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SAIL Showing Strength – ICICI

May 21, 2008

ICICI Sec has recommended a BUY on SAIL [Steel Authority of India Ltd]. SAIL’s Results were above expectations even though the company is out of the Iron & Steel Cartel prevailing in India.

Average realisations at ~Rs37,200 in Q4FY08 were higher 15% YoY & 17% QoQ. While SAIL will maintain prices for the next 2-3 months (as committed to the Government), the average realisation for Q1FY09 would be higher since the price increase was taken largely during February and March. Also, 200% cost escalation due to new coking coal contracts, which the company is on the verge of finalising, would only start from July-August, leaving enough time to hike prices. Further, the introduction of export duty would only marginally affect SAIL since it sells more than 90% in domestic markets.

Average realisation is expected to be Rs40,583/te for FY09E, which is 25% higher than the average in FY08. Several initiatives such as increasing production from 64% to 100% via the concast route, higher capacity utilisation (which touched 118% last year) and increasing power generation capacity from 873MW to 1,922MW will drive operational efficiency.

SAIL is expected to report an EPS of Rs 25.4 and Rs 29.8 for Fy09 and FY10 respectively. ICICI Sec recommends a buy with a target price of Rs 325.

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