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Steel Authority of India 3QFY14 Conference-Call Update

February 17, 2014, Monday, 12:34 GMT | 07:34 EST | 18:04 IST | 20:34 SGT
Contributed by Nirmal Bang


Steel Authority of India (SAIL) organised a conference call for analysts on 17 February, 2014 regarding its 3QFY14 results. The company indicated that the macro-economic environment continues to remain challenging because of weakness in demand. We have revised our EBITDA estimates downward by 22%/16% for FY14/FY15, respectively, driven by slippage in sales volume on account of the delay in commissioning new projects and a rise in other expenses compared to our earlier estimates. We have also increased FY16 estimates, with EBITDA growth seen at 31% driven by higher volume. We have retained our Sell rating on SAIL with a revised TP of Rs48 (4.8x FY16E EV/EBITDA) compared to Rs45 (4.8x FY15E EV/EBITDA) earlier. Our revised TP is 21% below the current market price. Following are the key highlights:

- Finished steel inventory rose to 1.46mt as of end-December 2013, but the company is hopeful of bringing it down to the FY13 level of 1.22mt by the end of FY14.

- SAIL has capitalised projects worth Rs25,000mn in the first nine months of FY14, while it expects FY14 capitalisation to the tune of Rs80,000mn. This will result in higher interest costs and depreciation, which are broadly flat so far.

- SAIL has deferred the commissioning of IISCO’s blast furnace by four-five months because of the delay by contractors, which was scheduled to commence operations by the end of December 2013. Overall, the company is looking at 7%- 8% steel volume growth in FY15E.

- SAIL had finalised a wage agreement with non-executive employees on 25 January, 2014, whereby it agreed for a 17% wage hike and a 6% increase in pension, taking the total increase to 23%, effective 1 January, 2012. The company had already provisioned a 20% wage hike until September 2013 and hence it had to provide for an additional 3% rise in arrears to the tune of Rs3,395mn in 3QFY14.

- SAIL also agreed to pay a 6% personal allowance on the dearness allowance, effective 1 January 2014.

- The company expects the outflow on account of wage hike arrears to be spread equally in FY15 and FY16, which amounted to Rs18,990mn at the end of 3QFY14.

- The company expects some benefit from the reversal of actuarial expenses following the rise in yields, while it also has to provide for higher retirement expenses because of finalisation of the wage agreement. It expects the net impact of the above factors to be favourable.

- Following lower availability of domestic coal, imported coal’s proportion in overall coal mix rose to 81% in 9MFY14 versus 75% a year ago. Every 1% increase in the proportion of imported coal results in a rise in raw material costs by Rs830mn.