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Recommendations India

Steel Authority of India 3QFY2014 performance highlights and results update

February 18, 2014, Tuesday, 11:10 GMT | 06:10 EST | 15:40 IST | 18:10 SGT
Contributed by Angel Broking

Steel Authority of India (SAIL) reported a better-than-expected profitability performance for 3QFY2014 due to lower-than-expected staff costs. However, due to expensive valuation, we recommend a Reduce rating on the stock.

Higher volumes boost top-line growth: During 3QFY2014, SAIL’s standalone net sales increased by 8.3% yoy to Rs.11,363cr, below our estimate of Rs.11,566cr. Its sales volumes grew by 8.4% yoy to 3.0mn tonne while realizations were flat yoy to Rs.38,130/tonne.

Higher Other expenditure mutes EBITDA growth: SAIL’s employee cost stood at Rs.2,268cr and was below our estimate as there was a write back of Rs.230cr. Other expenditure for the quarter grew by 21.0% yoy to Rs.2,121cr, resulting in a flattish EBITDA on a yoy basis at Rs.1,132cr, representing an EBITDA margin of 10.0%. The company reported an exceptional item of Rs.20cr related to forex gain (forex loss of Rs.31cr in 3QFY2013). Adjusting these exceptional items, SAIL’s adjusted net profit remained flat yoy at Rs.513cr (ahead of our estimate of Rs.379cr). Its reported net profit stood at Rs.533cr.

Outlook and valuation: We expect SAIL’s operational and financial performance to be impacted by 1) inability to maintain/raise sales volumes amidst slower demand growth; 2) higher fixed (employee) costs, and 3) delays/cost overruns in its brownfield expansion projects. SAIL is on the verge of expanding its saleable steel production capacity from 12.4mn tonne to 20.2mn tonne by FY2015-16. However, the current rich valuation of 9.5x FY2015E EV/EBITDA more than discounts its anticipated volume growth over FY2013-FY2016. Hence, valuing the stock at 7.0x FY2015 EV/EBITDA and FY2015E CWIP at 0.8x, we derive a target price of Rs.56 and recommend Reduce rating on the stock.