Sell SAIL - Disappointment abounds; Sales volume at 20-qtr low! - PINC Result Review

SAIL's EBITDA for Q1FY11 declined 2% YoY to Rs18.4bn, mainly due to a 17% decline in sales volume to 2.32mnt, a 20-qtr low, even though EBITDA/tonne grew 17% YoY to Rs7,943 on improved steel prices. PAT declined 12% YoY to Rs11.7bn on higher interest cost and lower treasury income. The company incurred Rs28bn in Q1FY11 towards its planned capex of Rs700bn.

OUTLOOK

We believe that steel margins would be under pressure in Q2FY11 due to sequential decline in steel prices amidst higher RM cost (coking coal contract price rose 12.5% QoQ to USD225/t). However, correction in raw material spot prices by 20-35% since April would lead to lower contract prices for Q3. We believe that this, aided by bottoming out of steel prices, should help improve operating margins Q3 onwards. We have assumed HRC price/tonne of USD650 and USD700 for FY11 & FY12 respectively.

VALUATIONS AND RECOMMENDATION

Although SAIL's exposure to infra-led domestic growth, strong balance sheet and significant resource integration do give some respite, our confidence in the stock is dented by huge volume disappointment, cost & time-overrun on ongoing capacity addition projects and large employee cost reducing benefits of captive iron ore. Moreover, impending 10% equity dilution through FPO in two tranches is additional overhang on the stock. We recommend 'SELL' with a target price of Rs184 (5x FY12E EV/EBITDA).

Source : Equity Bulls

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