Raw material cost woes continue; EBITDA/t at new low

In Q3FY11, SAIL's revenues grew 15% YoY to Rs115.1bn on higher volume (up 11% YoY) and improved realisations (4% YoY rise). However, EBITDA declined 30% YoY to Rs18.0bn on higher raw material, employee and power cost. Consequently, EBITDA/t declined to a 2-yr low (and ~6-yr low excl. Dec'08 qtr) to Rs5,517. PAT declined 34% YoY to Rs11.1bn despite lower interest expense and fall in effective tax rate (32.0% vs 33.9%).

Even though Q3 sales volume grew 11% YoY to 3.25mnt, 9MFY11 sales at 8.6mnt is down 1% YoY due to lower sales in H1FY11.

Blended realisation at Rs35,369/t, though up 4% YoY, declined 2% QoQ despite sequential improvement in HRC prices.

Raw material cost pressure continues: Cost of goods sold rose 18% YoY to Rs29,851/t, mainly on higher contract prices for coking coal (USD209/t in Q3FY11 vs USD128 in FY10) and increased power and employee cost. Despite reduction in manpower, employee cost increased 15% YoY to Rs5,654/t from Rs4,910/t in Q3FY10.

Consumption of high cost carry-over coal (@USD305/tonne): The company consumed 0.68mnt of high-cost coal in Q3 (~1.7mnt in H1). Consumption of remaining ~2mnt is expected by FY12.

Capex update: During Q3FY11, SAIL incurred Rs26.9bn (Rs80.0bn in 9MFY11) towards their planned capex of Rs700bn for 60% capacity enhancement and modernisation projects, out of which Rs123bn is lined up in FY11.

Balance sheet: SAIL has Rs141bn of Debt and Rs135bn of cash.

Dividend: SAIL has announced an interim dividend of Rs1.2/sh.

VALUATIONS AND RECOMMENDATION: Under Review

Raw material prices continue to strengthen aided by supply concerns, as exports from Australia have been hampered by floods. However, despite sporadic hike in steel prices, steel producers have been unable to fully pass on the cost hike due to slow demand offtake, which has resulted in a squeeze in their margins.

We are reviewing our FY12 outlook for metals sector. Consequently, we are putting SAIL under review. At CMP of Rs161, the stock is trading at 5.5x FY10 and 6.5x 9MFY11 annualised EV/EBITDA.