Credit Suisse retains underperform on SAIL, valuations expensive

Moneycontrol Bureau

Credit Suisse has maintained underperform call on Steel Authority of India (SAIL) as the stock remained expensive even at FY18 EBITDA (earnings before interest, tax, depreciation and amortisation) and any deleveraging looks unlikely till FY19.

The brokerage says SAIL's surprise positive EBITDA (operating profit) per tonne in Q1 (USD 4 per tonne) raises a larger question on whether its turnaround is indeed under way, as its much delayed capex programme draws to a close.

It further says the company's capex (capital expenditure) programme is likely to be completed by FY17-end, though mining related capex will continue.

Its capex guidance for FY17 is Rs 4,000 crore while Q1FY17 capex was around Rs 1,140 crore. Net debt of the company was over Rs 34,000 crore in FY16.

EBITDA for the quarter was at around Rs 230 crore while analysts were expecting the company to post EBITDA loss of over Rs 300 crore.

So far, SAIL's deteriorating mix had been impacting margins. In steady state, this could add around USD 30-40 per tonne to average selling prices. SAIL's energy consumption too can revert back closer to Tata's (can add around USD 5-7 per tonne to margins) plus logistic optimisations could also save some costs, the brokerage feels.

However, the bigger risks to EBITDA, according to Credit Suisse, come from lower-than-expected volumes given SAIL's weak track record in tactically exploiting exports and personnel wages: not just from the impending hike but also from actuarial assumptions (discouted rate still at 8 percent).

It feels company's FY17 guidance of 14.5-15.0 million tonne looks ambitious.

The brokerage now expects a small positive FY18 EPS assuming 15.8 million tonne of sales (around 80 percent utilisation).