Edelweiss: 'Accumulate' SAIL

Edelweiss, in a results update, has maintained its "Accumulate" rating on Steel Authority of India (SAIL).

In a report released on July 28, the brokerage said: "SAIL's Q1FY07 results came in above our expectations. However, earnings have been bolstered by a one-time arrear from price escalation for prior period sales. Topline rose 32% Y-o-Y (down 20% Q-o-Q) to INR 74.1 bn despite 30% higher saleable steel volumes and 6% lower average realisations.

"Net of the one-time arrear, topline has actually grown 22% Y-o-Y, but growth has declined 26% Q-o-Q. Despite improved operating efficiencies and higher productivity, EBITDA rise was restricted to 17% Y-o-Y (54% Q-o-Q) to INR 23.4 bn due to higher cost of imported coking coal.

"EBITDA margins compressed 390bps Y-o-Y (but improved 1,510bps Q-o-Q). Lower interest payments and higher other income led to net profits rising 23% Y-o-Y (26% up Q-o-Q) to INR 13.8 bn. However, net of one-time arrear from price escalation for prior period, net profit has declined 10% Y-o-Y (down 9% Q-o-Q).

"We believe that with realisations improving and coking coal prices softening, SAIL's margins should bounce back in FY07.

"At CMP of INR 72, the stock trades at an EV/EBITDA of 3.4x and P/E of 5.2x FY07E. On a replacement cost basis, the stock trades at a discount of about 50%, which we believe is unjustified. We reiterate our 'ACCUMULATE' recommendation."

Click here for the complete report