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Steel Authority of India 4QFY2011 performance highlights and results update

May 17, 2011, Tuesday, 11:55 GMT | 06:55 EST | 15:25 IST | 17:55 SGT
Contributed by Angel Broking


By Angel Broking

 

 

SAIL reported net sales of Rs.11,945cr, below our estimate of Rs.13,307cr for 4QFY2011. However, net profit at Rs.1,507cr was slightly below our estimate of Rs.1,566cr. Lower-than-expected sales volume led to deviation in the top line.


Lower sales volume – A negative surprise: SAIL’s 4QFY2011 sales volume declined by 3.5% qoq and 7.8% yoy to 3.1mn tonnes, while higher realisation (up 11.1% qoq and 8.4% yoy to Rs.38,101/tonne) led to 7.2% qoq growth in the top line to Rs.11,945cr, though flat yoy. Despite higher realisation, EBITDA/tonne declined by 21.4% yoy to US$156; however, up 26.5% qoq. This was due to higher coking coal and staff costs. Consequently, EBITDA margin contracted by 740bp yoy to 18.5%; however, up 239bp sequentially. As a result, EBITDA declined by 28.6% yoy to Rs.2,211cr (up 23.1% qoq). Further, net interest income declined by 13.5% yoy (up 18.8% qoq) to Rs.239cr and depreciation increased by 13.9% yoy to Rs.386cr (flat qoq), which resulted in a 27.7% yoy decline in net profit to Rs.1,507cr (up 36.1% qoq).


Outlook and valuation: At the CMP, the stock is trading at 8.5x FY2012E and 6.8x FY2013E EV/EBITDA, respectively. Going ahead, SAIL is expected to increase its saleable steel production capacity from 12.5mn tonnes to 23.1mn tonnes by FY2015. With captive iron ore backing the upcoming steel expansion, we expect strong profitability from these plants. Hence, we upgrade our rating to Buy from Accumulate with a revised target price of Rs.191 (Rs.195).

 

 


Result highlights


Net revenue was below estimates


During the quarter, sales volume declined by 3.5% qoq and 7.8% yoy to 3.1mn tonnes despite higher steel production at 3.4mn tonnes. However, on the positive side, average realisation for the quarter increased by 11.1% qoq and 8.4% yoy to Rs.38,101/tonne. Consequently, net revenue was flat yoy but grew by 7.2% sequentially to Rs.11,945cr.

 


EBITDA margin contracted due to higher coking coal cost


Despite higher realisation, EBITDA/tonne declined by 21.4% yoy to US$156; however up 26.5% qoq. This was due to higher raw-material and staff costs. Raw-material cost during 4QFY2011 grew by 13.4% yoy and 6.0% qoq to Rs.16,642/tonne mainly on account of higher coking coal cost. Similarly, staff cost increased by 35.8% yoy and 14.1% qoq to Rs.6,545/tonne. Consequently, EBITDA margin contracted by 740bp yoy to 18.5%; however up 239bp sequentially. As a result, EBITDA declined by 28.6% yoy to Rs.2,211cr (up 23.1% qoq).

 


During the quarter, exceptional items included a) write-back of provision of Rs.94cr on account of removal of over burden in mines and b) Rs.36cr write-back in respect to disputed electricity dues. Further, net interest income declined by 13.5% yoy (up 18.8% qoq) to Rs.239cr, while depreciation increased by 13.9% yoy to Rs.386cr (flat qoq), which resulted in a 27.7% yoy decline in net profit to Rs.1,507cr (up 36.1% qoq).

 


Outlook


World steel production has grown steadily…


World steel production has continued to grow steadily on mom basis since January 2009. Further (as per World Steel Association data), world steel consumption is expected to grow by 5.9% yoy to 1,359mn tonnes in CY2011 and by 6.0% yoy to 1,441mn tonnes in CY2012.

 


…while raw-material prices remain high…


Strong demand in China has led to an increase in international spot iron ore prices to over US$180/tonne. The flooding in Australia during December 2010– January 2011 has severely hit mining operations in Queensland, which accounts for ~50% of the world’s coking coal trade, which has resulted in a spurt in spot prices of coking coal since then. Contract price for coking coal for 1QFY2012 has been settled at US$330/tonne (+46.7% qoq).

 


…resulting in lower margins for steelmakers


While prices of key inputs, iron ore and coking coal, are near their 2008 highs, steel prices are significantly below their 2008 highs. Hence, we expect margins of steel companies to remain under pressure in FY2012 despite steel prices rising by 15–20% since January 2011. We believe the rise in prices of iron ore and coking coal will offset the rise in steel prices.

 


Investment rationale


Volume growth to double, albeit in 2–3 years


SAIL is expected to increase its saleable steel production capacity from 12.5mn tonnes to 23.1mn tonnes by FY2015 at a capex of Rs.70,000cr. With captive iron ore backing the upcoming steel expansion, we expect strong profitability from these plants. Also, we expect SAIL's older loss-making plants to be modernised as a part of its modernisation programme. Although there could be unexpected delays in its capacity expansion plans, we believe these projects have a greater possibility of sailing through compared to greenfield projects, which have multiple bottlenecks.

 


Product mix to improve


Post the expansion and modernisation of the steel plants, SAIL will benefit from the improvement in its product mix. Management plans to reduce sale of semis to nil post the expansion of its steel capacity. Semis constituted 19.7% of the company’s product mix in FY2010 (11% of the product mix in 4QFY2011). Moreover, contribution of structural steel is expected to improve to 15% from 4.5% currently.

 


Outlook and valuation


At the CMP, the stock is trading at 8.5x FY2012E and 6.8x FY2013E EV/EBITDA, respectively. SAIL is expected to increase its saleable steel production capacity from 12.5mn tonnes to 23.1mn tonnes by FY2015. With captive iron ore backing the upcoming steel expansion, we expect strong profitability from these plants. Also, we expect SAIL's older loss-making plants to be modernised as a part of its modernisation programme. Although there could be unexpected delays in its capacity expansion plans, we believe these projects have a greater possibility of sailing through compared to greenfield projects, which have multiple bottlenecks. We upgrade our rating on the stock to Buy from Accumulate with a revised target price of Rs.191 (Rs.195).


We have lowered our sales volume estimates by 6.7% for FY2012, while we have slightly raised our volume estimates by 1.4% for FY2013. Further, we have slightly raised our price assumption for FY2012. EBITDA margin has been lowered to factor in the higher raw-material costs, employee costs and royalty expenses.