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Last Updated : Mar 22, 2013 12:32 PM IST | Source:

Accumulate SAIL; target of Rs 70: Emkay

Emkay Global Financial Services is bullish on Steel Authority of India (SAIL) and has recommended accumulate rating on the stock with a target of Rs 70 in its March 21, 2013 research report.

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Emkay Global Financial Services is bullish on Steel Authority of India (SAIL) and has recommended accumulate rating on the stock with a target of Rs 70 in its March 21, 2013 research report.

  • The government decided to offload 5.82% of its holding in SAIL in the first tranche through offer for sale (OFS) opening March 22 with an option to sell further 5% later
  • The government holding will come down 85.8% to 80%. At the floor price of Rs 63 per share, the government will mop up a minimum of Rs 15.14 bn
  •  Delay in projects and inventory of ~1.6 mt have been major concerns; our FY14 sales volume estimate stands at 12.6 mt; believe the stock is already factoring most of the concerns
  •  Valuations at Rs 63, looks good with 8.2xFY14 EPS and 0.6xFY14 P/ BV; Recommend Subscribe on an absolute basis, while upgrading the sock to Accumulate with TP of Rs 70

OFS to fetch Rs 15 bn for the government at Rs 63 per share The government is planning to offload 5.82% (~240 mn shares) of its holding in SAIL through an OFS to be held on Friday, 22th March, 2013. There is also an option to sell 5% more at a later date. After the successful subscription, the government holding will come down to 80% from current 85.82%. With the floor price at Rs 63 per share, the government would mop up Rs 15.14 bn under its ongoing divestment scheme. Poor market response has been an issue with the current divestments by the government, forcing it to offer lesser quantity of shares than earlier decided. 

Project delays, inventory remain major concerns As per the company’s plan, after the ongoing expansion, SAIL would have an annual saleable steel capacity of 20.2 mt (12.4 mt currently) during FY14. We however believe this would be extended beyond FY14, as most of the projects are delayed as of now due to various reasons. This remains the biggest concern for the company apart from the recent accumulation of inventory (~1.6 mt). Coupled with this poor domestic demand been impacting its operating performances. In this context, Q4FY13 performance would be important to understand the ability of the company improve upon its sales volume and margins considering the seasonality and lower coking coal prices. We see our volume estimate of 12.6 mt for FY14 reasonable however, Believe, as the company starts commissioning its upcoming projects in Rourkela and IISCO, it should boost the market sentiment.
Valuation- concerns seem mostly factored in: The stock has corrected 30% during past three months factoring in most of the concerns related to project delays and inventory accumulation. At the Rs 63, the stock would be available at 8.2xFY14 EPS and 0.6xP/ BV with dividend yield of 3.4%.FY14 EV/ EBITDA of 7.5 seems higher due to higher ongoing projects. We have revised our FY13 and FY14 estimates based on adjustments in the CWIP assumptions. We upgrade the stock to Accumulate with a target price of Rs 70 (5xFY14 EV/ EBITDA adjusting for CWIP). Recommend Subscribe in the OFS on an absolute basis. On the relative basis however, both Tata Steel and JSW Steel are also available at competitive valuations. 
FIIs holding more than 30% in Indian cos

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First Published on Mar 22, 2013 12:32 pm
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