Steel Authority of India (Sail) reported a weak set of numbers for 2QFY2016 with
a loss at the operating and net profit level. While volumes were in line with
expectations at 2.74MT (estimate 2.75MT), blended realisations declined 15% yoy
to Rs37,388/tonne as against our expectation of a 12% decline. Owing to a
higher-than-expected drop in realisations, net sales declined 21% yoy to Rs9,113,
3% below our estimate.
Operating expenses came in much higher than expectations, resulting in an
EBITDA loss of Rs1,048cr as against our expectations of an EBITDA loss of Rs170cr.
Material costs came in much ahead of our expectations at Rs4,065cr (44.6% of net
sales) as against our expectations of Rs3,713cr (39.5% of revenues). Other
expenses too were higher than expectations, resulting in a higher than expected
EBITDA loss. Lower than expected depreciation and finance expenses and a
higher than expected deferred tax credit resulted in a net loss of Rs1,056cr, nearly
at par with the loss at the EBITDA level, as against our expectations of a net loss
of Rs623cr.
Outlook and valuation
The stock is currently trading at a P/BV of 0.5x and 0.6x its FY2016E and
FY2017E book value, respectively. Given the weak outlook on steel prices and
with the company already in the red at the operating level, we expect tough times
to continue for the stock. The capacity expansion coupled with negative cash flows
will also result in a significant worsening in leverage ratios. We retain our Neutral
view on the stock.

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