has been spent on capex program to expand saleable capacity expansion to 20mtpa. About 27% of the capex is long term debt funded. FY13 capex is expected to be INR120b. Out of the total INR720b capex for expansion 2
and modernization, about INR391b is being spent on capacity expansion while INR330b is being spent upon modernization and upgradation of existing facilities. 3 coke-oven batteries were rebuilt during FY12 A new turbo blower was installed and Coke Oven Batteries (COBs) 1 & 2 were rebuilt at Bokaro Steel Plant. COB-6 was rebuilt at Bhilai Steel Plant and new ladle furnace was installed at Alloy Steels Plant, etc. Targeting IISCO and Rourkela new furnace to be commissioned by FY13 IISCO Steel Plant at Burnpur: Raw Material Handling System, Sinter Plant, COB-11, Blast Furnace, SMS and casters, Power Blowing Station and Wire Rod Mill will pave the way for full-fledged operations to start in this greenfield plant. RSP: New Raw Material Handling System, Sinter Plant-3, new COB-6, new Blast Furnace-5, new slab caster and converter are expected to be commisioned towards the end of year. Bhilai: New 700tpd Oxygen Plant has become operational on 3rd May 2012 and Ore Handling Plant will be commissioned during the year. DSP: Medium Structural Mill and rebuilt COB-2 at Durgapur Steel Plant. Bokaro: Hot Metal Desulphurisation Unit in SMS-2, Cold Rolling Mill-3 and Cast House Granulation System for BFs 1, 2 & 3. Valuation and view SAIL plans to commission 2.4mtpa new blast furnace at Burnpur by end of FY13. Also, the new furnace at Rourkela will be complete by end of FY13. We don t expect any volume growth in 1HFY14 from new projects because ramp up will take longer due to teething problems. We are modeling 6.1% volume growth in FY13 and further 18.2% volume growth leading to 14.3m tons of sales in FY14. We expect earnings to grow 23% in FY13 due to better margins. Coking coal costs will be lower and there will be benefit of operating leverage. However, the earnings will struggle to grow in FY14 despite volume growth as higher interest and depreciation will eat away the EBITDA growth. We maintain bearish view on steel prices due to demand slowdown in China, Europe and India. SAIL is trading at expensive FY13 valuations of 7xEV/EBITDA. On P/BV, the stock is trading 1x but the RoE will fall to 9.8%. We value the stock at INR99 based on SOTP (FY14 EV/EBITDA of 6.5x and 50% discount to CWIP). Maintain Sell. 3
SAIL: an investment profile Company description Steel Authority of India (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 self sufficient in iron ore (captive mines). However, it has to depend on purchase of coking coal and a large share is imported. SAIL 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 12.4mtpa currently to 20.2mtpa through de-bottlenecking and brownfield expansions. Many long-term positive developments have occurred in terms of raw material security e.g. 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. Comparative valuations SAIL Tata Steel JSW Steel P/E (x) FY13E 9.5 12.1 13.4 FY14E 11.4 11.0 15.3 P/BV (x) FY13E 0.9 1.5 0.8 FY14E 0.9 1.4 0.8 EV/Sales (x) FY13E 1.2 0.7 1.1 FY14E 1.3 0.6 1.1 EV/EBITDA (x) FY13E 7.0 5.9 6.2 FY14E 8.9 5.8 6.6 Recent developments Board of Directors have recommended a final dividend of INR0.80/share taking the full year dividend for FY12 including interim dividend to be INR2/share.. Valuation and view We value the stock at INR99 based on SOTP (FY14 EV/ EBITDA of 6.5x and 50% discount to CWIP). Sell. Sector view Steel prices showed improvement in 4QFY12 after declining in 3QFY12. Prices were 11%, 11%, 7% and 6% higher in 4QFY12 than their 3QFY12 lows for Russia, Europe, North America and China, respectively. However prices have started to correct on declining raw material prices and subdued demand. Prices of key inputs such as coking coal and iron ore have eased off in the past few months and are expected to correct further, going forward. Domestic steel prices also showed QoQ improvement in 4QFY12 as large producers benefited at cost of secondary producer. Increased regulatory vigil has resulted in scarcity of iron ore for secondary producers. However with decreasing raw material prices, subdued demand and commissioning of new capacities, we expect domestic steel prices to correct in FY13. EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY13 9.8 11.1-11.5 FY14 8.1 13.7-40.4 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 93 99 6.1 Sell Stock performance (1 year) Shareholding Pattern (%) Mar-12 Dec-11 Mar-11 Promoter 85.8 85.8 85.8 Domestic Inst 7.7 7.9 7.6 Foreign 3.6 3.4 4.3 Others 2.9 2.9 2.3 4
Financials and valuation 5
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