Last Updated : Sep 20, 2017 12:13 PM IST | Source: Moneycontrol.com

Is turnaround in sight for SAIL?

The year will mark a significant deviation from the past when production had remained stagnant at about 12 million tonnes in the last five years. There are positive signs that SAIL is on a stronger growth trajectory.

 
 
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Steel Authority of India (SAIL), which for many years struggled because of lack of capacity, is finally in the last leg of expansion. The year will mark a significant deviation from the past when production had remained stagnant at about 12 million tonnes in the last five years. There are positive signs that SAIL is on a stronger growth trajectory. It reported 7 percent growth in sales during the first five months of the current fiscal to 5.5 million tonnes.

Importantly its capacity expansion is getting complete at a time when demand and prices are improving. There are ample reasons to believe that the outlook for India’s long term steel consumption is positive. With significant investments lined up for infrastructure, defence, railways, smart cities, bullet trains, housing for all and a delayed but revival of private capex, steel companies too will see their share of gains particularly in the light of consolidation in the sector with very few players surviving post the last down cycle.

Sitting on huge assets

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SAIL is undergoing Rs 62,000 crore steel expansion plan thereby increasing its present capacity from 14.3 million tonnes to 21.4 million tonnes. Its balance sheet holds close to 30 percent of the capital employed or Rs 23000 crore under project that are under implementation (capital work in progress).

Once these capacities are operational and ramped up they will have a significant impact on earnings. The company will benefit because of higher capacity, better realisations and operating leverage in the business as a result of the scale of operation. Most of its expansion in capacity is at final stages.

Capacity ramp-up to impact earnings

In the current fiscal, the company is expected to produce 16 million tonnes and close to 18 million tonnes in FY19 as against 14 million tonnes in FY17. This additional 4 million tonnes, assuming current realisations at Rs 35000 a tonne, could add another Rs 14000 crore or close to 30 percent of its sales of Rs 50000 crore in FY17. What is important is, even if the realisations remain flat, which is unlikely, cost per tonne will come down and EBIDTA per tonne will improve thus leading to a significant jump in profitability.

To put it in perspective, today, the cost per tonne is around Rs 34000, which if it gets reduced to 31000 per tonne by FY19 would lead to an EBIDTA per tonne of Rs 3000/ tonne or consolidated EBIDTA of Rs 5490 crore.
Earnings  sensitivityCurrentAddition (till FY19)Combined
Production (million tonne)14.3418.3
Base caseBase caseBest caseBase caseBest case
Realisation (Rs)3400034000360003400036000
Cost per tonne (Rs)3390031000300003100030000
EBIDTA per tonne (Rs)1003000600030006000
EBITDA (Rs crore)12002400549010980

Moreover, SAIL is also looking at gaining retail market share with the focus on rural markets that are having low per capita consumption. The company aims to achieve this through branding, expanding reach and levering its larger dealer network, to help create market for the additional production and at the same time get better margins.

Valuations

SAIL has a market capitalisation of close to Rs 25,500 crore and debt of Rs 41300 crore translating to its enterprise value (value of entire business) of Rs 66,800 crore. Now if one removes the cash and capital work in progress, the value of the core business comes to around Rs 41000 crore, which is quite reasonable for a 14.3 million tonne capacity (possibly below replacement value). The stock is trading at 0.7 times its book value, which is again quite reasonable.

We have valued the business on the basis of assets as current earnings are depressed and difficult to ascribe a value to. The company incurred losses in the last two financial years. Between the year 2007-10, the company made an average EBITDA of Rs 9500 crore on a sales of Rs 12 million tonne steel. In FY19, despite the expected jump in saleable steel to about 17 million tonnes, the EBITDA will be half of average EBIDTA generated during fiscal 2007-10.But given the expected turnaround, the stock should find a place on the radar of savvy investors.
(Rs crore)FY16FY17FY18E
Sales387934421055305
EBITDA-2362-324260
EBITDA %-608
Net profit-4116-2493-847

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First Published on Sep 20, 2017 12:13 pm
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