29 May 2015
4QFY15 Results Update | Sector: Metals
SAIL
BSE SENSEX
27,828
Bloomberg
Equity Shares (m)
M.Cap. (INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val/Vol ‘000
Free float
Financials & Valuation (INR b)
Y/E Mar
Sales
EBITDA
NP
Adj. EPS
EPS Gr(%)
BV/Sh.INR
RoE (%)
P/E (x)
P/BV
EV/EBITDA
( )
2015 2016E 2017E
461.2
51.8
21.1
5.1
106.9
4.8
0.7
11.3
500.5
44.3
-1.4
-0.3
104.2
-0.3
0.7
14.8
578.4
69.5
10.3
2.5
104.3
2.4
30.4
0.7
10.2
S&P CNX
8,434
SAIL IN
4,130.1
313.5/5.1
113/65
-12/-23/-40
516/6091
25.0
CMP: INR66
TP: INR41 (-38%)
Sell
Above estimates on lower cost; price and volume headwinds continue
Standalone EBITDA at INR9.3b (down 23% YoY/24% QoQ) was 15% ahead of our
estimate on lower cost. PAT was down 26% YoY (-42% QoQ) to INR3.3b as against our
estimate of a loss of INR477m due to higher other income (INR2.9b v/s est. of
INR1.1b) and tax credit of INR590m.
Volume down 9% YoY:
Steel sales volume declined 9% YoY to 3.16mt on poor
demand. Finished steel inventories increased 90kt QoQ. Saleable steel production
was up 5% YoY (8% QoQ) to 3.4mt. ISP, which was commissioned in 3QFY15,
continues to operate at low levels due to lack of downstream capacities and
typically 9-12 months of stabilization phase. The management is guiding for 2mt
overall volume growth in FY16E to 13.7mt (our est. 14.2mt).
Realization fell 6% QoQ; further downside in 1QFY16:
Net sales realization (NSR)
declined by ~INR2,000/t QoQ (-6%) to INR33,183/ton. The management expects
further cut to the tune of INR1,000-1,500/ton based on the run-rate in April/May.
EBITDA/ton declined INR1,280 QoQ to INR2,943:
Lower realization was partly
offset by INR800/ton QoQ savings in cost. We expect EBITDA/ton to fall further in
1QFY16 to INR1,920 on likely price cut. With lower coking coal prices and volume
leverage, we expect EBITDA/t to improve to ~INR4,260/ton by FY17E. SAIL did not
provide for DMF (MMDRA Act, 2015) unlike Tata Steel, which would have further
impacted profitability.
Interest cost continues to rise; FY16E capex at INR75b:
Interest cost rose 16%
QoQ to INR4.3b as capacities get commissioned while borrowings continue to rise
(INR20b higher QoQ). Capex was INR65b in FY15 and is expected to increase to
INR75b in FY16.
Target price INR41; maintain Sell:
Our FY16E/17E EBITDA is cut by 20%/2% on
lower steel realization partly getting offset by lower coking coal prices in
FY17E,.Our EV/EBITDA-based (6.5x FY17E) target price is INR41 (INR38 earlier).
11.1 -106.9 -814.5
14.9 -217.3
Estimate change
TP change
Rating change
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
Other key highlights
Lower power and fuel cost drive savings:
Lower power and fuel cost was the
key driver of lower-than-expected cost and drove the EBITDA beat of 10%.
Power and fuel cost per ton of saleable steel production came at INR3,700 v/s.
our estimate of INR4,400 and was down from INR3,850 in 4QFY14.
Tax rate at 11.3% for FY15:
SAIL benefited from investment allowance tax
provision in FY15 driving its overall tax rate to just 11.3% (and a deferred tax
asset in 4QFY15). With capitalization of ~INR280b over the next two years, tax
rate is guided to be at 16-17% in FY16E/17E.
Staff cost down 4% YoY adjusted for impact of lower interest rate:
On absolute
basis staff cost grew by 2% to INR97b in FY15. However this included INR5.5b
impact of increase in actuarial valuation reassessment at lower interest rate.
Adjusting for this, staff cost was down 4% to INR91.8b as it benefits from natural
attrition. In 4QFY15 impact of actuarial revaluation was INR3b.
Exhibit 1: Quarterly trends in cost
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
1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15
43,110 41,362 38,800 38,533 39,190 38,260 38,647 38,931 41,166 39,791 38,837 36,662
2.5
2.9
-13,073
56,427
19,925
12,240
17,104
15,153
2.6
2.9
-11,209
57,342
20,898
12,739
17,339
11,093
2.8
3.0
-7,143
52,974
20,815
11,140
17,531
11,384
3.2
2.8
11,264
45,274
24,734
12,185
20,808
9,039
2.6
2.9
-6,110
46,676
22,948
11,526
17,967
9,673
3.0
3.0
4,556
46,927
24,954
12,977
17,272
8,669
3.0
3.0
-3,739
50,819
22,678
12,298
21,211
11,320
3.5
3.1
14,240
48,297
25,206
12,621
22,520
12,208
2.8
2.8
-439
44,267
24,585
13,223
20,478
11,298
2.9
3.1
-596
43,691
23,645
14,751
21,931
13,364
2.9
3.0
-6,506
46,665
23,003
13,508
22,322
12,081
3.2
3.2
-6,540
50,611
26,130
12,753
23,599
9,298
-4,582 -3,841 -2,416 4,023 -2,116 1,501 -1,261 4,549
-158
-194 -2,201 -2,015
19,779 19,651 17,920 16,169 16,168 15,462 17,140 15,430 15,946 14,246 15,786 15,592
6,984 7,162 7,041 8,834 7,949 8,222 7,649 8,053 8,856 7,710 7,782 8,050
4,290 4,366 3,769 4,352 3,992 4,276 4,148 4,032 4,763 4,810 4,570 3,929
5,995 5,942 5,931 7,431 6,223 5,691 7,154 7,195 7,377 7,151 7,552 7,270
6,061 4,241 4,140 2,825 3,692 2,875 3,818 3,518 4,101 4,553 4,224 2,943
Source: MOSL, Company
Maintain Sell; target price INR41
NSR is expected to decline further by INR1,000-1,500/t QoQ in 1QFY16 with
more downside risk because import prices are nearly 3000-4000/t lower than
current domestic steel prices. Buildup of steel inventories and continued import
pressure will likely force another price cut.
While we expect volumes to grow by ~2.5mt YoY in FY16E, SAIL is guiding for
volumes increase of ~2mt (it has high leverage to volumes). Moreover, it is
cautious of achieving growth target amid tepid domestic demand and continued
pressure from imports.
Our FY16E EBITDA is cut by 20% to INR38.5b on cut to steel realization estimate.
FY17E EBITDA is cut by 2% to INR63.6b as impact of lower realization is partly
offset by benefit of lower coking coal cost. Our EV/EBITDA based TP (6.5x FY17E)
2
29 May 2015

SAIL
is INR41 (from INR38 earlier) on lower-than-earlier expected net debt in FY17E
(adjustments to working capital estimate).
Key catalyst over the next 12 months
Aggressive exports from Chinese/CIS suppliers.
Delay in production ramp up
Key risks
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
2015
11.7
4,427
51,844
6.5
336,987
274,364
147,992
210,616
51
2016E
2017E
14.2
16.2
3,127
4,296
44,310
69,465
6.5
6.5
288,015
451,524
342,597
396,390
135,492
115,492
80,911
170,626
20
41
Source: MOSL, Company
183,642
361,549
229,317
339,585
Exhibit 3: Metal sector valuation
Rating
Steel
Tata Steel
JSW Steel
SAIL
Non-Ferrous
Hindalco
Nalco
Vedanta
Mining
Coal India
Hindustan Zinc
NMDC
Buy
Buy
Sell
Buy
Buy
Neutral
Buy
Buy
Sell
Price MCAP
EPS
(INR) (USD M) FY15E FY16E FY17E
329
916
66
129
48
197
391
169
129
5,022
3,485
4,284
4,197
1,965
9,178
38,898
11,245
8,059
2.9
74.5
4.2
11.1
4.9
20.3
21.7
19.2
16.6
26.6
48.1
1.3
10.4
5.6
10.3
22.4
14.8
10.4
63.7
62.6
2.6
19.2
6.5
11.4
28.5
16.3
10.4
P/E (x)
FY16E FY17E
12.4
19.1
48.9
12.4
8.6
19.1
17.5
11.4
12.4
5.2
14.6
25.6
6.7
7.4
17.3
13.7
10.4
12.5
EV/EBITDA (x)
FY16E FY17E
7.2
7.3
11.0
7.3
2.6
7.5
9.7
6.1
7.5
5.1
6.7
9.1
5.9
1.5
6.4
P/B(x)
FY15E FY16E
1.8
1.0
0.6
1.1
1.0
0.8
1.6
0.9
0.6
1.0
0.9
0.8
7.4
6.1
5.9
4.9
1.6
1.5
7.7
1.6
1.5
Source: MOSL, Company
29 May 2015
3

SAIL
Story in charts
Exhibit 4: Volumes to increase at 18% CAGR FY15-17E
Volumes (mt)
16.2
6,429
5,343
4,217
3,469
3,932
2,718
3,937
Exhibit 5: But EBITDA/t to remain under pressure
EBITDA/t - INR
11.7
11.4
11.1
12.1
11.7
14.2
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 6: Interest/depreciation to see steep rise
Interest - INR b
Depreciation - INR b
32
26
15
5
7
16
7
14
17
10
15
18
20
24
Exhibit 7: Net debt will continue to remain rise
Capex
Net Debt
114
101
95
89
93
68
75
60
FY11
FY12
FY13
FY14
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
8.3
3.6
6.3
Exhibit 9: SAIL 1yr fwd EV/EBITDA trading range
16
12
8
4
0
7.7
6.9
1.1
EV/EBDITA(x)
Median(x)
Peak(x)
Min(x)
Avg(x)
15.0
8.1
Source: MOSL, Company
Source: MOSL, Company
29 May 2015
4

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
2015
11.7
-3.0
461,150
-2.1
409,306
51,844
15.2
4,427
18,985
32,859
15,439
7,015
24,436
1,998
26,434
-400
4,060
3,661
13.8
22,773
-14.1
21,050
11.1
(INR Million)
2016E
14.2
21.0
500,507
8.5
456,197
44,310
-14.5
3,127
27,053
17,257
20,942
2,316
-1,370
-1,370
-1,035
1,106
71
-5.2
-1,441
-106.3
-1,443
-106.9
2017E
16.2
14.1
578,386
15.6
508,921
69,465
56.8
4,296
33,316
36,150
24,413
1,959
13,695
13,695
1,827
1,558
3,385
24.7
10,310
-815.5
10,308
-814.5
Balance Sheet (Consolidated)
Y/E March
Sources of Funds
Share Capital
Reserves and Surplus
Share holders fund
Loans
Deferred Tax Liability
Capital Employed
Application of Funds
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
2011
41,304
334,823
376,127
204,751
15,567
596,457
2012
41,305
361,426
402,732
173,606
17,817
594,155
2013
41,305
375,169
416,474
225,405
19,002
660,881
2014
41,305
391,761
433,067
260,896
22,222
716,184
2015
41,305
400,146
441,451
300,437
25,769
767,656
(INR Million)
2016E
41,305
388,942
430,248
340,437
26,875
797,559
2017E
41,305
389,490
430,796
380,437
28,434
839,666
374,194
223,104
151,090
153,822
447
404,391
238,301
166,091
224,220
608
440,657
253,014
187,643
283,157
685
451,411
267,528
183,883
361,549
729
566,469
283,515
282,953
339,585
565
678,487
302,501
375,986
295,985
2,553
778,487
329,554
448,932
270,985
2,553
878,487
362,870
515,617
230,985
2,553
91,617
36,235
227,185
7,863
36,618
115,069
40,799
177,490
25,146
31,549
138,989
48,478
66,623
22,669
36,711
161,657
45,632
41,763
24,772
45,209
153,655
55,006
31,580
24,249
52,656
179,010
32,106
26,073
23,442
78,743
191,975
41,138
-2,160
23,442
78,702
221,847
47,539
-15,954
23,442
79,113
71,240
41,155
64,407
222,717
528,079
32,651
91,210
60,654
205,538
596,457
33,236
97,603
59,962
122,670
594,155
34,449
100,715
69,150
114,720
660,881
32,218
130,415
61,432
93,082
716,184
36,228
144,374
65,640
93,132
767,656
47,994
144,374
65,640
75,089
797,559
55,462
144,374
65,640
90,511
839,666
29 May 2015
5

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
2012
9.1
12.8
97.5
2.0
2013
6.0
9.3
100.8
2.0
2014
4.6
10.9
104.8
2.0
2015
5.1
10.1
106.9
2.0
2016E
-0.3
6.2
104.2
2.0
2017E
2.5
10.6
104.3
2.0
6.4
4.7
4.3
0.8
469
0.8
8.3
5.9
6.6
0.9
595
0.8
12.6
8.1
9.7
1.1
1,096
0.8
16.6
7.0
12.1
1.2
1,097
0.7
14.9
7.5
11.3
1.3
1,224
0.7
-217.3
12.2
14.8
1.3
1,129
0.7
30.4
7.2
10.2
1.2
1,071
0.7
23.3
22.0
23.5
60.5
33
82
84
-4
0.8
18.3
13.8
13.9
37.2
34
97
34
24
0.7
13.7
9.7
10.6
21.6
38
109
30
44
0.8
11.4
6.1
7.2
14.4
37
131
31
59
0.7
9.6
4.5
5.0
8.8
43
119
28
48
0.7
11.2
4.8
5.4
8.3
25
142
32
53
0.6
8.9
-0.3
2.5
3.6
30
140
35
56
0.6
12.0
2.4
4.7
6.3
30
140
35
67
0.7
-0.2
0.1
0.3
0.4
0.5
0.6
0.8
0.9
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
2015
26,434
18,985
15,439
-393
1,555
62,019
-21,937
40,082
-68,400
-8,370
-70,389
50,000
-15,439
-9,762
24,799
-5,507
31,580
26,073
(INR Million)
2016E
-1,370
27,053
20,942
1,076
-10,231
37,471
2017E
13,695
33,316
24,413
-2,238
-28,805
40,381
37,471
-75,000
-37,529
-75,000
40,000
-20,942
-9,762
9,296
-28,233
26,073
-2,160
0.0
40,381
-60,000
-19,619
-60,000
40,000
-24,413
-9,762
5,825
-13,794
-2,160
-15,954
29 May 2015
6

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 (%)
Mar-15
Promoter
DII
FII
Others
75.0
15.4
6.0
3.6
Dec-14
75.0
15.2
6.2
3.6
Mar-14
80.0
10.9
5.9
3.2
Exhibit 8: Sensex rebased
120
105
90
75
60
May-14
Aug-14
Nov-14
Feb-15
May-15
SAIL
Sensex - Rebased
Exhibit 12: Top holders
Holder Name
LIC of India
LIC of India Market Plus-1 Growth Fund
% Holding
10.1
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)
FY16
FY17
MOSL
forecast
-0.3
2.5
Consensus
forecast
6.6
8.1
Variation
(%)
-105.3
-69.3
29 May 2015
7

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8