SAIL can outperform, says Verma
Sanju Verma, MD & CEO of Violet Arch Capital Advisors is of the view that Steel Authority of India (SAIL) can outperform.
March 14, 2013 / 14:57 IST
Sanju Verma, MD & CEO of Violet Arch Capital Advisors is of the view that Steel Authority of India (SAIL) can outperform.
Verma told CNBC-TV18, "The performance of some of the offer for sale (OFS) issues in the last two and half months has been pretty much lackluster. Look at NMDC for instance, the OFS was done well below Rs 150 in the region of about Rs 146-Rs 147. This was after the stock had already fallen 15 percent prior to the OFS. The stock has been hovering in and around the Rs 144-Rs 145 levels."She further added, "The point I am trying to make is despite a steep fall prior to the OFS, the stock still haven't recovered. So there have been very few takers and ditto goes for Rashtriya Chemicals and Fertilizers (RCF). I think the OFS performances have left a lot to be desired. That said, between the three names that you ask me to pick from Nalco, SAIL and Neyveli Lignite, if I had to pick one, I would actually go with SAIL.""True, the performance for SAIL has not been very flattering either. About a year back every analyst on the street was talking of SAIL doing something like Rs 10-Rs 11 for FY13. For the first three quarters they have done earnings per share (EPS) of just about Rs 5. I will be happy if they end FY13 with an EPS of Rs 7. So, that speaks very little about the credibility of the earnings momentum for the company.""That said, FY14 will be pretty superior for SAIL on conservative estimates. My analyst tells me they are well on their way to doing an EPS of Rs 11, if not more. So, at Rs 11 on FY14 estimates, at a price of Rs 70 or Rs 72 is where it has been hovering at for the better part of last few weeks. The stock is available to you on price to earnings at less than 7 times. Given that it has a decent amount of cash on its balance sheet, ex-cash the stock is available at less than 6 times or 5 times. So, valuation wise there is huge amount of cushion and comfort," she added. "What has been a problem with SAIL and where I would like to see greater clarity before I decide to take the plunge and then go the whole hog is some clarity on the EBITDA per tonne. Remember, this was a company till about 18 months back which was doing an EBITDA per tonne of something like USD130- USD135 and for the last two quarters, for the September quarter and then again for the December quarter, the EBITDA per tonne has come crashing down to somewhere in the region of just about USD 70 to USD 75. If they can go back to the USD 120-130 then I think you have a good story in the making which again is the function of the capex, where government policy intervention on the supportive side comes into the picture."Verma said, "Government policy intervention unfortunately has not been supportive, it has been quite contrary. Don’t forget that they have a current capacity of about 12 million tonne. They were slated to do something like 25 million tonne by the end of FY15. Now, I am told they will do 25 million tonne perhaps by the end of FY17 or even FY18. The expansion calendar was the big story for SAIL. The expansion calendar itself has been pushed back by two and half years. That is what has done the price in. But, if there is clarity on that front I think there is reason to believe that SAIL can outperform.""Given that international coking coal prices have still been pretty much on the softer side and don’t forget coking coal prices was something like USD 325 a tonne two years back, USD 200 a tonne plus a year back, currently they are in the region of USD 180. So they will continue to benefit from lower commodity prices and even if there is a 5 percent uptick in finished product prices, they sell at about Rs 38,000 a tonne. If there is a 5 percent uptick given the huge elasticity of earnings to a small change in end products prices, SAIL stands to benefit.""My analyst tells me that if there is a 5 percent change in key product prices, it actually increases SAIL’s EBITDA and net profit between 25 percent and 40 percent. That is the kind of elasticity impact it will gain from. I would like to believe that given a choice, I would some time stick my neck out for SAIL. The other two, I would let them go by," Verma added. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
