steel authority of india limited -...

Firstcall India Equity Advisors Pvt Ltd

STEEL AUTHORITY OF INDIA LIMITED

HOLD

CMP: Rs.164.50 Market Cap: Rs.679450.8mn.

Date: 2 Nov,2009

Key Ratios:

Particulars FY08 A FY09 A FY10E FY11E

OPM(%) 32 25 28 29

NPM(%) 19 14 16 16

ROE(%) 33 22 19 17

ROCE(%) 45 27 23 22

P/BV(x) 4.66 1.33 1.98 1.64

P/E(x) 14.25 6.03 10.65 9.65

EV/EBDITA(x) 2.87 6.21 6.60 6.19

Debt

Equity(x)

0.13 0.27 0.24 0.22

Key Data:

Sector Steel Sector

Face Value 10.00

52 wk. High/Low (Rs.) 197.50/55.25

Volume (2 wk. Avg.) 1516580

BSE Code 500113

SYNOPSIS

• SAIL is India’s largest steel producing company.

With a turnover of Rs.48681 crore, the company is

among the top five higest profit earning corporates

of the country.

• It is a fully integrated iron and steel maker,

producing both basic and special steels for

domestic construction, engineering, power,

railway, automotive and defence industries and

for sale in export markets.

• The company plans to raise Rs 1,400 crore of the

capex in this year. In the first phase of its

expansion programme, the company is

augmenting its annual production capacity from

about 14 million tonnes to 23 million tonnes by

2012.

• The current quarter is not comparable with that in

the same quarter last year, as the current quarter

figures include the earnings of BRL, which was

merged with the company pursuant to the

government order in July.

• The topline of the company are expected to grow

at a CAGR of 3% over 2008A to 2011E.

• Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

[email protected]

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

[email protected]


Table of Content

Investment Highlights ................................................................................................................................... 3

Peer Group Comparison ................................................................................................................................ 7

Financials ....................................................................................................................................................... 8

Charts .......................................................................................................................................................... 10

Outlook and Conclusion .............................................................................................................................. 11

Industry Overview ....................................................................................................................................... 12


Investment Highlights

• Results Updates (Q2 FY10)

The bottomline of the company for the quarter was Rs.16634.90mn from

Rs.20096.00mn of same period of last year. The better-than-expected result of the

current quarter is not comparable with that in the same quarter last year, as the current

quarter figures include the earnings of BRL, which was merged with the company

pursuant to the government order in July. Total revenue for the second quarter stood at

Rs.100390.50mn from Rs.122385.90 which is 18% down increased than that of a year

ago period.EPS for the quarter stood at Rs.4.03 per equity share of Rs.10.00 each.

Expenditure of the company decreased 17% YoY to Rs.76507.00mn from Rs.92270.70mn

of same period of last year. Interest expenses for the quarter stood at Rs.735.00mn.

OPM & NPM for the quarter stood at 29% and 17% respectively.

The financial results of the quarter ended Sep. 30, 2008 and the year ended Mar. 31,

2009, do not include the figures of the erstwhile Bharat Refractories (BRL), and are

therefore not comparable with those of the current quarter year. The figures for the

current quarter include the results of erstwhile BRL, subsequent to its amalgamation

with the company.

The biggest impact on the profit was on account of lower price realisation. Last year, in

the second quarter, steel prices were at historic peak. The “adverse impact due to lower

price realisations” in the reporting period over that of a year ago was to the tune of Rs

3,000 crore. SAIL saved around Rs 1,000 crore in Q2 on account of the cost saving

measures

The company is hopeful of a better third quarter, as demand and prices almost

bottomed in the year-ago period.We expect demand growth in the third quarter, he

subscribes to the World Steel Association’s prediction of over 9 per cent growth in

India’s steel demand this year.


• Capex Plans

The company plans to raise Rs 1,400 crore of the capex in this year. In the first phase of

its expansion programme, the company is augmenting its annual production capacity

from about 14 million tonnes to 23 million tonnes by 2012.In the second phase, it will

ramp up the capacity by another three million tonnes.To feed its expanding capacities

the company is working towards raw material security and has entered into a lease

agreement with the Chhattisgarh government for iron ore mines.This will provide iron

ore security to Bhillai steel plant for next 30 years.


• Care reaffirms AAA rating to SAIL

Credit rating agency, CARE has reaffirmed a AAA rating to the Bond Programme of Rs

60,000 million (size enhanced from Rs 40,000 million) and Public Deposit Programme of

Rs 10,000 million of Steel Authority of India (SAIL). The outstanding bonds have been

raised in multiple tranches with tenure ranging from five years to 15 years. Further CARE

has reaffirmed a PR1+ rating to the Commercial Paper/Inter Corporate Deposit (CP/ICD)

programme of Rs 40,000 million (size enhanced from Rs 20,000 million) of SAIL. The

rating is mainly based on the credit enhancement in the form of an unconditional and

irrevocable guarantee from Ministry of Steel, Government of India (GoI).

• SAIL likely to cut steel prices by over Rs 500 a ton from Nov

SAIL may cut prices of its products by more than Rs 500 per ton in November on

weakening international trends.The company said that there is a need to reduce the

prices of flat steel products in line with softening international prices. Long steel prices

in India are also under pressure, the reduction could be higher than Rs 500 per ton.Steel

prices have globally softened up to USD 50 per ton mainly on account of over capacity at

Chinese steel mills.

• Govt to sell 10% stake in SAIL via FPO

Steel Authority of India (SAIL) announced that ministry of steel has given `in principle`

approval of department of disinvestment for further public offer (FPO) equivalent to

10% of existing paid-up equity capital by SAIL.Further it has sanctioned disinvestment of

equivalent size of equity held by the government of India in two discrete tranches, each

containing 5% of FPO + 5% offer for sale. This is subject to fulfillment of certain

conditions including obtaining approval of cabinet committee on economic affairs

(CCEA).

• SAIL pays final dividend of Rs 4.6 bn to govt

SAIL paid Rs 4,608.1 million to the government as final dividend for the last financial

year.The total dividend the company paid to its shareholders for the last fiscal totaled to

Rs 10,739 million, which is equivalent to 26% of SAIL`s paid-up equity capital of Rs

41,304 million. The government has been paid a total dividend of about Rs 9.21 billion in

2008-09.The steel ministry, which has given approval to the two-phased disinvestment

of its stake and issue of fresh shares of the company, holds 85.82% stake in SAIL.SAIL

said during the last three years, it has paid total dividend of Rs 38.83 billion, out of

which the government has received Rs 33.32 billion.

• SAIL seeks full control of Chiria mines


Steel Authority of India (SAIL), the prime stakeholder in Chiria mines, one of the world`s

largest source of good quality iron ore, has sought the full control of the over 2 billion

ton ore reserve estimated in the region.The fresh move from the state-owned steel

major is expected to dent plans of companies such as ArcelorMittal, JSW Steel, Essar

Steel and Tata Steel, which have been eyeing a portion of Chiria mines to serve their

proposed steel projects in the state. The Jharkhand government and SAIL have locked

horns over the ownership of the Chiria mines for more than three years. The state

continues to dispute SAIL`s claim over the mines in Chiria, which were allotted to the

Indian Iron & Steel Company (IISCO), which subsequently merged with SAIL four years

ago. In fact, the state government terminated three out of six mining lease of IISCO in

the Chiria to release iron ore resources for meeting the captive requirements of other

steel companies, including ArcelorMittal.

• SAIL to import 11 MT of coking coal in 2009-10

SAIL will import about 11 million tons of coking coal this fiscal, lower than the imports in

2008-09 due to the recession and the subsequent fall in demand. SAIL plans to import

10-11 million tons of coking coal this fiscal. Imports may bounce back to 13 million tons

of coal next fiscal as the company is witnessing a recovery in demand. Every month is

better than the past month.The official further added that this year imports are low

because of the recession and fall in demand. Imports for last fiscal stood at 13 million

tons.

Peer Group Comparison

Name of the

company

CMP

(As on2

Nov, 2009)

Market

Cap.

(Rs. Mn.)

EPS

(Rs.) P/E (x)

P/BV

(x) Dividend(%)

SAIL 164.50 679450.8 14.95 11.00 1.33

Tata Steel 471.60 418410.2 40.78 11.56 1.72 160

JSW 755.60 141334.0 38.13 19.82 1.86 10

Jindal Steel &

Power Ltd 640.25 595933.1 15.41 41.55

11.01 550


Financials

12 Months Ended Profit & Loss Account (Standalone)

Particulars FY 08 A FY 09 A FY 10 E FY11 E

(Rs.Mn) 12m 12m 12m 12m

Net Sales 402,141.60 442,084.30 402296.71 442526.38

Other Income 13,028.80 19,023.20 21876.68 24501.88

Total Income 415,170.40 461,107.50 424173.39 467028.27

Expenditure -285,618.90 -351,689.40 -310975.4 -340745.32

Operating Profit 129,551.50 109,418.10 113198.03 126282.95

Interest -2,509.40 -2,532.40 -3165.50 -3482.05

Gross Profit 127,042.10 106,885.70 110032.53 122800.90

Depreciation -12,354.80 -12,851.20 -13365.2 -13899.9

Profit before Tax 114,687.30 94,034.50 96667.29 108901.04

Tax -39,319.50 -32,286.40 -32866.9 -37026.4

Net Profit 75,367.80 61,748.10 63800.41 71874.69

Equity Capital 41,304.00 41,304.00 41,304.00 41,304.00

Reserves 189,331.70 238,537.00 302,337.41 374,212.10

EPS 18.25 14.95 15.45 17.40

*A=Actual, E=Estimated


Quarterly Ended Profit & Loss Account (Standalone)

Particulars Mar 09 A June 09 A Sep 09 A Dec 09 E

(Rs.Mn) 3m 3m 3m 3m

Net Sales 120,577.90 91,527.90 100,390.50 105410.03

Other Income 5,323.30 5,399.70 5,362.30 5630.42

Total Income 125,901.20 96,927.60 105,752.80 111040.44

Expenditure -99,320.60 -72,772.10 -76,507.00 -80217.03

Operating Profit 26,580.60 24,155.50 29,245.80 30823.41

Interest -411.7 -827.7 -735 -793.80

Gross Profit 26,168.90 23,327.80 28,510.80 30029.61

Depreciation -3,298.20 -3,268.70 -3,322.20 -3388.64

Profit before Tax 22,870.70 20,059.10 25,188.60 26640.97

Tax -8,003.90 -6,798.20 -8,553.70 -9046.90

Net Profit 14,866.80 13,260.90 16,634.90 17594.06

Equity Capital 41,304.00 41,304.00 41,304.00 41304.00

EPS 3.60 3.21 4.03 4.26


Charts


Comparative Graph

Outlook and Conclusion

• At the current market price of Rs.164.50, the stock trades at a P/E of 10.65x and 9.45x for

FY10E and FY11E respectively.

• On the basis of EV/EBDITA, the stock trades at 6.60x and 6.19x for FY10E and FY11E

respectively.

SAIL BSE SENSEX


• Price to Book Value of the stock is expected to be at 1.98 and 1.64 respectively for FY10E and

FY11E.

• The Net sales of the company are expected to grow at a CAGR of 3% over 2008 to 2011E.

• Out of about Rs 10,000 crore capital expenditure planned for this year to fund its expansion

programme, Roongta, SAIL has already raised about Rs 3,600 crore.

• The company plans to raise Rs 1,400 crore of the capex in this year. In the first phase of its

expansion programme, the company is augmenting its annual production capacity from

about 14 million tonnes to 23 million tonnes by 2012.

• In the second phase, it will ramp up the capacity by another three million tonnes.To feed its

expanding capacities the company is working towards raw material security and has entered

into a lease agreement with the Chhattisgarh government for iron ore mines.This will

provide iron ore security to Bhillai steel plant for next 30 years.

• The government’s thrust on the infrastructure sector will give a fillip to steel demand in this

fiscal. The impact of the decline in prices was partially offset by cost saving measures taken

by the company. Demand from sectors such as automobiles and white goods is also

encouraging.

• We recommend ‘HOLD’ in this particular scrip with a target price of Rs.181.00.

Industry Overview

The Indian steel industry entered into a new development stage from 2005–06, resulting in

India becoming the 5th largest producer of steel globally. Producing about 53 million tonnes

(MT) of steel a year, today India accounts for a little over 7 per cent of the world's total

production.

India is the only country worldover to post a positive overall growth in crude steel production at

1.01 per cent for the January-March period of 2009. The recovery in steel production has been

aided by the improved sales performance of steel companies. The steel sector grew by 5.3 per

cent in May 2009.


According to a report from Barclays Capital, China and India are going to provide the impetus

for steel demand for the next few years.

Production

Steel production grew at 1.2 per cent in the January-March quarter of 2008-09 over the same

period last year. The fourth quarter saw most of the large steel companies such as SAIL, Tata

Steel, Essar and JSW operating at full capacity.

The National Steel Policy has a target for taking steel production up to 110 MT by 2019–20.

Nonetheless, with the current rate of ongoing greenfield and brownfield projects, the Ministry

of Steel has projected India's steel capacity is expected to touch 124.06 MT by 2011–12. In fact,

based on the status of Memoranda of Understanding (MOUs) signed by the private producers

with the various state governments, India's steel capacity is likely to be 293 MT by 2020.

In the first 10 months of 2008-09, India's steel production went up to 46.8 MT up by 1.1 per

cent from last year.

Consumption

India accounts for around 5 per cent of the global steel consumption. Almost 70 per cent of the

total steel used is for kitchenware. However, its use in railway coaches, wagons, airports, hotels

and retail stores is growing immensely. Steel consumption grew at 5.2 per cent during the first

quarter of 2009-10 as against 3.8 per cent in the January-March quarter last year.

A Credit Suisse Group study states that India's steel consumption will continue to grow by 16

per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion.

The World Steel Association has forecast a 2 per cent growth in the country's steel consumption

in 2009, making it the only major economy to post an increase in a year that will see global

consumption of the metal fall by around 15 per cent. India is expected to consume 53.5 MT of

steel in 2009.

The scope for raising the total consumption of steel is huge, given that per capita steel

consumption is only 35 kg – compared to 150 kg across the world and 250 kg in China.

Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail

outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail

outlets called JSW Shoppe and is targetting to increase it to 200 by March 2010. They expect at

least 10-15 per cent of their total production to be sold by their retail outlets.

Essar Steel also has 150 such retail outlets of which 65 are hypermarts across India with the

latest one being opened in Orissa.


Exports

Out of India’s annual iron ore production of more than 200 MT, about 50 per cent is exported.

Iron ore exports increased 17 per cent to 12.6 MT in February 2009 from 10.8 MT in the same

month a year ago, owing to a moderate revival in demand from Chinese steel producers, as per

the latest data compiled by a group of top Indian mining firms.

Earlier, according to a study, with the rise in demand for steel in China, India’s iron ore exports

went up by 38 per cent to reach 13.6 MT in December 2008 against 9.8 MT in December 2007.

Around 50-60 per cent of India’s iron ore is exported to China.

India’s exports during April-December 2008 were 64.4 MT. The government has reduced export

duty on iron ore lumps from 15 per cent to 5 per cent, which has given a further fillip to

exports. Further, the reduction in railway freight has also benefitted the domestic iron ore

miners.

Investments

A host of steel companies have lined up major investment proposals. Furthermore, with an

expanding consumer market, the Indian steel industry is likely to receive huge domestic and

foreign investments.

• According to the Investment Commission of India investments of over US$ 30 billion in

steel are in the pipeline over the next 5 years.

• Arcelor-Mittal, the largest steel maker of the world, is planning to set up a captive port

near Paradip in Orissa. The port will be used to serve two mega integrated steel plants

of the company proposed in Orissa and Jharkhand.

• Tata Steel has raised US$ 500 million by issuing 'global depository receipts' (GDRs)

aiming at expansion of its Jamshedpur plant and overseas mining projects.

• Japanese steel major, Kobe Steel, has decided set up a subsidiary in Kolkata to market

its steel production machinery in India.

• Steel companies have committed US$ 122.50 million for setting up sponge iron units in

Koppal and Bellary in Karnataka.

• SAIL will invest US$ 724.12 million to set up a 4-million tonne per annum steel mill at its

Bhilai Steel Plant.

Government Initiative

Subsequent to the recent fall in international prices of commodities and to protect Indian

producers, the Indian government has announced some changes in customs duty rates, which

were effective from November 2008.


The government has removed full exemption of customs duty on some industrial and

agricultural commodities. Iron and steel products like pig iron, spiegeleisen, semi-finished

products, flat products and long products are now subject to a basic custom duty of 5 per cent

ad valorem.

The Indian government plans to invest over US$ 350 billion in industries related to

infrastructure and construction which will give a fillip to the steel sector.

Moreover, in the Union Budget 2009-10, the government has made a 23 per cent hike in

allocation for highway development and US$ 1.034 billion increase in budgetary support to

Railways which will further promote the steel industry.

Road ahead

While the demand for steel will continue to grow in traditional sectors such as infrastructure,

construction, housing automotive, steel tubes and pipes, consumer durables, packaging, and

ground transportation, specialised steel will be increasingly used in hi-tech engineering

industries such as power generation, petrochemicals, fertilizers, etc. The new airports and

railway metro projects will require a large amount of stainless steel.

According to an estimate, with the growing need for oil and gas transportation infrastructure, a

US$ 118 billion opportunity is waiting to be tapped by steel manufacturers in the next five

years. Indian steelmakers are set to make the most of booming global demand for steel pipes

and tubes with the government withdrawing the 10 per cent duty on the exports of these

products. According to a study by ICICI Direct, Indian steel companies are likely to get 19 per

cent of the total global demand in the years to come.

The Steel Ministry will propose two-tier empowered committees at the Centre and the States

to address mining disputes and other issues haunting the growth of the domestic steel sector.

The committee will propose setting up empowered committees at the state level and the

Central government level for deciding about mining issues, hinting at an early end to the

dispute over the ownership of the Chiria mines, hurting Steel Authority of India's (SAIL) growth.

SAIL wants early control of the Chiria mines in Jharkhand -- home to over 2 billion tonnes of

high-grade iron ore to feed its expanded capacity of 26.3 million tonnes, which is scheduled to

go on stream in 2011-12.

The steel major, which at present has an annual production capacity of 15 million tonnes, is

looking for central assistance to get ownership of the Chiria mines and its leases renewed.


"Either there should be some mechanism to expedite issues or at least the iron ore mines

should be transferred to the Ministry of Steel, adding that raw material insecurity is a major

obstacle in the country producing 124 million tonnes of steel by 2011-12.

_____________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but we do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.


Firstcall India Equity Research: Email – [email protected]

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