13 November 2014
2QFY15 Results Update | Sector:
Metals
SAIL
BSE SENSEX
27,941
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
8,358
SAIL IN
4,130.1
113/54
2/-12/-51
CMP: INR80
n
n
TP: INR104
Neutral
Operating leverage, lower staff and RM cost expanded margin
2QFY15 EBITDA grew a healthy 18% QoQ (54% YoY) to INR13.3b, it was 15% below
our estimate driven primarily by lower-than-expected realization.
While we had estimated realization to decline 4% QoQ on pricing pressure, the
decline was steeper at 8%. EBITDA per ton still improved 6% QoQ to INR4,342/t on
lower wage bill, raw material cost and operating leverage. Steel production
increased 11% QoQ to 3.3mt. Sales volumes increased 12% QoQ to 3.1mt.
Segmental EBIT of Bhilai steel plant increased 60% QoQ to INR8b, while other
plants witnessed no improvement in EBIT.
Interest expense increased 17% QoQ on capitalization of new production facilities.
Depreciation remained flat QoQ on reassessment of useful life of plants and
machinery pursuant to Companies Act 2013 becoming effective from April 1, 2014.
Other income remains high as SAIL continues to maintain high amount of liquid
funds. Adjusted PAT increased 23% QoQ to INR6.5b. Net debt remained
unchanged at ~INR230b. Capex was largely funded from internal accruals.
Company is likely to benefit from the commissioning of new 2.4mtpa steel
capacity at ISP, Burnpur, unlike Roorkela whose products are oversupplied. ISP,
Burnpur is likely to get fully commissioned during 2HFY15. We expect ISP to
contribute additional 2mt volumes in FY16E. This plant is well placed to cater to
the expected demand growth from construction sector.
Though Indian steel demand has so far failed to pick up, we expect a pick-up in
4QFY15.
We expect EBITDA to post a CAGR of 33% to INR107b over FY14-17E aided by the
benefit of operating leverage. Stock trades at FY16E EV/EBITDA of 6.5x. Maintain
Neutral.
M.Cap. (INR b) / (USD b) 331.6/5.4
Financials & Valuation (INR Billion)
Y/E MAR
Net Sales
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
EV/EBITDA
( )
2015E 2016E 2017E
502.6
75.7
37.0
9.0
95.4
8.3
8.2
9.0
0.7
7.7
575.5
97.1
40.8
9.9
10.3
8.6
8.7
8.1
0.7
6.5
652.9
106.6
39.4
9.5
-3.5
7.8
8.2
8.4
0.6
6.1
n
n
n
n
n
n
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.

SAIL
Operating leverage, lower staff and RM cost drove margin expansion
While 2QFY15 EBITDA grew a healthy 18% QoQ (54% YoY) to INR13.3b, it was 15%
below our estimate driven primarily by lower than expected realization. While we
had estimated realization to decline 4% QoQ on pricing pressure, the decline was
steeper 8%. EBITDA per ton still improved 6% QoQ to INR4342/t on lower wage bill,
raw material cost, and operating leverage. Steel production increased 11% QoQ to
3.3mt. Sales volumes increased 12% QoQ to 3.1mt.
n
n
n
n
Net sales increased just 3% QoQ (1% YoY) to INR116.8b as benefit from higher
volumes (12% QoQ) was offset by lower realization.
Net sales realization at INR 37,942/t was 8% lower QoQ as against our estimate
of a 4% decline. This is much worse than 2% decline for JSW steel and 6% gain
for Tata Steel over same period.
EBITDA grew by a strong 18% QoQ (54% YoY). Strong EBITDA improvement was
driven by high operating leverage, lower provisioning for staff and decline in raw
material cost. Resultantly, EBITDA/t improved 6% QoQ to INR4,342.
Raw material cost declined sharply by 11% QoQ to INR13,288/t. The
provisioning for staff cost too was lower than expectation.
Exhibit 1: Quarterly trends in costs
Source: MOSL, Company
n
n
Interest expense increased 17% QoQ on capitalization of new production
facilities. Depreciation remained flat QoQ on re-assessment of useful life of
plants and machinery pursuant to Companies Act 2013 becoming effective w.e.f.
1
st
April 2014.
Other income remains high as SAIL continues to maintain high amount of liquid
funds. Adjusted PAT increased 23% QoQ to INR6.5b.
13 November 2014
2

SAIL
SAIL: an investment profile
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.
Recent developments
n
International Coal Ventures Pvt. Limited (ICVL), a
joint venture Company of Steel Authority of India
Limited, Coal India Limited, Rashtriya Ispat Nigam
Limited, NMDC Ltd. and NTPC Ltd. has signed an
agreement for acquisition of 2.6 billion tonnes coal
resource in Mozambique from Rio Tinto Plc., UK.
Valuation and view
n
Stock is trading at rich valuation of 7.0xFY15
EV/EBITDA and 6.3x FY16 EV/EBITDA. Maintain
Neutral
Key investment arguments
n
n
n
INR720b capex would raise the capacity of saleable
steel volumes from 12mtpa currently to 20mtpa
through de-bottlenecking and brown field
expansions.
Operating leverage will benefit the margins as
volumes start growing on expansion of capacity.
Iron ore integration ensures steady and reliable
supply of key raw material.
Sector outlook - positive
n
n
We believe that Indian steel demand growth has hit
bottom in FY14. We expect Indian steel demand
growth to accelerate to 4% in FY15 and 6% in FY16.
The conversion spreads for steel mills are expanding
on global demand (ex-China) growth and oversupply
of iron ore and coking coal.
Key investment risks
n
Unexpected fall in steel prices and slow execution of
projects would adversely impact earnings.
EPS: MOSL forecast v/s consensus (INR)
SAIL TATA STEEL Jindal Steel
9.0
14.1
7.6
8.1
8.0
7.9
0.7
1.4
0.7
0.7
1.2
0.6
1.2
0.8
2.4
1.1
0.8
1.9
7.7
7.0
7.7
6.5
6.3
7.3
MOSL
Forecast
FY15
FY16
9.0
9.9
Consensus
Forecast
6.5
7.9
Variation
(%)
37.7
25.6
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
Target price and recommendation
Current
Price (INR)
80
Target
Price (INR)
104
Upside
(%)
30
Reco.
Neutral
Shareholding pattern (%)
Sep-14
Promoter
DII
FII
Others
80.0
10.8
5.7
3.5
Jun-14
80.0
10.8
5.9
3.3
Sep-13
80.0
11.1
5.4
3.6
Stock performance (1-year)
Note: FII Includes depository receipts
13 November 2014
3

SAIL
Financials and valuations
Income statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2014
471.0
4.5
45.0
9.6
18.4
26.6
10.6
8.0
9.6
33.6
7.1
21.1
26.5
18.9
-23.7
0.0
18.9
2015E
502.6
6.7
75.7
15.1
18.4
57.4
15.3
4.4
0.0
46.4
9.4
20.3
37.0
37.0
95.4
0.0
37.0
(INR Billion)
2016E
575.5
14.5
97.1
16.9
26.4
70.6
20.0
2.2
0.0
52.8
12.0
22.7
40.8
40.8
10.3
0.0
40.8
2017E
652.9
13.4
106.6
16.3
34.1
72.4
23.3
1.8
0.0
51.0
11.6
22.7
39.4
39.4
-3.5
0.0
39.4
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2014
4.6
9.0
104.8
2.0
51.5
17.5
8.9
0.8
1.2
12.5
2.5
4.5
5.0
0.7
42.6
119.1
27.6
0.5
2015E
9.0
13.4
111.4
2.0
26.4
9.0
6.0
0.7
1.2
7.7
2.5
8.3
8.2
0.6
35.0
115.0
41.2
0.5
2016E
9.9
16.3
119.0
2.0
23.9
8.1
4.9
0.7
1.1
6.5
2.5
8.6
8.7
0.7
35.0
115.0
42.1
0.6
2017E
9.5
17.8
126.1
2.0
24.8
8.4
4.5
0.6
1.0
6.1
2.5
7.8
8.2
0.7
35.0
115.0
41.8
0.6
Balance sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2014
41.3
391.8
433.1
260.9
22.2
716.2
566.5
283.5
283.0
339.6
0.6
317.1
153.7
55.0
31.6
76.9
224.1
32.2
191.8
93.1
716.2
2015E
41.3
419.0
460.3
310.9
26.2
797.4
716.5
301.9
414.6
279.6
0.6
342.7
158.4
48.2
57.9
78.3
240.0
48.2
191.8
102.7
797.4
(INR Billion)
2016E
2017E
41.3
41.3
450.1
479.7
491.4
521.0
350.9
390.9
28.9
31.6
871.2
943.5
876.5 1,036.5
328.3
362.4
548.2
674.0
204.6
104.6
0.6
0.6
364.9
418.8
181.3
205.7
55.2
62.6
48.5
69.1
79.9
81.4
247.0
254.5
55.2
62.6
191.8
191.8
117.9
164.3
871.2
943.5
E: MOSL Estimates
Cash flow statement
Y/E Mar
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2014
33.6
18.4
-8.0
10.6
-2.5
11.5
59.6
-93.1
0.2
0.0
-92.9
0.0
35.5
-10.6
-9.8
23.2
-10.2
41.8
31.6
2015E
46.4
18.4
-4.4
15.3
-6.9
18.1
87.0
-90.0
0.0
0.0
-90.0
0.0
50.0
-15.3
-9.8
29.3
26.3
31.6
57.9
(INR Billion)
2016E
52.8
26.4
-2.2
20.0
-10.8
-23.0
63.2
-85.0
0.0
0.0
-85.0
0.0
40.0
-20.0
-9.8
12.4
-9.3
57.9
48.5
2017E
51.0
34.1
-1.8
23.3
-10.4
-24.4
71.7
-60.0
0.0
0.0
-60.0
0.0
40.0
-23.3
-9.8
8.8
20.5
48.5
69.1
13 November 2014
4

SAIL
NOTES
13 November 2014
5

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SAIL
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STEEL AUTHORITY OF INDIA
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13 November 2014
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6