SAIL reported net revenue of Rs122.3 billion and EPS of Rs4.87 for Q2FY09. We estimate SAIL’s average selling price (ASP) was higher by ~11% q-o-q due to price increase on contract sales and mix shift.
However, price increase is not expected to hold in future quarters as steel prices are following a downward trend since September 2008.
SAIL has guided towards a decrease of ~Rs3,000/tonne in Q3FY09. We are modeling a decline of ~Rs4,000/tonne for Q3FY09 and another ~Rs2,000/tonne for Q4FY09 taking our ASP to Rs37,000/tonne. For FY10, our ASP assumption stays at Rs37,000/tonne.
Inventory increased in the second quarter by 0.5m tonnes (~20% of production). Sales were lower by 0.2m tonnes q-o-q and 0.5m tonnes y-o-y. We believe rising inventory is a signal that SAIL is facing difficulty in selling, signifying a slow down in demand.
The rising inventory can also be attributed to inventory de-stocking by intermediaries and buyers pushing out purchases as prices continue to fall.
We have reduced the production volume assumption from 7.1m tones to 5.8m tonnes for 2HFY09. We are also reducing our sales volume assumption from 12.6m tonnes to 11.2m tonnes for FY09 in line with the weakening demand and the inventory build-up.
SAIL used low cost coking coal inventory in Q2FY09 leading to lower raw material cost. Raw material costs will be higher as coking coal cost will be more than $300/tonne for H2FY09. Freight costs will however be lower at $25/tonne in comparison to $50/tonne earlier due to significant fall in shipping rates.
Our target price of Rs80 is based on 5x FY10 EPS estimate of Rs16.11. We believe that the stock continues to trade at a premium to peers as the stock has the best balance sheet in the sector. An Rs1,000 drop in steel prices impacts our FY10 EPS estimate by 13.7%.