14 August 2015
1QFY16 Results Update | Sector: Metals
SAIL
BSE SENSEX
28,067
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(x)
2015 2016E 2017E
461.2 469.9 561.9
51.8
21.1
5.1
25.1
-10.7
-2.6
66.2
8.4
2.0
S&P CNX
8,519
SAIL IN
4,130.1
231.3/3.6
91/54
-3/-21/-41
303/4033
25.0
CMP: INR56
TP: INR33 (-41%)
Sell
First EBITDA loss in 12-13 years; focus on operations still missing
SAIL reported EBITDA loss of INR817m (est. INR67m) under pricing pressure and poor
sales volumes. NSR declined 4% QoQ and volumes 2% YoY. The company added 250kt
to the inventories. Depreciation was lower by INR839m due to increase in useful life
of assets on reassessment. Further, the interest and depreciation were down on
lower capitalization. Loss before tax at INR7.8b was lower than our estimate of
INR9.5b. Although the cash taxes were nil, there was a deferred tax asset on account
of investment-related tax benefit. Loss after tax was INR3.2b.
n
Operating matrix disappoints again:
It is disappointing to see that there is no
reduction in production cost despite weak trend in input costs. Further, SAIL is
still struggling to increase steel production despite commissioning of two new
blast furnaces over last few years. Although the company is guiding for 13%
growth in production to 14.5mt for FY16, this appears to be an uphill task—given
the high inventories, continued pricing and import pressure.
n
Will safeguard duty help SAIL?
Indian steel industry is lobbying for a safeguard
duty to protect against cheaper imports; while this will provide interim relief,
provided import prices become stable, it will not address the challenges SAIL
faces because of high fixed costs. We are not sure whether the safeguard duty
will really protect Indian steel industry in the medium to long run because
international prices will flow through backdoor in the guise of cheaper steel scrap
imports. Globally, scrap melting is becoming unviable. Recently, Tata Steel’s
Southeast Asian arm substituted scrap by cheaper Chinese billets.
n
Focus on operational efficiencies still missing:
SAIL needs to focus aggressively
on reducing costs and inventories, increasing production to take advantage of
operating leverage, and manage working capital more efficiently by bringing in
supply chain automation; so far, we don’t see any of these initiatives.
Sell
11.1 -150.9 -178.4
106.9 101.9 101.6
4.8
5.4
0.5
9.8
-2.5
0.4
0.5
23.0
2.0
4.2
0.6
9.7
Estimate change
TP change
Rating change
7%
-10%
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
1QFY16 Result analysis
First EBITDA loss in 12-13 years
n
n
n
n
n
Production was up 6%, but sales were down 2%:
Saleable steel production
increased 6% YoY but the sales were down 2% YoY. SAIL added 250kt to the
already high level of 1.4-1.5mt of inventories at the end of FY15.
NSR declined 4%:
The steel prices in both long and flat product segment
declined 4% QoQ (-15% YoY) to INR35,313/t
Raw material cost increased surprisingly:
Raw material cost increased 5% QoQ
to IN16,372/t despite a weaker price trend. It appears that SAIL has added more
of intermediate products and raw materials to inventories whose volumes don’t
get counted in the denominator i.e. production of net saleable steel.
Specific operating costs up on negative leverage:
Power & fuel, other operating
expenditure increased QoQ on negative leverage.
EBITDA dipped into red:
SAIL reported first quarterly EBITDA loss in last 12-13
years squeezed between pricing pressure and rising cost of production under
negative operating leverage.
Exhibit 1: Quarterly trends in costs
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
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16
39,190 38,260 38,647 38,931 41,166 39,791 38,837 36,662 35,313
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
2.7
2.9
-11,440
48,151
24,167
13,466
21,501
-817
Remarks
down -4% QoQ
down -2% YoY
up 6% YoY
250kt added
down -8% QoQ
up 6% QoQ
-2,116 1,501 -1,261 4,549
-158
-194 -2,201 -2,015 -3,890
16,168 15,462 17,140 15,430 15,946 14,246 15,786 15,592 16,372
7,949 8,222 7,649 8,053 8,856 7,710 7,782 8,050 8,217
3,992 4,276 4,148 4,032 4,763 4,810 4,570 3,929 4,579
6,223 5,691 7,154 7,195 7,377 7,151 7,552 7,270 7,311
3,692 2,875 3,818 3,518 4,101 4,553 4,224 2,943
-303
up 5% QoQ
up 17% QoQ
up 1% QoQ
Source: MOSL
Maintain Sell; target price INR33
n
n
n
n
14 August 2015
We expect NSR to decline by ~INR2,000/t QoQ to ~INR33,350 in 2Q on pressure
from cheaper imports. We expect prices to recover there-after to ~INR35,700/t.
We are building production volume growth of ~13% YoY to 14.5mt, in-line
management guidance. However, the risk is to the downside considering its high
finished steel inventory (of ~1.6mt as at June 2015 end), unabated cheaper
imports and its unfavorable cost structure.
Our FY16E price realization is cut by ~INR650/t while for FY17E is up by
INR250/t. Our EBITDA for FY16E is cut by 36% to INR19.3b and for FY17E is up by
7% to INR60.4b on realization change.
Our TP stands revised to INR33 (from INR28 earlier). Maintain Sell.
2

SAIL
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
2015
11.7
4,427
51,844
6.5
336,987
274,364
147,992
2017E
15.6
4,242
66,194
6.5
430,264
407,474
115,492
138,283
33
Source: MOSL, Company
2016E
13.6
1,847
25,135
6.5
163,376
346,541
135,492
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
Neutral
Netural
Sell
Buy
Buy
Neutral
Buy
Buy
Sell
Price MCAP
(INR) (USD M)
237
901
56
93
32
107
377
145
97
3,596
3,401
3,637
3,008
1,273
4,962
37,218
9,584
6,028
FY15
2.9
74.5
5.1
13.5
4.6
20.3
21.7
19.2
16.6
EPS
FY16E
8.9
-16.6
-2.6
2.1
2.8
14.2
24.0
16.1
9.6
FY17E
37.0
40.6
2.0
11.9
3.4
12.4
28.5
16.6
10.4
P/E (x)
FY16E FY17E
26.6
-54.3
-21.7
45.5
11.3
7.5
15.7
9.0
10.2
6.4
22.2
27.7
7.9
9.4
8.7
13.3
8.8
9.4
EV/EBITDA (x)
FY16E FY17E
8.4
9.6
23.1
8.8
2.3
6.5
8.6
4.1
5.3
5.7
7.1
9.7
6.9
1.2
5.8
P/B(x)
FY15 FY16E
1.3
1.0
0.5
0.9
0.6
0.6
1.3
1.0
0.6
0.9
0.6
0.8
7.1
5.9
5.7
3.2
1.4
1.3
5.0
1.2
1.1
Source: MOSL, Company
14 August 2015
3

SAIL
Story in charts
Exhibit 4: Volumes to increase at 15% CAGR FY15-17E
Volumes (mt)
6,429
11.7
11.4
11.1
12.1
11.7
13.6
15.6
5,343
4,217
3,469
3,932
1,421
3,870
Exhibit 5: But EBITDA/t to remain under pressure
EBITDA/t - INR
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
24
15
5
7
16
7
14
17
10
15
18
19
23
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
-0.1
5.8
Exhibit 9: SAIL 1yr fwd EV/EBITDA trading range
20
16
12
8
4
0
7.9
7.5
1.1
EV/EBDITA(x)
Median(x)
Peak(x)
Min(x)
Avg(x)
15.6 13.0
Source: MOSL, Company
Source: MOSL, Company
14 August 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
13.6
16.2
469,909
1.9
444,775
25,135
-51.5
1,847
25,387
-252
19,894
3,239
-16,907
-16,907
-2,512
-3,676
-6,188
36.6
-10,719
-147.1
-10,721
-150.9
2017E
15.6
14.7
561,942
19.6
495,747
66,194
163.4
4,242
33,316
32,879
23,584
1,959
11,253
11,253
1,363
1,485
2,848
25.3
8,405
-178.4
8,403
-178.4
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
379,664
420,969
360,437
22,093
803,499
2017E
41,305
378,307
419,612
430,437
23,578
873,627
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
327,888
450,599
270,985
2,553
878,487
361,203
517,283
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
180,239
38,623
13,896
23,442
78,236
215,539
46,187
22,962
23,442
78,574
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
45,060
144,374
65,640
79,362
803,499
53,885
144,374
65,640
122,806
873,627
14 August 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
-2.6
3.6
101.9
2.0
2017E
2.0
10.1
101.6
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
11.0
5.5
9.8
1.1
1,053
0.5
-21.6
15.8
23.0
1.2
1,036
0.5
27.5
5.5
9.7
1.1
998
0.6
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
5.3
-2.5
0.4
-0.1
30
140
35
51
0.6
11.8
2.0
4.2
5.8
30
140
35
65
0.6
-0.2
0.1
0.3
0.4
0.5
0.6
0.8
1.0
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
-16,907
25,387
19,894
3,019
1,086
32,479
2017E
11,253
33,316
23,584
-1,701
-34,039
32,413
32,479
-75,000
-42,521
-75,000
60,000
-19,894
-9,762
30,344
-12,177
26,073
13,896
32,413
-60,000
-27,587
-60,000
70,000
-23,584
-9,762
36,654
9,067
13,896
22,962
14 August 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 (%)
Jun-15
Promoter
DII
FII
Others
75.0
15.3
6.1
3.6
Mar-15
75.0
15.4
6.0
3.6
Jun-14
80.0
10.8
5.9
3.3
Exhibit 10: Sensex rebased
110
95
80
65
50
Aug-14
Nov-14
Feb-15
May-15
Aug-15
SAIL
Sensex - Rebased
Exhibit 12: Top holders
Holder Name
LIC of India
LIC of India Market Plus-1 Growth Fund
% Holding
10.2
1.2
Note: FII Includes depository receipts
Exhibit 13: Top management
Name
Rakesh Singh
Designation
Chairman & Managing Director
Exhibit 14: Directors
Name
Rakesh Singh
Anil Kumar Chaudhary
Binod Kumar
Upendra Prasad Singh
Bharathi S Sihag
Name
Atmanand*
J M Mauskar*
S S Mohanty
Kalyan Maity
Atmanand
*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
-2.6
2.0
Consensus
forecast
4.4
6.5
Variation
(%)
-158.5
-69.1
14 August 2015
7

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