Hold SAIL; target of Rs 108: BP Equities

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Hold SAIL; target of Rs 108: BP Equities

BP Equities has recommended hold rating on Steel Authority of India (SAIL) with a target of Rs 108, in its August 4, 2011 research report.

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BP Equities has recommended hold rating on Steel Authority of India (SAIL) with a target of Rs 108, in its August 4, 2011 research report.

"Steel Authority of India Ltd's (SAIL) Q1FY12 earnings were below street estimates. The company reported19.7% growth in sales turnover at Rs. 118.91 bn YoY, however profit after tax (PAT) was lower by 29% at Rs. 8.38 bn YoY due to sharp increase in input costs and employee cost. There were non-recurring expenses like increase in Dearness Allowances (DA) which had impact of Rs1.1 bn and gratuity which had impact of Rs. 900mn."

"For the quarter, SAIL had to bear additional expenditure of nearly Rs. 5.80 bn on cost of coal alone. Of this, around Rs. 4.22 bn was on account of higher cost of imported coking coal. Prices of coking coal went upto $330 in Q1 of FY12 as compared to $200 per tonne in Q1 FY11 due to floods in Australia thereby disrupting supply. Management expects prices of coking coal to soften in next 3 to 4 months. After the price rise in month of January and February 2011 which was majorly cost push price rise, steel prices have softened in past two months on the back of sluggish demand. Also second quarter is seasonally weak for all steel players with slow down in infrastructure work. The ongoing expansion has been planned to achieve saleable steel production of 20.23 million tonne, at a cost of Rs. 391.31 bn (USD 8.7 billion) approximately. Cumulative Capex till June 2011 is Rs. 313.06 bn. It has spent Rs. 2006cr in Q1FY12. The capex is funded partly through debt and equity which is likely to increase borrowings which currently stands at Rs. 21000cr."

"At current price of Rs. 118 the stock is trading at stock is trading at P/E of 10x and P/B of 1.3x. SAIL has a robust project pipeline, however there is delay in execution of projects is the worrying factor and benefits of volume growth is now shifted beyond FY2013. In view of the higher input costs, delay in the company's expansion plans and uncertainty on timing of proposed FPO, we recommend HOLD rating with target price of Rs 108 on SAIL," says BP Equities research report.

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To read the full report click on the attachment