Bhavesh Chauhan, senior analyst-metals, Angel Broking advised investors to avoid SAIL OFS.
He believes even after a decline in stock price over the last three months, it is quite expensive. "At present volumes and high fixed costs are a key concern for SAIL," he said in an interview to CNBC-TV18.
Steel major SAIL's offer-for-sale (OFS) hit the market on Friday. The government currently holds 85.82 percent stake in the company and plans to sell 5.82 percent via the OFS route. The floor price of the issue was fixed at Rs 63 per share.
Given the slowdown in steel demand in India, he expects SAIL to be one of the worst performers going ahead. Angel Broking expects an earnings decline of 16 percent for SAIL in FY14.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: What is your recommendation on this offer for sale? What are you telling people to do?
A: We are telling investors to avoid the follow-on public offer (FPO). We believe that even after a decline in stock price over 20-30 percent over the last three months, it is quite expensive at 7.5 times, close to seven times FY15 EV/EBITDA.
Q: You are not in the camp which believes that valuations are compelling for the Steel Authority of India Limited (SAIL) issue at this price of Rs 63. You think other metal stocks offer better value?
A: In general we find very little value in metal stocks. Selectively we like some of the stocks. As far as SAIL is concerned, we have seen its volumes to be disappointing over the last four quarters.
Going forward also given the slowdown in steel demand in India, we expect SAIL to be one of the worst performers. Being PSU with lack of focus on marketing and fixed cost is very high compared to other steel players. Going forward, FY14 is not looking that great and we expect an earnings decline of 16 percent for SAIL in FY14.
Q: Some people are calling this an FY15 story including the fact that expansion then picks up but the track record in terms of expansion for SAIL hasn’t been great, has it?
A: That is another reason why we don’t like the stock. We have seen delays in capacity expansion plans and also some cost overruns. So, probably it might not be an FY15 story in our view, it might be a FY16 story.
We believe there is still time to play this volume growth story of SAIL. We would be looking to change our recommendation. Maybe within next one, one and half years that will be the right time to play the volume growth.