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Emkay
Steel Authority of India Ltd.
Research
Results in line- expansion on track
C-6, Ground Floor, Paragon Center Pandurang Budhkar Marg, Worli, Mumbai – 400 013. India
 
 
31 January 2008
Not Rated
Price Target PriceRs220 N.A.
Sensex – 17,759Price Performance
 
(%) 1M 3M 6M 12M
Absolute (23) (16) 52 94
 
Rel. to Sensex (12) (6) 28 56
 
Source: Bloomberg 
Stock Details
 
Sector Metals& MiningReuters SAIL.BOBloomberg SAIL@INEquity Capital (Rs mn)41304Face Value (Rs) 1052 Week H/L (Rs) 293/92Market Cap (Rs bn) 907.4Daily Avg Vol (No of shares) 10947930Daily Avg Turnover (USD mn) 71.8
Shareholding Pattern (%)
 
(31st Dec.’07)
 
Promoters 85.8FII/NRI 6.3Institutions 5.5Private Corp. 0.6Public 1.8
Vishal Chandak
vishal.chandak@emkayshare.com +91 22 6612 1251
Chirag Khasgiwala
chirag.khasgiwala@emkayshare.com +91 22 6612 1254
We attended the conference call of Steel Authority of India Ltd. (SAIL) for 3QFY08results. SAIL reported net sales of Rs95.3bn (yoy up 11.7%, qoq up 4.0%), EBITDA ofRs29.8bn (yoy up 22.7%, qoq up 13.5%) and PAT of Rs19.3bn (yoy up 31.5%, qoq up13.8%). SAIL reported FDEPS of Rs4.68. The results are in line with estimates. Duringthe quarter, the company reported EBITDA margin of 31.3% (yoy up 281bps, qoq up260bps). SAIL’s expansion plans are running as per schedule and managementexpects the expansion to be completed by Sep ‘10. The total capex stands atRs530bn, which will be funded through a debt/equity ratio of 1:1. The companycurrently has a cash balance of Rs106bn and a very comfortable gearing of 0.13:1.
The key takeaways from the concall are as under:-
n
The company’s expansion plans are progressing as per schedule. It has issued tendersfor 100% of the equipments required and has already placed orders for 30% of the totalequipments. SAIL expects the plants to be operational by Sep ‘10. 
n
The total capex plan stands at Rs530bn, which will be funded through a debt/equityratio of 1:1. 
n
Out of the total capex, SAIL will be spending Rs20bn in FY08 and Rs46bn in FY09. 
n
SAIL’s raw material cost declined to 28% of net sales (yoy down 612bps, qoq down465bps). This was primarily because of imported coking coal which is on long termcontract. The company is sourcing 80% of coal on long term agreement; 70% of thetotal long term agreement at USD96/t (FOB) from Australia and Canada. Balance 30%indigenously sourced at a landed cost of Rs4,000-4,500/t. The annual coking coalagreements will be negotiated by Jun ’08. We expect the prices coking coal prices toincrease in excess of 20% for the period July ’08 to Jun ’09.
n
SAIL has received the approval from government to source upto 90% of their coalrequirement on long term agreement as compared to 80% earlier, enabling them to tieup higher quantity of coking coal under long term contracts in a scenario where spotprices are significantly higher than the contract prices.
n
Personal cost increased to 18% of net sales (yoy up 356bps, qoq up 166bps). This wasprimarily because of higher actuarial provision as per AS15. The company hasaccounted for Rs4bn of the provision in 3QFY08 and will be accounting for the balanceRs3bn provision in 4QFY08.
n
Spot freight (from Australia) rate is currently around USD40-45/t. SAIL has entered intolong term freight agreement for 5 years at an average rate of USD38/t. However, this isexpected to come down to around USD35/t. 
n
During 3QFY08, realization for long products increased by 14% yoy and for flatproducts by 10% yoy. This is primarily because of increasing share of value-addedproducts and declining share of semi finished steel. The contribution of semi finishedsteel declined to 80% in 3QFY08 as compared to 84% in 3QFY07. 
n
The company expects modest volume growth in the range of 5-10% over the next 2yrsthrough de-bottlenecking and modernization.
Valuation
At the CMP of Rs220, the stock is trading at 10.6x FY09 consensus estimates of Rs20.7.We do not have a rating on the stock, but considering the company’s expansion plans, weremain positive on the stock.
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. Concall Update
 
Emkay
 Research 
 
31 January 20082
Quarterly results summary
3QFY08 3QFY07 % yoy 2QFY08 % qoq
Saleable Steel production -('000 tonnes) 3,365 3,300 2.0% 3,250 3.5%
Net Sales 95,333 85,371 11.7% 91,635 4.0%
ExpenditurePurchase & R/M cons 32,521 31,660 2.7% 29,636 9.7%Change in stock -5,540 -2,274 143.6% 562 -1086.2%Total cost of goods sold 26,982 29,386 -8.2% 30,198 -10.7%
Adj Gross profit 68,351 55,985 22.1% 61,437 11.3%Gross margin 71.7% 65.6% 612 bps 67.0% 465 bps
Personnel exp 17,097 12,273 39.3% 14,911 14.7%Purchase of power 7,125 6,536 9.0% 6,889 3.4%Stores and Spares 6,724 6,638 1.3% 6,778 -0.8%Other exp 7,572 6,222 21.7% 6,567 15.3%Total operating exp 38,517 31,668 21.6% 35,146 9.6%
EBITDA 29,834 24,316 22.7% 26,291 13.5%Ebitda margin 31.3% 28.5% 281 bps 28.7% 260 bps
Depreciation & amortization 3,160 3,299 -4.2% 3,012 4.9%
EBIT 26,673 21,017 26.9% 23,279 14.6%EBIT margin 28.0% 24.6% 336 bps 25.4% 258 bps
Interest 598 906 -34.0% 594 0.7%Interest income 2,955 0 0Other income 189 2,231 -91.5% 3,043 -93.8%PBT 29,219 22,342 30.8% 25,728 13.6%Provision for tax 9,873 7,630 29.4% 8,726 13.1%As a % to PBT 33.8% 34.2% -1.1% 33.9% 24 bps- Current tax 9,696 6,816 42.3% 8,606 12.7%- Deferred tax liability 110 751 -85.3% 53 110.1%- Fringe benefit tax 62 61 1.6% 67 -7.5%- Earlier Years 5 2 -
PAT 19,347 14,712 31.5% 17,002 13.8%Net margin 20.3% 17.2% 306 bps 18.6% 174 bps
Equity capital 41,304 41,304 41,304Reported EPS- Basic 4.68 3.56 31.5% 4.12 13.8%
- Diluted 4.68 3.56 31.5% 4.12 13.8%
All fig. in Rs mn except percentage and per share data 
Common size ratios
3QFY08 3QFY07 % yoy 2QFY08 % qoq
Net Sales 100% 100% - 100% -Raw material cost 34% 37% -297 bps 32% 177 bpsChange in stock -6% -3% -315 bps 1% -642 bpsCost of goods sold 28% 34% -612 bps 33% -465 bpsPersonal expenses 18% 14% 356 bps 16% 166 bpsPower cost 7% 8% -18 bps 8% -4 bpsStores & Spares 7% 8% -72 bps 7% -34 bpsOther expenses 8% 7% 65 bps 7% 78 bpsEBITDA 31% 28% 281 bps 29% 260 bpsDepreciation 3% 4% -55 bps 3% 3 bpsInterest expense 1% 1% -43 bps 1% -2 bpsInterest income 3% 0% 310 bps 0% 310 bpsOther income 0% 3% -242 bps 3% -312 bpsPAT 20% 17% 306 bps 19% 174 bps
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