SAIL losing competitive advantage; outlook bleak: Macquarie
SAIL looks cheap on asset valuations, but its competitive advantage has reduced by USD65-70/tonne due to a sharp fall in global iron ore prices, says Macquarie
Brokerage house Macquarie has reiterated its ‘underperform’ rating on state-owned steel major SAIL with a price target of Rs 63, saying the steep fall in iron ore prices has reduced the company’s competitive advantage.
“SAIL looks cheap on asset valuations, but its competitive advantage has reduced by USD65-70/tonne due to a sharp fall in global iron ore prices. This means that the expected improvement in SAIL’s margin post up-gradation/expansion will fail to materialize,” said the Macquarie note to clients.
The government plans to sell a 5 percent stake in the company through an auction on the stock exchange, and Steel Authority of India (SAIL) Friday, and has fixed the floor price at Rs 83 per share.
Iron ore prices have fallen over 50 percent so far in 2015 and Macquarie expects them to stay subdued at USD 70-75/tonne till FY17. and our
“SAIL with its captive iron ore cost of USD20-25/tonne enjoyed competitive advantage of USD 154/tonne between FY11-14; that has now reduced to just US$64/t. Excluding the margin due to cheap iron ore, SAIL’s steel conversion margin has been a negative of USD 61/t during FY11-14,” said the note, adding that with global steel industry operating at 80 percent capacity utilisation, a recovery looked unlikely.