FPO Note | Steel
March 21, 2013
SAIL
AVOID
Issue Open: March 22, 2013
Expensive valuation
Issue Close: March 22, 2013
Company background: Incorporated in 1973, SAIL is one of the leading
Issue Details
steel-making companies in India with an annual saleable steel production
capacity of 12.4mn tonne. Major plants owned by SAIL are located at Bhilai,
Face Value: `10
Bokaro, Durgapur, Rourkela, Burnpur and Salem. The company’s steel plants are
Present Eq. Paid-up Capital: `4,130cr
fully backed by captive iron ore mines. SAIL has a Navratna status; thus, it enjoys
Offer Size: 24.03cr Shares
significant operational and financial autonomy.
Post Eq. Paid-up Capital: `4,130cr
Slow progress on capacity continues: SAIL is increasing its saleable steel
production capacity from 12.4mn tonne to 20.2mn tonne by FY2015 at a capex
Issue size (amount): `1,514cr
of `72,000cr. We expect robust profitability from these plants, with captive iron
OFS Floor Price: `63
ore backing the upcoming steel expansion. Also, we expect SAIL's older
Post-issue implied mkt cap: `26,022cr
loss-making plants to be modernized as part of its modernization program.
Promoters holding Pre-Issue: 85.8%
However, the company has reported delays in its expansion projects over the last
few quarters. Going forward, we do not rule out further delays and cost over-runs
Promoters holding Post-Issue: 80.0%
in its expansion plans.
Sales volumes continue to disappoint: SAIL reported disappointing sales
Post Issue Shareholding Pattern
volumes for 9MFY2013 in the midst of lower steel demand. Lower-than-expected
Promoters Group
80.0
volumes reflect lower demand in India as well as lack of focus on marketing by
MF/Banks/Indian
SAIL, in our view. Given the slowdown in steel demand in India, and rising
FIs/FIIs/Public &
Others
20.0
imports from FTA countries (which attract lower import duty), we remain skeptical
over SAIL’s sales volume growth during FY2014.
Outlook and valuation: We expect SAIL’s operational and financial
performance to remain weak during FY2014 due to its:
1) inability to
maintain/raise sales volumes amidst slower steel demand in India; 2) higher fixed
costs, and 3) delays/cost overruns in its brownfield expansion projects. SAIL is on
the verge of expanding its saleable steel production capacity from 12.5mn tonne
to 24.0mn tonne by FY2015. However, we believe that there is still time to play
the volume growth story of SAIL. Moreover, it is expensively valued at the
offer-for-sale (OFS) floor price of `63 (7.2x FY2015E EV/EBITDA). Hence, we
recommend investors to Avoid subscribing to SAIL OFS.
Key financials (Standalone)
Y/E March (` cr)
FY12
FY13E
FY14E
FY15E
Net sales
45,665
43,438
53,685
63,235
% chg
6.8
(4.9)
23.6
17.8
Net profit
3,545
2,695
2,260
2,939
% chg
(28.2)
(24.0)
(16.1)
30.0
FDEPS (`)
8.6
6.5
5.5
7.1
OPM (%)
13.3
12.0
9.3
11.3
Bhavesh Chauhan
P/E (x)
6.8
9.7
11.5
8.9
Tel: 022- 39357600 Ext: 6821
P/BV (x)
0.7
0.6
0.6
0.6
RoE (%)
9.2
6.6
5.4
6.7
RoCE (%)
7.8
5.9
4.6
6.8
Vinay Rachh
EV/Sales (x)
0.8
0.7
0.8
0.8
Tel: 022- 39357600 Ext: 6841
EV/EBITDA (x)
5.8
6.1
8.3
7.2
Source: Company, Angel Research
Please refer to important disclosures at the end of this report
1
SAIL | FPO Note
Company Background
Incorporated in 1973, SAIL is one of the leading steel-making companies in India
with an annual saleable steel production capacity of 12.4mn tonne. SAIL’s major
plants are located at Bhilai, Bokaro, Durgapur, Rourkela, Burnpur and Salem. The
company’s steel plants are fully backed by captive iron ore mines. SAIL has a
Navratna status; thus, it enjoys significant operational and financial autonomy.
During February 2011, SAIL received clearances for Chiria iron ore mines, which
have proven reserves of 1.8bn tonne.
Issue Details
The Promoter (Government of India), proposes to sell 24,03,96,572 equity shares
of face value of `10 each representing 5.8% of the total paid up equity share
capital of the company.
SAIL has fixed the OFS floor price at `63 per share (at a
1.4% discount to its closing price as on March 21, 2013).
Exhibit 1: Shareholding Pattern
Pre-Issue
Post-Issue
Particulars
No. of shares
(%)
No. of shares
(%)
Promoter and promoter group
3,54,48,16,803
85.8
3,30,44,20,231
80.0
Total public holding
58,57,08,486
14.2
82,61,05,058
20.0
Total
4,13,05,25,289
100
4,13,05,25,289
100
Source: Company, Angel Research
March 21, 2013
2
SAIL | FPO Note
Investment rationale
Slow progress on capacity continues
SAIL is increasing its saleable steel production capacity from 12.4mn tonne to
20.2mn tonne by FY2015 at a capex of `72,000cr. We expect robust profitability
from these plants, with captive iron ore backing the upcoming steel capacity
expansion. Also, we expect SAIL's older loss-making plants to be modernized as
part of its modernization program. However, the company has reported delays in
its expansion projects over the last few quarters. Going forward, we do not rule out
further delays and cost over-runs in expansion plans.
Sales volumes continue to disappoint
SAIL reported disappointing sales volumes for 9MFY2013 in the midst of lower
steel demand. Lower-than-expected volumes reflect lower demand in India as well
as lack of focus on marketing by SAIL, in our view. Given the slowdown in steel
demand in India, and rising imports from FTA countries (which attract lower import
duty), we remain skeptical over SAIL’s sales volume growth during FY2014.
Outlook and valuation
We expect SAIL’s operational and financial performance to remain weak during
FY2014 due to its: 1) inability to maintain/raise sales volumes amidst slower steel
demand in India; 2) higher fixed costs, and 3) delays/cost overruns in brownfield
expansion projects. SAIL is on the verge of expanding its saleable steel production
capacity from 12.5mn tonne to 24.0mn tonne by FY2015. However, we believe
that there is still time to play the volume growth story of SAIL. Moreover, it is
expensively valued at the OFS floor price of `63 (7.2x FY2015E EV/EBITDA).
Hence, we recommend investors to avoid subscribing to SAIL OFS.
March 21, 2013
3
SAIL | FPO Note
Profit & loss statement (Standalone)
Y/E March (` cr)
FY10
FY11
FY12
FY13E
FY14E
FY15E
Gross sales
44,002
47,103
50,361
47,905
59,206
69,737
Less: excise duty
3,425
4,353
4,696
4,467
5,521
6,503
Net sales
40,551
42,750
45,665
43,438
53,685
63,235
Other operating income
0
590
688
625
368
386
Total operating income
40,551
43,339
46,353
44,063
54,053
63,621
% chg
(7.2)
6.9
7.0
(4.9)
22.7
17.7
Total expenditure
31,157
35,742
40,267
38,866
49,070
56,489
Net raw materials
18,601
18,686
21,662
19,145
26,314
30,869
Other mfg costs
6,305
3,720
4,470
7,254
8,965
10,560
Personnel
5,527
7,678
7,936
8,253
8,583
8,926
Other
3,619
5,657
6,199
4,213
5,207
6,134
EBITDA
9,395
7,598
6,086
5,198
4,983
7,132
% chg
10.1
(19.1)
(19.9)
(14.6)
(4.1)
43.1
(% of net sales)
23.2
17.8
13.3
12.0
9.3
11.3
Depreciation
1,430
1,488
1,567
1,629
1,879
2,213
EBIT
7,965
6,109
4,518
3,569
3,104
4,918
% chg
9.9
(23.3)
(26.0)
(21.0)
(13.0)
58.5
(% of net sales)
19.6
14.3
9.9
8.2
5.8
7.8
Interest expenses
474
475
678
732
805
1,594
Other income
2,782
1,481
1,576
970
894
827
(% of PBT)
27.1
20.8
29.1
25.5
28.0
19.9
Share in profit of associates
-
-
-
-
-
-
Recurring PBT
10,273
7,115
5,416
3,806
3,193
4,152
% chg
9.3
(30.7)
(23.9)
(29.7)
(16.1)
30.0
Extraordinary inc/(expense)
-
125
(262)
-
-
-
PBT (reported)
10,299
7,240
5,154
3,806
3,193
4,152
Tax
3,448
2,302
1,609
1,111
932
1,212
(% of PBT)
33.5
31.8
31.2
29.2
29.2
29.2
PAT (reported)
6,851
4,938
3,545
2,695
2,260
2,939
Add: Share of earnings of asso.
-
-
-
-
-
-
Less: Minority interest
-
-
-
-
-
-
Extraordinary expense/(inc.)
-
-
-
-
-
-
Net income (reported)
6,851
4,938
3,545
2,695
2,260
2,939
Adj. PAT
6,851
4,812
3,807
2,695
2,260
2,939
% chg
10.9
(29.8)
(20.9)
(29.2)
(16.1)
30.0
(% of net sales)
16.9
11.3
8.3
6.2
4.2
4.6
Basic EPS (`)
16.6
12.0
8.6
6.5
5.5
7.1
FDEPS (`)
16.6
12.0
8.6
6.5
5.5
7.1
% chg
10.9
(27.9)
(28.2)
(24.0)
(16.1)
30.0
March 21, 2013
4
SAIL | FPO Note
Balance sheet (Standalone)
Y/E March (` cr)
FY10
FY11
FY12
FY13E
FY14E
FY15E
SOURCES OF FUNDS
Equity Share Capital
4,130
4,130
4,130
4,130
4,130
4,130
Reserves & Surplus
29,613
32,939
35,681
37,410
38,705
40,679
Shareholders Funds
33,743
37,069
39,811
41,541
42,835
44,809
Minority Interest
1
-
-
-
-
-
Total Loans
17,638
19,056
16,097
21,097
25,097
29,097
Deferred Tax Liability
1,430
1,491
1,644
1,644
1,644
1,644
Other Long term liabilities
-
1,097
1,090
1,090
1,090
1,090
Long Term Provisions
-
3,192
3,513
3,513
3,513
3,513
Total Liabilities
52,812
61,905
62,156
68,886
74,180
80,154
APPLICATION OF FUNDS
Gross Block
37,419
38,077
41,728
53,728
71,228
93,728
Less: Acc. Depreciation
22,310
23,018
24,601
26,230
28,109
30,322
Net Block
15,109
15,059
17,127
27,498
43,119
63,406
Capital Work-in-Progress
15,309
22,075
28,049
24,549
17,049
6,549
Goodwill
-
-
-
-
-
-
Investments
45
684
685
685
685
685
Long Term loans and adv.
-
1,692
2,003
2,003
2,003
2,003
Other non- current assets
-
30
41
41
41
41
Current Assets
40,035
36,544
28,431
32,490
31,683
29,152
Cash
22,719
17,480
6,416
14,511
8,838
2,938
Loans & Advances
3,736
1,246
1,386
1,386
1,386
1,386
Other
13,580
17,817
20,630
16,593
21,459
24,829
Current liabilities
17,686
14,178
14,181
18,381
20,400
21,682
Net Current Assets
22,350
22,365
14,250
14,109
11,283
7,470
Mis. Exp. not written off
-
-
-
-
-
-
Total Assets
52,812
61,905
62,156
68,886
74,180
80,154
March 21, 2013
5
SAIL | FPO Note
Cash flow statement (Standalone)
Y/E March (` cr)
FY10
FY11
FY12
FY13E FY14E FY15E
Profit before tax
10,299
7,194
5,151
3,806
3,193
4,152
Depreciation
1,426
1,483
1,574
1,629
1,879
2,213
Change in Working Capital
1,427
(3,263)
(3,086)
8,237
(2,848)
(2,087)
Less: Other income
(4,435)
(1,043)
(656)
-
-
-
Direct taxes paid
3,619
2,215
1,456
1,111
932
1,212
Cash Flow from Operations
5,097
2,157
1,170
12,561
1,292
3,065
(Inc.)/ Dec. in Fixed Assets
(10,371)
(10,621)
(9,487)
(8,500)
(10,000)
(12,000)
(Inc.)/ Dec. in Investments
15
(9)
5
-
-
-
(Inc.)/ Dec. in loans and adv.
-
-
-
-
-
-
Other income
(2,112))
(1,697)
(1,948)
-
-
-
Cash Flow from Investing
(8,257)
8,933
(7,535)
(8,500)
(10,000)
(12,000)
Issue of Equity
45
159
-
-
-
Inc./(Dec.) in loans
8,886
3,641
(3,086)
5,000
4,000
4,000
Dividend Paid (Incl. Tax)
1,402
1,395
1,152
965
965
965
Others
169.4
429
620
-
-
-
Cash Flow from Financing
7,359
1,818
4,699
4,035
3,035
3,035
Inc./(Dec.) in Cash
4,199
12,908
(11,064)
8,096
(5,674)
(5,900)
Opening Cash balances
18,522
22,439
17,480
6,416
14,512
8,838
Closing Cash balances
22,721
17,480
6,416
14,512
8,838
2,938
March 21, 2013
6
SAIL | FPO Note
Key ratios
Y/E March
FY10
FY11
FY12
FY13E
FY14E
FY15E
Valuation Ratio (x)
P/E (on FDEPS)
3.8
5.4
6.8
9.7
11.5
8.9
P/CEPS
3.1
4.0
5.1
6.0
6.3
5.1
P/BV
0.8
0.7
0.7
0.6
0.6
0.6
Dividend yield (%)
5.2
4.1
1.6
3.2
3.2
3.2
EV/Sales
0.5
0.6
0.8
0.7
0.8
0.8
EV/EBITDA
2.2
3.5
5.8
6.1
8.3
7.2
EV / Total Assets
0.4
0.4
0.6
0.5
0.6
0.6
Per Share Data (`)
EPS (Basic)
16.6
11.7
9.2
6.5
5.5
7.1
EPS (fully diluted)
16.6
11.7
9.2
6.5
5.5
7.1
Cash EPS
20.0
15.6
12.4
10.5
10.0
12.5
DPS
3.3
2.6
1.0
2.0
2.0
2.0
Book Value
81.7
89.7
96.4
100.6
103.7
108.5
Dupont Analysis
EBIT margin
19.6
14.3
9.9
8.2
5.8
7.8
Tax retention ratio (%)
66.5
68.2
68.8
70.8
70.8
70.8
Asset turnover (x)
1.7
1.2
1.0
0.9
1.0
1.0
ROIC (Post-tax)
22.1
12.2
7.0
5.1
4.1
5.3
Cost of Debt (Post Tax)
-
1.7
2.9
2.5
2.3
3.9
Leverage (x)
-
0.0
0.2
0.1
0.4
0.6
Operating RoE
22.1
12.4
7.9
5.5
4.7
6.1
Returns (%)
RoCE (Pre-tax)
17.8
11.1
7.8
5.9
4.6
6.8
Angel RoIC (Pre-tax)
60.9
38.0
22.7
15.2
9.2
9.1
RoE
22.2
13.9
9.2
6.6
5.4
6.7
Turnover ratios (x)
Asset Turnover (Gross Block)
1.2
1.1
1.2
0.9
0.9
0.8
Inventory / Sales (days)
180
225
194
200
200
200
Receivables (days)
33
36
33
33
33
33
Payables (days)
122
119
103
103
103
103
WC cycle (ex-cash) (days)
70
69
77
78
71
75
Solvency ratios (x)
Net debt to equity
(0.2)
0.0
0.2
0.1
0.4
0.6
Net debt to EBITDA
(0.5)
0.1
1.5
1.1
3.1
3.6
Interest Coverage (EBIT / Int.)
16.8
12.9
6.7
4.9
3.9
3.1
March 21, 2013
7
SAIL | FPO Note
Research Team Tel: 022 - 39357800
DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make
such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies
referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
risks of such an investment.
Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make
investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this
document are those of the analyst, and the company may or may not subscribe to all the views expressed within.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify,
nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While
Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory,
compliance, or other reasons that prevent us from doing so.
This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
redistributed or passed on, directly or indirectly.
Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or
other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in
the past.
Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in
connection with the use of this information.
Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the
latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have
investment positions in the stocks recommended in this report.
Disclosure of Interest Statement
SAIL
1. Analyst ownership of the stock
No
2. Angel and its Group companies ownership of the stock
No
3. Angel and its Group companies' Directors ownership of the stock
No
4. Broking relationship with company covered
No
Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors
March 21, 2013
8
SAIL | FPO Note
6th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai- 400 093. Tel: (022) 39357800
Research Team
Fundamental:
Sarabjit Kour Nangra
VP-Research, Pharmaceutical
Vaibhav Agrawal
VP-Research, Banking
Bhavesh Chauhan
Sr. Analyst (Metals & Mining)
Viral Shah
Sr. Analyst (Infrastructure)
Sharan Lillaney
Analyst (Mid-cap)
V Srinivasan
Analyst (Cement, Power, FMCG)
Yaresh Kothari
Analyst (Automobile)
Ankita Somani
Analyst (IT, Telecom)
Sourabh Taparia
Analyst (Banking)
Bhupali Gursale
Economist
Vinay Rachh
Research Associate
Amit Patil
Research Associate
Shareen Batatawala
Research Associate
Twinkle Gosar
Research Associate
Tejashwini Kumari
Research Associate
Technicals:
Shardul Kulkarni
Sr. Technical Analyst
Sameet Chavan
Technical Analyst
Sacchitanand Uttekar
Technical Analyst
Derivatives:
Siddarth Bhamre
Head - Derivatives
Institutional Sales Team:
Mayuresh Joshi
VP - Institutional Sales
Hiten Sampat
Sr. A.V.P- Institution sales
Meenakshi Chavan
Dealer
Gaurang Tisani
Dealer
Akshay Shah
Sr. Executive
Production Team:
Tejas Vahalia
Research Editor
Dilip Patel
Production Incharge
Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946
Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP /
March 21, 2013
9
