In Q2FY11, SAIL's revenues grew 8% YoY to Rs109.6bn on improved realisations (up 7% YoY). However, EBITDA declined 29% YoY to Rs16.9bn mainly on account of higher imported coal cost. EBITDA/tonne declined to a 7-qtr low of Rs5,593. PAT declined 35% YoY to Rs10.9bn.

Carry over of high cost coal (@USD305/t) drag on profitability: SAIL consumed 0.68mnt of carry-over coal in Q2 (~1.0mnt in Q1), which led to higher coal cost and CoP at Rs30,582/t (up 18% YoY)

Capex update: SAIL incurred Rs28.1bn in Q2FY11 towards their planned capex of Rs700bn of which Rs123bn is lined up in FY11.

Balance sheet: SAIL has Rs13.4bn of Debt and Rs14.0bn of cash.

OUTLOOK Although Indian producers have hiked steel prices by ~Rs2,500/t in last one month on increased construction activity, demand offtake has been slow. Globally, a weak Dec'10 qtr guidance by steel majors, amidst decline in prices in Europe and US, has raised some concerns on steel outlook. For Indian producers, however, we expect steel margins to improve in H2FY11 on higher steel prices and decline in coking coal cost. Profitability of SAIL to improve further on reduced usage of high-cost coal. We estimate SAIL's FY11 EBITDA/t of Rs7,464 vs. Rs6,612 in H1FY11.

VALUATIONS AND RECOMMENDATION SAIL's Q2 EBITDA at USD120/t and OPM at 15.5%, in spite of captive iron ore, is substandard due to high employee cost and operational inefficiencies. Although we expect these to improve with capacity expansions, high capital cost and time-overrun on capex remains additional concerns. 10% equity dilution through FPO in two tranches is additional overhang on the stock. At CMP of Rs195, the stock is trading at EV/EBITDA of 6.4x. We recommend 'HOLD' with a revised target price of Rs185 (5x FY12E EV/EBITDA).