India Infoline analyst Tarang Bhanushali believes at a floor price of Rs 63 per share for its offer-for sale (OFS) issue, the SAIL stock prices in all the negatives. "We are recommending our clients to invest at the floor price," he said in an interview to CNBC-TV18. The much-hyped Steel Authority of India OFS hit the market today. The government will divest over 5 percent stake in the company to mop up around Rs 1,500 crore. The remaining 5 percent will be auctioned in FY14.
Moreover, at IIFL they expect SAIL to see marginal increase in volumes next year, which would lead to margin expansion. Bhanushali expects FY15 to be a bumper year for SAIL and the volumes would jump 14 percent YoY. He sees FY14 PAT increasing by 9.2 percent and FY15 by 16 percent.
"We have a one year target of Rs 72 on SAIL", he adds.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: What’s the advice? At the floor price of Rs 63, what should an investor do with SAIL?
A: We are recommending our clients to invest at the floor price. We believe at the floor price, most of the negatives are priced in. On the valuation front, it looks a bit cheap compared to its historical average. In the last few months the stock has been battered down, so we believe the current valuations are good for someone who is looking to invest in the steel space.
Q: It appears like it is only a valuation bet, isn’t it. What is the current valuation that Rs 63 implies and what kind of EPS growth are you penciling in?
A: Next year we expect to see an improvement in margins because the steel realisations which we had expected to be lower have in fact improved over the last two months. The input cost like coking coal prices have come down largely on a year-on-year (YoY) basis and also there would be new capacities which would be commercialised in the second half of FY14, which would lead to higher volumes.
So, we believe in the next year SAIL would have a marginal increase in volumes plus an improvement in margins which would lead to higher profitability. We expect the year FY15 to be a bumper year for SAIL and the volumes would jump 14 percent YoY. Since, SAIL has a high fixed cost nature, the increased in volumes would lead to margin expansion over there too.
On the profit after tax (PAT) front, we expect FY14 PAT to increase by 9.2 percent and FY15 by 16 percent.
Q: The government this time around is only selling part of what they had initially planned for which means that there is a possibility that there is a second tranche of a SAIL OFS coming through perhaps, maybe next fiscal. Would that imply that there is going to be more supply pressure and therefore the stock price remains subdued and they might have to once again go ahead for a big discount to sell that second tranche in SAIL if it has to be?
A: I don’t think that the government would sell at a discount to the current price, in the second tranche. The reason behind the reduction in the offer-for-sale is largely because on the pricing. The government had expected the OFS floor price to be somewhere around Rs 70-75 against Rs 63 which has been given now. I believe that in the second tranche, if market conditions improve the price would be higher and would not be at a discount from the current floor price.
It is true that the upside would be capped because of increase in supply but we believe the downside again is quite limited in the near term.
Q: So if someone buys at Rs 63 from a one year time horizon, what could be the kind of upside he could be staring at?
A: We have a one year target of Rs 72 on SAIL. Maybe 14 percent from the floor price is what we are expecting over the next 9-12 months.
Q: They have a big capex that comes on stream in 2015. Are you penciling that they come in on time; they will stick to the schedule?
A: What we have seen is that capacities which were expected in FY12 have been pushed and I believe few of the capacities would be commissioned in the second half of FY14. That is where we would see the volume growth coming into.
There would be some capacities which would come in second half of FY15 but I expect two-three plants to be commissioned in second half of FY14 and that would lead the volume growth in FY15.