Stock Review: STEEL Authority of India Limited’s (SAIL)

 

STEEL Authority of India Limited's (SAIL) stock has been on a downtrend since October last year and touched its 27-month low of 116.10 on 2nd August, consequent to rising concerns. Though delayed capacity expansions had been a cause of concern for some time and FY12 volumes are likely to remain flat, its margins were dented in the June quarter due to an increase in coal and employee costs. Further, the full impact of high coal costs is to be felt in the second quarter. The steel demand is also slowing and second quarter is likely to reflect this; volumes are expected to pick up only from third quarter onwards. With all these concerns, analysts have been reducing their forward guidance and earnings estimates for the company.

MARGINS UNDER PRESSURE

The June quarter saw increase in realisations, which is estimated to have come from a higher proportion of long products. However, most of the revenue growth was due to a 19 per cent increase in volumes year-on year; sequentially, though, volumes at 2.75 million tonnes were down by 12 per cent. Increasing coal costs, higher dearness allowance linked to wage costs and rising fuel expenses led to a margin compression. Thus, SAIL's earnings before interest, tax, depreciation and amortisation (Ebitda) declined to $97 a tonne, compared to $149 a tonne in previous (March) quarter and $163 a tonne in the year ago quarter.

Moving forward, the margins are expected to remain under pressure as the full impact of higher coal costs will be felt from the second quarter. In the first quarter, SAIL had used some carry-over coal. Further, analysts at Bank of America Merrill Lynch observe that SAIL may provide for wage rises for non-executive due in January 2012, pushing employee costs further. Thus, margins are likely to remain under pressure for the next few quarters.

CAPEX PLANS

As part of its expansion plans, the company aims to expand its saleable steel capacity from 12.6 mt in FY11 to 20.2 mt in FY15. However, the expansions are moving at a slower pace and may not come up on schedule. PINC analysts in a report observe that persistent delays and cost overruns have led to the ballooning of capex costs of around $1,200 per tonne.

Analysts say it's 2 mt per annum Rourkela blast furnace may start functioning by the end of FY12, and the integrated steel plant by mid FY13. Further, expanded steel production at the IISCO plant in Burnpur, West Bengal, will only start by that time. While the company's management has guided for flat volumes in FY12, analysts have lowered their volume estimates. Analysts at Religare Securities have reduced their volume estimates to 12.4 mt for FY12 and 13.7 mt for FY13.

OUTLOOK

With all these concerns, a majority of analysts maintain a 'hold' to 'sell' rating on the stock; only 38 per cent of analysts have gone for the 'buy' rating, as per the data from Bloomberg. At

`118.30, the stock trades at 9 times its FY12 with consensus on earnings estimates.