Stock Market Result Update on Steel Authority of India for 2QFY2012

Stock Market Result Update on Steel Authority of India for 2QFY2012 with an Neutral recommendation.

For 2QFY2012, SAIL reported net sales of `10,837cr, slightly below our estimate of `11,135cr. However, adjusted PAT at `1,003cr was above our estimate of `836cr. We recommend a Neutral rating on the stock.

Lower volumes mute 2QFY2012 net sales growth: During 2QFY2012, net sales grew by 2.2% yoy to `10,837cr (slightly below our estimate of `11,135cr) mainly due to increased realization (up 8.7% yoy to `38,023/tonne), partially offset by lower sales volume (down 5.9% yoy to 2.9mn tonnes).

Power, fuel and staff costs dent SAIL’s EBITDA: Despite 8.7% yoy growth in realization, EBITDA dipped by 13.9% yoy to `1,327cr and EBITDA margin contracted by 230bp yoy to 12.2% mainly due to higher power and fuel (up 28.2% yoy) and staff costs (up 16.5% yoy). EBITDA/tonne stood at `4,657 in 2QFY2012 compared to `5,090 in 2QFY2011.

Forex loss hits net profit: SAIL reported an exceptional item related to forex loss of `509cr in 2QFY2012 compared to forex gain of `153cr in 2QFY2011. Hence, net profit decreased by 54.6% yoy to `495cr. However, excluding exceptional items, adjusted net profit grew by 7.0% yoy to `1,003cr in 2QFY2012.

Outlook and valuation: SAIL is expected to increase its saleable steel production capacity from 12.5mn tonnes to 23.1mn tonnes by FY2015. Also, we expect SAIL's older loss-making plants to be modernized as part of its modernization program. However, the company has reported delays in its expansion plans. The stock is currently trading at a 9.1x and 6.4x FY2012 and FY2013 EV/EBITDA, respectively. Given the company’s modest volume growth in the near term and fair valuations, we have a Neutral view on the stock.