Correction not yet over in Steel Authority of India (SAIL); Retain sell, says Nirmal Bang
SAIL stock price has declined 51 percent over the past six months compared to a 3 percent drop in the Nifty during the same period. We believe the correction is not yet over as weak demand, slow expansion project ramp-up and languid marketing strategies would ensure a downward revision in consensus earnings estimates for the coming quarters. We have fine tuned our earnings estimates based on the pricing trend over the past few months, leading to 9 percent/15 percent cut in our EBITDA estimates for FY14/FY15, respectively. The benefit from lower coking coal prices would be offset by rupee depreciation, while price hikes (following rupee depreciation) would be limited owing to weak demand. Our FY14/FY15 EBITDA estimates are 13 percent/29 percent below consensus projections, respectively, and our PAT consensus estimates are 23 percent/49 percent below consensus projections, respectively, for the same period.
1QFY14 production update: SAIL reported saleable steel production of 3.2mt, up 7 percent YoY and 3 percent QoQ. Although production performance remains decent, sales volume remains a key factor due to inventory build-up witnessed during the year-ago period. Reduction in consensus estimates likely to continue: SAIL witnessed 20 percent/26 percent decline in consensus FY14 EBITDA/PAT estimates, respectively, over the past six months and 31 percent/39 percent fall, respectively, over the past one year. Over the past six months, FY15 consensus EBITDA/PAT estimates witnessed 13 percent/21 percent drop, respectively. We believe the slide is not yet over and our EBITDA/PAT estimates for FY14 are 13 percent/23 percent lower, respectively, from consensus estimates. Our FY15 EBITDA/PAT estimates are 29 percent/49 percent lower, respectively, from consensus estimates.
Change in our earnings estimates: We have revised our earnings estimates following the new pricing assumptions on steel and coking coal. Although, we have cut global price estimates sharply, this has been mitigated by lower rupee-US dollar rate assumption. However, due to rupee depreciation our cost estimates have risen, largely pertaining to coking coal. We have increased our FY14 realisation assumption by 0.4 percent while FY15 realisation assumption has been lowered by 1.6 percent, although we have kept our volume estimates unchanged. We have raised our cost estimates per tonne by 1.7 percent/0.2 percent for FY14/FY15, respectively. Our EBITDA estimates declined 9 percent/15 percent for FY14/FY15, respectively, while PAT witnessed a drop of 18 percent and 31 percent, respectively, for the same period.
Valuation: "SAIL stock currently trades at P/E multiples of 9.4x and 12.5xr FY14E and FY15E earnings, respectively, while EV/EBITDA multiples are at 8.5x and 8.3x, respectively, for the same period. EV/EBITDA multiple, adjusted for capital work-inprogress, stands at 6.1x for FY15E, which is higher compared to the past 10 years’ average of 4.4x. We have retained our Sell rating on SAIL with a revised TP of Rs38 (4.8x FY15E EV/EBITDA), which is 20 percent below the CMP," says Nirmal Bang research report.
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