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Also, analysts, who were looking at SAIL commissioning new capacity at a faster pace, are again disappointed after the management’s guidance of a delay in some projects by six months post the results on February 14.
Of the 27 analysts polled by Bloomberg since February 14, three have Buy ratings, one Hold and the remaining Sell on SAIL, with a consensus one-year target price of Rs 53.60.
Steel price scenario
Steel prices, especially for flat products, which had seen a 14 per cent uptick since August 2013 on the back of rupee depreciation, now face a risk of softening. Analysts at Kotak Institutional Equities observe that while domestic flat prices that were trading at a discount of $50-70 a tonne in August 2013 (versus international prices) are now trading at import parity prices. However, moving forward, prices for flats are to soften as there are expectations of a decline in global steel prices (due to weaker raw material/scrap prices amid weak demand in China), they add. Analysts at Prabhudas Lilladher also see a potential downside risk of $25-30 a tonne in the US and European markets. This is not good news for domestic players such as SAIL.
Project delays
With expansion underway, there were expectations of production volumes growing by two million tonnes (mt) during FY15. However, some expansion plans have got delayed further by six months and analysts at Elara Capital add that commercial production will take more time. The company has guided for an additional production and sales of around 1.5 mt and one mt, respectively, during FY15. This has led to analysts cutting their volumes and earnings estimates for the company.
While a correction in steel prices will lead to pressure on SAIL’s margins, there are other factors that can have an impact. Going ahead, employee costs are likely to see an upside with the wage settlements expected to be reached. A wage revision has been due since January 1, 2012 and the company has been providing for settlements (around Rs 340 crore has already been provided for in Q3 FY14). Ashish Kejriwal at Elara Capital observes that though the final agreement on a wage increase may be marginally higher than the current rate of provisioning, any actuarial gain/loss will be taken care of in the March 2014 quarter. Hence, he expects employee costs to increase by around seven per cent sequentially in the current quarter.
After cutting the FY14 Ebitda by 12 per cent to factor in the Q3 FY14 numbers, Ashish Kejriwal has also reduced his FY15 Ebitda by 12 per cent and the FY16 Ebitda by 4 per cent to factor in lower volumes (13.2 mt and 15.5 mt in FY15 and FY16 against earlier estimates of 14 mt and 15.5 mt, respectively) due to the delay in expansion. He adds that the stock should remain under pressure as he does not see any meaningful reduction in the cost structure.
Analysts at Prabhudas Lilladher observe that SAIL continued to disappoint on realisations with a sequential rise of 1.5 per cent or Rs 523 per tonne in Q3 FY14, significantly lower than the Rs 1,000-1,100 a tonne rise reported by its peers. They add that this clearly vindicates their concern that volume growth would come at the cost of lower prices and, hence, weaker margins. This would get further exposed since the company is on the verge of commissioning its sizeable capacity expansion. Given the justified concerns over an uncompetitive cost structure, dismal project execution and weak domestic demand, Prabhudas Lilladher’s analysts maintain a ‘Reduce’ rating on SAIL’s stock, with a target price of Rs 53.
Giriraj Daga at Nirmal Bang Securities, too, has revised his Ebitda estimates downward by 22 per cent/16 per cent for FY14/FY15, respectively, driven by a slippage in sales volume on account of the delay in commissioning new projects and a rise in other expenses compared to his earlier estimates.
