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Published on 14/06/2018 2:32:59 PM | Source: Emkay Global Financial Services Ltd

Buy Steel Authority of India Ltd For Target Rs.94.00 - Emkay

Commendable performance; Upgrade to BUY

* Revenue stood at Rs170bn (+34% yoy/+11% qoq), marginally above our expectation, primarily driven by better realization. Realization increased by 24% yoy to Rs45,580/tonne (+13% qoq).However, offtake came below expectation at 3.738mt (+8% yoy/-2% qoq)

* EBITDA/tn was ~33% above our estimate at Rs6,280/tn (+66% qoq). Absolute EBITDA stood at Rs23bn (+63% qoq). Adjusting for one time provisions (net impact Rs 4.25 bn), the EBITDA/ tonne stands at Rs 7416

* APAT increased by 5x qoq to Rs4.4bn. There was Rs3.8bn of exceptional gain in Q4FY18 pertaining to write-back of pension for executives and non-executives, which were provided in earlier years.

* Better asset sweating through ramping up, supported by improving macro scenario is likely to result in stronger performance. Better cashflow to help deleveraging. Factoring in these we upgrade the stock to BUY with a revised target price of Rs 94

Strong realization leads to superior performance

Better realization helped post strong numbers. Realization stood at Rs45,580/tn (+24% yoy/+13% qoq). Offtake came in below expectation at 3.74mt (+8% yoy/-2% qoq) due to logistic-related problems. RMC/tn rose by 1.4% yoy to Rs20,320/tn (+3% qoq). Consequently, EBITDA/tn came in very strong at Rs6,280/tn (+66% qoq). Rs4.78bn of exceptional loss was recorded in Q4FY18 on account of employee provisioning. If we adjust for this, EBITDA/tn stood at Rs7,558/tn. Bhillai and Bokaro steel plants continued to report strong operating profit at Rs5.6bn (+64% yoy) and Rs5.5bn (+153% yoy), respectively. Integrated Steel Plant also reported profit at Rs2.7bn - for the first time post several consecutive quarters of losses. Loss at VSP plant declined significantly to Rs150mn (v/s Rs252mn loss in Q4FY17).

Management has guided for strong production volume (+27% growth) for FY19 at 18mt. Bhilai, IISCO and Rourkela plants are expected to contribute significantly. In IISCO and Rourkela, only ramp-up needs to take place while in Bhilai plant, all units are expected to be commissioned fully by the end of Q1FY19, post which scale up will be done. Also, SAIL has diversified into Canada and USA for coal sourcing, which will aid in overcoming logisticsrelated problems that were hindering production and sales targets. With this guidance, the management expects EBITDA/tn at Rs8,000/tn in FY19. We have estimated sales volume at 16mt and 17.8mt in FY19 and FY20 respectively.

Production ramp-up to aid performance; Upgrade to BUY

We have revised our estimates for FY19E and FY20E. Higher volume would be a positive trigger. Better cash flows will help in deleveraging. Based on the improved fundamentals, both at macro as well as company level, we upgrade the stock to BUY with a TP of Rs94, valuing the company at 6.5x FY20E EV/EBITDA.

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