Dolat Capital is bearish on Steel Authority of India (SAIL) and has recommended 'Sell' rating on the stock with a price target of Rs 35 in its August 16, 2013 research report.
Dolat Capital's research report on Steel Authority of India (SAIL)
"SAIL Q1FY14 PAT at Rs 4.5bn was higher than our estimate as well as the consensus due to lower tax rate and a surprise increase in realizations by 1.3 percentQoQ. SAIL sounded confident of commissioning of its expansion projects but we remain circumspect about the substantial increase in commercial production, we factor only 0.5mn tonne and 1.2mn tonne in FY14E and FY15E respectively. We continue to maintain that it will be challenging for SAIL to sell incremental volumes without substantial margin erosion, given the large surplus in the domestic steel markets. We have reduced our valuation multiple (EV/ EBITDA) for SAIL to 5.5x from 6x (given the deteriorating balance sheet, overhang of wage revision on employee cost, and uncompetitive conversion cost). We continue to maintain Sell on SAIL with a price target of Rs 35 (5.5xFY15EV/ EBITDA+0.5x CWIP) weak steel price scenario, subdued demand and uncompetitive cost matrix."
"SAIL’s Q1 FY14 sales volumes at 2.62mn tonne (DCe:2.5mn tonne) were up by 4.8 percentYoY but decreased sequentially by 18.9 percent due to seasonality. Sales realisations rose by 2.4 percentQoQ to Rs 38573 as against our estimate of 1 percent fall in realizations. Net sales at Rs 102.6bn (-4.7 percentYoY/-16.7 percentQoQ) were marginally higher than our estimate of Rs 102.15bn. However key concerning part was the increase in inventory by 273000 tonnes to 1.45mn tonnes."
"Raw material cost per tonne fell by 10.7 percentQoQ to Rs 15483 per tonne as against our expectation of Rs 16904 per tonne. Employee cost increased by 15.2 percentYoY to Rs 22.94bn higher than our estimate of Rs 22bn as it provided Rs 1bn towards actuarial valuation."
"EBITDA declined 36 percentYoY but was up 5.8 percentQoQ to Rs 9.67bn (DCe: Rs 6.8bn) primarily due to higher realizations and lower cost. EBITDA per tonne improved by 30.5 percentQoQ to Rs 3692 per tonne but has fallen sharply by 39.1 percentYoY.Forex loss of Rs 878mn was lower than our est of Rs 1.1bn."
"Lower tax rate of 13 percent (DCe:33 percent) due to MAT credit entitlement coupled with higher operating profits led to sequentially flat profits at Rs 4.5bn higher than Dolat estimate of Rs 2.5bn and consensus estimate of Rs 2.9bn) . However PAT has fallen 35.3 percentYoY due to lower realizations, higher employee cost and interest cost," says Dolat Capital research report.
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