In Q1’10, Steel Authority of India Ltd’s (SAIL’s) top-line declined by 16.0% y-o-y to Rs92.7 billion, and EBITDA plummeted by 32.4% y-o-y to Rs18.8 billion, primarily due to a 23.2% y-o-y fall in average sales realization.
In the near-to-medium term, we expect the domestic demand for steel products to improve, backed by the strong demand from the auto and consumer durable sectors and a rise in infrastructure spending.
Positive steel sector outlook
The domestic steel demand scenario improved in the past few months; during April–June 2009, the production and consumption of finished steel had increased by 3.1% y-o-y and 5.8% y-o-y, respectively.
Keeping in view the strong demand in the core sectors and increase in government and private investments in infrastructure, we expect the domestic steel demand to grow at a CAGR of 8–10% over FY09-11E.
Accordingly, we have upwardly revised our saleable steel sales volume estimates for the Company to ~12.5 million tonnes in FY10.
SAIL has embarked upon an aggressive capacity expansion plan to increase its crude steel production capacity by 7 million tonnes to 21.4 million tonnes by 2012. After this expansion, the Company will have an improved product mix (with complete elimination of semi-finished steel), comprising a higher proportion of value added products and improved average sales realizations resulting from premium for finished steel.
This should help the Company strengthen its leadership position and enhance its market share in India, which is one of the fastest growing markets. (India has recorded a 10% CAGR since 2000 in steel production, compared with the world CAGR of 7%).
At the current market price (CMP) of Rs166.1, the stock is trading at a forward P/E of 10.9x and 9.6x the FY10 and FY11 earnings, respectively.
Based on our DCF valuation, we have arrived at a target price of Rs184 (assuming a 15.5% WACC and a 5% terminal growth rate). The target price does not provide any significant upside potential from the CMP. Thus, we give a HOLD rating to the stock.