13 February 2015
3QFY15 Results Update | Sector:
Metals
SAIL
BSE SENSEX
29,095
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
AvgVal(INRm)/Vol ‘000
Free float (%)
S&P CNX
8,806
SAIL IN
4,130.4
309.8/5.0
113/54
-10/-20/-19
556/6,749
25
CMP: INR75
TP: INR44 (-41%)
Downgrade to Sell
In-line; pricing pressure ahead; downgrade to Sell
SAIL’s 3Q performance was weak, as expected. PAT, adjusting for INR2b gain on sale of
cement JV, declined 36% QoQ to INR4.2b. EBITDA declined 10% QoQ to INR12.1b,
driven by lower margins and lower volumes.
n
Sales volume declined 3% QoQ:
Steel sales volume declined 3% QoQ to 2.86mt on
poor demand. Inventories increased by 96kt to 1.354mt. Saleable steel production
declined 3% as well. ISP lit new blast furnace on 30 November and produced 155kt
hot metal, but hardly contributed to saleable steel.
n
Steel realization declined 4% QoQ:
Net sales realization (NSR) declined by
~INR950/t QoQ (-2%), while steel realization was down 4% QoQ to INR35,175/t.
Non-steel revenue increased INR1.1b QoQ.
n
EBITDA/t declined INR329 QoQ to INR4,224:
Lower P&F cost and coking coal
costs helped reduce cost of production by INR625/t partially absorbing NSR loss.
n
PBT declined 31% QoQ on capitalization:
Interest and depreciation increased 3%
and 19% QoQ due to capitalization of ISP, Burnpur from 30 November. PBT
(before EO) declined 31% QoQ to INR5.2b (in-line).
n
Pricing pressure ahead:
NSR is likely to decline further by INR1,500/t QoQ in
4QFY15, with more downside risk because import prices are 4,000-5,000/t lower
than current domestic steel prices. Build-up of steel inventories (3mt in 9MFY15 in
India) and continued import pressure could force another price cut.
n
Volumes significantly off target:
Despite commissioning of two new blast
furnaces, SAIL will once again finish the year with near flat volumes, significantly
missing the target of 8.3% growth in FY15. SAIL is unable to reap the benefit of
operating leverage due to delay in production ramp-up, and poor market
conditions.
n
Target price cut 37%; downgrade to Sell:
We are reducing FY16E realization and
EBITDA/t by USD20 to USD60/t and volumes by 100k to 14.2mt (+16.4% YoY). We
cut FY16E EBITDA by INR18b to INR53b and our target price by 37% to INR44.
Sell.
Financials & Valuation (INR Billion)
Y/E MAR
Sales
EBITDA
NP
Adj. EPS (INR)
EPS Gr(%)
BV/Sh. (INR)
RoE (%)
P/E (x)
P/BV
EV/EBITDA (x)
2015E 2016E 2017E
478.8 526.8 605.6
56.7
22.1
5.3
58.9
9.3
2.3
72.7
12.3
3.0
32.1
2.8
25.1
0.7
9.3
16.5 -57.8
5.0
14.0
0.7
10.0
2.1
33.2
0.7
10.6
108.2 108.1 108.7
Estimate change
TP change
Rating change
37%
Sanjay Jain
(SanjayJain@MotilalOswal.com); +91 22 3982 5412
Dhruv Muchhal
(Dhruv.Muchhal@MotilalOswal.com); +91 22 3027 8033
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

SAIL
3Q results review
In-line; Realization decline partially absorbed by cost reduction
n
n
n
Revenue was down 5% QoQ (-3% YoY) to INR111b. Steel sales volumes were
down 3% QoQ to 2.86mt, in line with our estimate, on poor domestic demand.
Volume performance was weaker than its peers – JSW Steel had reported 1%
QoQ drop in steel sales volume, while Tata Steel India volumes were up 1%
QoQ. Saleable steel production was also down 3% QoQ to 3.2mt. Finished steel
inventories rose 96kt during the quarter to 1.354kt. While the ISP blast furnace
was commissioned on Nov 30
th
and produced 155kt of hot metal, contribution
to saleable steel was insignificant.
Blended net realization was down 2% QoQ (~INR950/t) to INR38,837/t. Pure
steel business realization were down by ~INR1,500/t. This is broadly in line with
QoQ decline for JSW Steel, but lower than Tata steel India. Non-steel revenues
grew to INR10.4b from INR9.3b in 2Q.
EBITDA/t was down 7% QoQ (~INR330) to INR4,224. Decline in realization
(~INR950/t) was partly offset by lower coking coal and power & fuel cost.
Increase in rail freight, port congestion charges, and higher cost of limestone
and dolomite had inflationary impact on raw material cost. EBITDA was down
10% QoQ to INR12.1b on drop in margins and volumes.
Exhibit 1: Quarterly trends in cost
1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15
Net Sales Realization (INR/ton)
Volumes (m tons)
Sales
Prodn. (net of interplant transfer)
Expenditure (INR m)
Inc(-)/Dec in stock & captive cons.
Consumption of Raw Materials
Staff cost
Power & Fuel
Other Expenditure
EBITDA
Costs per ton of production (INR)
Inc(-)/Dec in stock & captive cons.
Consumption of Raw Materials
Staff cost
Power & Fuel
Other Expenditure
EBITDA per ton
of sales volumes
43,110
2.5
2.9
41,362
2.6
2.9
38,800
2.8
3.0
-7,143
52,974
20,815
11,140
17,531
11,384
-2,416
17,920
7,041
3,769
5,931
4,140
38,533
3.2
2.8
11,264
45,274
24,734
12,185
20,808
9,039
4,023
16,169
8,834
4,352
7,431
2,825
39,190
2.6
2.9
-6,110
46,676
22,948
11,526
17,967
9,673
-2,116
16,168
7,949
3,992
6,223
3,692
38,260
3.0
3.0
4,556
46,927
24,954
12,977
17,272
8,669
1,501
15,462
8,222
4,276
5,691
2,875
38,647
3.0
3.0
-3,739
50,819
22,678
12,298
21,211
11,320
-1,261
17,140
7,649
4,148
7,154
3,818
38,931
3.5
3.1
14,240
48,297
25,206
12,621
22,520
12,208
4,549
15,430
8,053
4,032
7,195
3,518
41,166
2.8
2.8
-439
44,267
24,585
13,223
20,478
11,298
39,791
2.9
3.1
-596
43,691
23,645
14,751
21,931
13,364
38,837
2.9
3.0
-6,506
46,665
23,003
13,508
22,322
12,081
-13,073 -11,209
56,427 57,342
19,925 20,898
12,240 12,739
17,104 17,339
15,153 11,093
-4,582
19,779
6,984
4,290
5,995
6,061
-3,841
19,651
7,162
4,366
5,942
4,241
-158
-194 -2,201
15,946 14,246 15,786
8,856
7,710
7,782
4,763
4,810
4,570
7,377
7,151
7,552
4,101
4,553
4,224
Source: MOSL, Company
n
n
Inventories during the quarter rose by INR6.5b, the highest absolute increase
since 1QFY14. This is the 3
rd
consecutive quarter of increase in inventory.
Inventories rose as SAIL held of market sales to some extend due to sharp
decline in domestic steel prices. If prices remain at current levels, management
mentioned, it would dispose of the inventory in the month of March.
Profit on sale of cement business JV led to a gain of INR2b (considered as
exceptional).
2
13 February 2015

SAIL
n
n
Adjusting for the profit on JV sales, PAT was down 36% QoQ to INR4.2b, largely
in line with our estimate. Interest cost rose by 3% QoQ (to INR3.7b), while
depreciation charge increased by 19% QoQ (to INR4.7b) primarily on
capitalization of ISP, Burnpur. Other income was down 10% QoQ to INR1.4b.
Reported net debt increased by INR27b in the quarter to INR253b. Capex spend
in 3Q stood at INR19.8b. For FY16, SAIL plans capex spent of INR75b, implying
~INR25b capex in 4Q.
Margin pressure ahead; Downgrade to Sell
Pricing pressure ahead
n
Volumes significantly off
target
n
Target price cut 37%;
downgrade to SELL
n
NSR is expected to decline further by INR1500/t QoQ in 4QFY15 with more
downside risk because import prices are nearly 4000-5000/t lower than current
domestic steel prices. Buildup of steel inventories (3mt during 9m in India) and
continued import pressure will likely force another price cut.
Despite commissioning of 2 new blast furnaces, SAIL will once again finish the
year with near flat volumes, significantly missing target of 8.3% growth in FY15.
SAIL is unable to reap the benefit of operating leverage due to delay in
production ramp up, and poor market conditions.
We are reducing FY16 realization and EBITDA/t by USD20/t to USD60/t and
volumes by 100k to 14.2mt (+16.4% YoY). EBITDA is reduced by INR18b to
INR53b and target price is cut 37% to INR44.
Key catalyst over the next 12 months
n
n
Aggressive exports from Chinese/CIS suppliers.
Delay in production ramp up
Key risks
n
n
Currency depreciation which would increase cost of imported steel for domestic
consumers.
Tariff and non-tariff barriers to steel imports
Exhibit 2: Target price derivation
YEAR
Sales (m tons)
EBITDA (INR per ton)
EBITDA
Target EV/EBITDA(x)
Target EV
less: Net Debt (INR m)
add: CWIP (50% disc.)
Equity value
Target price (INR/sh.)
2013
11.1
4,628
51,212
2014
12.1
3,727
44,985
2015E
12.2
4,660
56,713
6.5
368,636
256,257
139,393
251,771
61
2016E
2017E
14.2
16.2
4,158
4,494
58,913
72,662
6.5
6.5
382,936
472,305
316,998
363,295
116,893
66,893
182,831
175,903
44
43
Source: MOSL, Company
183,642
361,549
229,317
339,585
13 February 2015
3

SAIL
Exhibit 3: Metal sector valuation
Rating
Steel
Tata Steel
SAIL
JSW Steel
JSPL
NMDC
Non-Ferrous
Hindalco
SSLT
Hindustan Zinc
Nalco
Buy
Sell
Buy
Neutral
Buy
Buy
Buy
Buy
Buy
Price MCAP
EPS
(INR) (USD M) FY14E FY15E FY16E
367
75
990
152
142
154
212
176
49
5,742
5,012
3,858
2,242
9,078
5,111
10,138
11,991
2,018
35.5
4.6
38.6
20.9
16.1
12.5
17.2
16.3
2.6
19.7
5.3
95.5
9.5
17.2
12.2
19.6
20.3
5.5
44.4
2.3
81.6
3.8
14.9
13.8
18.6
18.5
6.7
P/E (x)
FY15E FY16E
18.6
14.1
10.4
16.0
8.3
12.6
10.8
8.7
8.9
8.3
33.3
12.1
39.6
9.6
11.1
11.4
9.5
7.2
EV/EBITDA (x)
FY15E FY16E
7.5
10.0
6.5
8.9
4.4
8.6
6.4
5.4
3.1
6.7
10.7
6.8
9.2
5.3
P/B(x)
FY14E FY15E
1.4
0.7
1.1
0.6
1.9
1.1
0.7
1.0
0.7
1.7
7.0
1.3
1.3
6.3
0.8
0.8
4.6
1.6
1.4
2.0
1.0
0.9
Source: MOSL, Company
13 February 2015
4

SAIL
Story in charts
Exhibit 4: Volumes to increase at 10% CAGR FY14-17E
Volumes (mt)
16.2
6,429
5,343
4,217
3,469
4,183
3,748
4,135
Exhibit 5: But EBITDA/t to remain under pressure
EBITDA/t - INR
11.7
11.4
11.1
12.1
12.2
14.2
FY11
FY12
FY13
FY14E
FY15E
FY16E
FY17E
FY11
FY12
FY13
FY14E
FY15E
FY16E
FY17E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 6: Interest/depreciation to see steep rise
Interest - INR b
Depreciation - INR b
34
27
15
5
FY11
7
16
7
14
17
10
14
18
19
23
Exhibit 7: As capex spend will continue to remain high
Capex
Net Debt
3
17
14
27
62
114 101 95
89
93
90
75
60
FY12
FY13
FY14E
FY15E
FY16E
FY17E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 8: ROIC to decline further
98.5
71.9
47.9
63.6 60.5
37.2
21.6
14.4
8.8
9.3
6.0
6.0
Exhibit 9: SAIL 1yr fwd EV/EBITDA trading range
16
12
7.7
8
6.9
4
1.1
0
8.1
EV/EBDITA(x)
Median(x)
Peak(x)
Min(x)
Avg(x)
15.0
Source: MOSL, Company
Source: MOSL, Company
13 February 2015
5

SAIL
Financials and valuations
Income Statement (Consolidated)
Y/E March
Sales (m tons)
Change (%)
Net Sales
Change (%)
Total Expenditure
EBIDTA
Change (%)
EBITDA per ton (INR)
Depreciation
EBIT
Interest
Other income
PBT before EO
Extra ordinary Item
PBT
Current Tax
Defrred Tax
Total Tax
Effective Rate (%)
Reported PAT
Change (%)
Minority Interest
Adjusted PAT
Change (%)
2010
12.1
7.3
405,726
-7.3
311,118
94,608
9.0
7,806
14,296
80,312
4,740
26,909
102,482
464
102,946
33,432
1,049
34,481
33.5
68,465
9.5
3.2
68,153
9.3
2011
11.7
-3.2
433,994
7.0
354,567
79,427
-16.0
6,768
16,030
63,398
5,724
14,923
72,597
1,239
73,836
24,293
-598
23,696
32.1
50,140
-26.8
1.8
49,296
-27.7
2012
11.4
-2.9
466,582
7.5
402,541
64,041
-19.4
5,618
16,859
47,182
7,782
16,046
55,446
-2,620
52,826
15,234
1,663
16,897
32.0
35,930
-28.3
37,711
-23.5
2013
11.1
-2.9
450,872
-3.4
399,660
51,212
-20.0
4,628
15,297
35,916
8,465
9,451
36,902
-2,293
34,608
11,190
124
11,314
32.7
23,294
-35.2
24,836
-34.1
2014
12.1
9.1
471,012
4.5
426,026
44,985
-12.2
3,727
18,419
26,566
10,573
8,005
23,999
9,596
33,594
2,527
4,553
7,079
21.1
26,515
13.8
18,940
-23.7
2015E
12.2
0.8
478,841
1.7
422,128
56,713
26.1
4,660
19,604
37,109
15,345
5,385
27,150
1,998
29,148
631
4,822
5,453
18.7
23,694
-10.6
22,068
16.5
2016E
14.2
16.4
526,759
10.0
467,845
58,913
3.9
4,158
28,648
30,266
20,208
2,374
12,431
12,431
1,587
1,520
3,107
25.0
9,324
-60.6
9,322
-57.8
(INR Million)
2017E
16.2
14.1
605,551
15.0
532,889
72,662
23.3
4,494
34,823
37,840
23,574
2,006
16,272
16,272
2,317
1,636
3,952
24.3
12,320
32.1
12,318
32.1
Balance Sheet (Consolidated)
Y/E March
Share Capital
Reserves and Surplus
Share holders fund
Loans
Deferred Tax Liability
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr. Assets, Loans & Advances
Inventory
Sundry Debtors
Cash & Bank Balances
Interest Receivable/Accrued
Loans and Advances
Current Liabilities
Sundry Creditors
Other Current Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2010
41,304
296,086
337,390
176,378
14,301
528,079
374,194
223,104
151,090
153,822
447
91,617
36,235
227,185
7,863
36,618
71,240
41,155
64,407
222,717
528,079
2011
41,304
334,823
376,127
204,751
15,567
596,457
404,391
238,301
166,091
224,220
608
115,069
40,799
177,490
25,146
31,549
32,651
91,210
60,654
205,538
596,457
2012
41,305
361,426
402,732
173,606
17,817
594,155
440,657
253,014
187,643
283,157
685
138,989
48,478
66,623
22,669
36,711
33,236
97,603
59,962
122,670
594,155
2013
41,305
375,169
416,474
225,405
19,002
660,881
451,411
267,528
183,883
361,549
729
161,657
45,632
41,763
24,772
45,209
34,449
100,715
69,150
114,720
660,881
2014
41,305
391,761
433,067
260,896
22,222
716,184
566,469
283,515
282,953
339,585
565
153,655
55,006
31,580
24,249
52,656
32,218
130,415
61,432
93,082
716,184
2015E
41,305
405,693
446,999
310,896
27,044
784,939
717,269
303,119
414,149
278,785
565
150,868
45,916
54,639
24,249
53,530
45,916
130,415
61,432
91,440
784,939
2016E
41,305
405,255
446,560
350,896
28,564
826,021
837,269
331,767
505,502
233,785
565
165,965
50,511
33,898
24,249
53,903
50,511
130,415
61,432
86,170
826,021
(INR Million)
2017E
41,305
407,813
449,118
390,896
30,200
870,214
997,269
366,589
630,679
133,785
565
190,790
58,067
27,601
24,249
54,391
58,067
130,415
61,432
105,186
870,214
13 February 2015
6

SAIL
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value per Share
Dividend Per Share
Valuation (x)
P/E
Cash PE
EV/EBITDA
EV/Sales
EV( USD/Ton)
Price to Book Value
Profitability Ratios (%)
EBITDA Margin
RoE
RoCE (pre-tax)
RoIC (pre-tax)
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors (Days)
Working Capital (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2010
16.5
20.0
81.7
3.3
2011
11.9
16.0
91.1
2.4
6.3
4.7
4.2
0.8
463
0.8
23.3
22.0
23.5
60.5
33
82
84
-4
0.8
-0.2
18.3
13.8
13.9
37.2
34
97
34
24
0.7
0.1
2012
9.1
12.8
97.5
2.0
8.2
5.9
6.5
0.9
590
0.8
13.7
9.7
10.6
21.6
38
109
30
44
0.8
0.3
2013
6.0
9.3
100.8
2.0
12.5
8.0
9.6
1.1
1,088
0.7
11.4
6.1
7.2
14.4
37
131
31
59
0.7
0.4
2014
4.6
10.9
104.8
2.0
16.4
6.9
12.0
1.1
1,089
0.7
9.6
4.5
5.0
8.8
35
115
35
48
0.7
0.5
2015E
5.3
10.5
108.2
2.0
14.0
7.2
10.0
1.2
1,134
0.7
11.8
5.0
5.7
9.3
35
115
35
28
0.6
0.6
2016E
2.3
9.2
108.1
2.0
33.2
8.2
10.6
1.2
1,079
0.7
11.2
2.1
4.1
6.0
35
115
35
36
0.6
0.7
2017E
3.0
11.4
108.7
2.0
25.1
6.6
9.3
1.1
1,015
0.7
12.0
2.8
4.7
6.0
35
115
35
47
0.7
0.8
Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation & Amort.
Interest Paid
Direct Taxes Paid
(Inc)/Dec in Working Capital
CF from Oper. Activity
Other Items
CF after EO Items
(Inc)/Dec in FA & CWIP
Free Cash Flows
CF from Inv. Activity
Inc / (Dec) in Debt
Interest Paid
Dividends Paid
CF from Finan. Activity
Inc / ( Dec) in Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2010
102,946
14,296
4,740
-33,432
-2,904
85,646
-270
85,376
-113,954
-28,388
-114,034
89,714
-4,740
-13,993
70,981
42,322
184,863
227,185
2011
73,836
16,030
5,724
-24,293
-32,517
38,779
1,247
40,026
-100,595
-61,974
-100,753
28,373
-5,724
-11,617
11,032
-49,695
227,185
177,490
2012
52,826
16,859
7,782
-15,234
-27,999
34,234
-1,216
33,018
-95,202
-61,045
-95,279
-31,145
-7,782
-9,681
-48,606
-110,867
177,490
66,623
2013
34,608
15,297
8,465
-11,190
-16,909
30,271
339
30,610
-89,147
-58,920
-89,191
51,799
-8,465
-9,613
33,721
-24,860
66,623
41,763
2014
33,594
18,419
10,573
-2,527
11,454
71,514
-3,928
67,586
-93,093
-21,414
-92,928
35,491
-10,573
-9,760
15,158
-10,184
41,763
31,580
2015E
29,148
19,604
15,345
-1,506
25,575
88,166
2016E
12,431
28,648
20,208
-1,960
-15,097
44,230
(INR Million)
2017E
16,272
34,823
23,574
-2,805
-24,825
47,038
88,166
-90,000
-1,834
-90,000
50,000
-15,345
-9,762
24,893
23,059
31,580
54,639
44,230
-75,000
-30,770
-75,000
40,000
-20,208
-9,762
10,030
-20,741
54,639
33,898
47,038
-60,000
-12,962
-60,000
40,000
-23,574
-9,762
6,664
-6,297
33,898
27,601
13 February 2015
7

SAIL
Corporate profile: SAIL
Company description
Steel Authority of India Ltd (SAIL), a public sector
undertaking (PSU), is the largest steel producer in
India, with ~20% market share. Its current capacity
of 13mtpa is vertically integrated from mines to
finished steel and is spread across four plants in the
mineral-rich belt of Chhattisgarh, Orissa and
Jharkhand. SAIL is totally self sufficient in iron ore
(captive mines). However, it has to depend on
purchase of coking coal and a large share is
imported. It has a wide range of products and is a
large producer of special steel.
Exhibit 11: Shareholding pattern (%)
Dec-14
Promoter
DII
FII
Others
75.0
15.2
6.2
3.6
Sep-14
80.0
10.8
5.7
3.5
Dec-13
80.0
10.6
6.3
3.1
Exhibit 8: Sensex rebased
Exhibit 12: Top holders
Holder Name
LIC of India
LIC of India Market Plus-1 Growth Fund
% Holding
9.8
1.2
Note: FII Includes depository receipts
Exhibit 13: Top management
Name
C S Verma
Vinod Kumar Thakral
Designation
Chairman
Director
Exhibit 14: Directors
Name
C S Verma
Vinod Kumar Thakral
Anil Kumar Chaudhary
Binod Kumar
Upendra Prasad Singh
Atmanand*
Name
J M Mauskar*
H S Pati
S S Mohanty
T S Suresh
Kalyan Maity
Sunil Barthwal
*Independent
Exhibit 15: Auditors
Name
B N Misra & Co
O P Totla & Co
S K Mittal & Co
K C Kohli & Co
R J Goel & Co
Sanjay Gupta & Associates
Type
Statutory
Statutory
Statutory
Cost Auditor
Cost Auditor
Cost Auditor
Exhibit 16: MOSL forecast v/s consensus
EPS
(INR)
FY15
FY16
FY17
MOSL
forecast
5.3
2.3
3.0
Consensus
forecast
6.4
7.7
8.5
Variation
(%)
-17.4
-70.3
-64.6
13 February 2015
8

SAIL
NOTES
13 February 2015
9

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