Amit SAIL Valuation Report

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This valuation report is made on 31st march 2010.

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Valuation Report on

Steel Authority of India Ltd.

Theres a little bit of SAIL in everybodys life

STEEL SECTOR2010

CMP: Rs 233.40 TMP: Rs 202.82 31st March

Steel Authority of India Ltd.

(Rs Mn) We are initiating the coverage of Steel Authority of India Ltd. With a 12 month target price in the range of Rs 200 to Rs 270.We anticipate that capacity expansion with wide product mix will drive companys revenue on a sustained growth path. The companys vast dealership and service network, operational expertise will help in achieving the revenue and profitability projections.

K ey Financials *

FY 07

FY 08

FY 09

FY 10E

FY 11E

SAIL has highest contribution in steel industry. It has 28% market share followed by Tata Steel & JSW. We expect that company revenue will be Rs 4, 92,979.88 Mn in FY11 i.e. a growth rate of 14.89% Key ratios (%) FY 07 FY 08 FY 09 over previous year. The company EBITDA margin is expected to increase from the current level of 20.91% in FY 09 to 23.69% in FY 10. We expect that sales volume will increase by 13.64% in FY 10 & 11.11% in FY 11. Steel majors like SAIL, JSW, Tata Steel, SAIL is only one with net cash position (Rs 44/ share as of 2009).Market Price P/ E P/ BV EV/ EBITDA EV/ SalesKy a e dt a Fc vl eR. ae a ( s u ) Sa s u t n i gm hr ot ad ( n e s n ) Mr ecpR.I m) a ta(sn l k n 5 we h h wR. 2 e i /lo ( s k g ) BE oe S Cd NE oe S Cd B o br Cd lom g o e e Ru r Cd et s oe e

N et sales 351443.70 412446.40 431500.80 429092.74 492979.88 %G row th 17.36% 4.62% -0.56% 14.89% E BIT D A 103924.30 126827.50 90234.70101662.40 121702.08 E BIT D A M argin % 29.57% 30.75% 20.91% 23.69% 24.69% A d ju sted P A T 64672.70 85672.60 61748.10 71234.68 79643.52 %G row th 32.47% -27.93% 15.36% 11.80% N et p rofit margin % 18.40% 20.77% 14.31% 16.60% 16.16% E P S (based on A d j.P at)* 15.67 20.74 14.95 17.24 19.28 Book valu e p er sh*are 41.94 55.83 67.73 81.52 96.94 R etu rn on equ ity 37.35% 37.15% 22.07% 21.15% 19.88%

FY 10E 172.80 10.02 2.12 6.29 1.49

FY11E 172.80 8.96 1.78 6.37 1.57

85.80 5.48 2.05 3.02 0.89

192.06 9.26 3.44 5.53 1.70

118.97 7.96 1.76 4.41 0.92

1 0 43. 1 11 7 737. 0 196 7 28 0 7. 0 5. - 3 3 1 501 013 SI AL SI @ AL I N SI . O ALB

The company has added new Share Holding Pattern (%) OND 09 products like Auto grade CR products, Galvanized coils/ 6% 1% Sheets. It has also launched 4% 1% plates/ pipes to meet API 100 3% grade specification. For 2% 86% Infrastructure requirements it has added Universal beams/ Promoters Insurance companies Foreign Institutional Investors Heavy beams with the size up Mutual Fund / UTI Financial Institutions / Banks Others to 1100. It has launched HCREQR TMT for earthquake resistant construction, Rock Source:Bseindia bolt TMT for tunnel construction, EN series HR coils for LPG cylinders. It has increased production Of rails & wheels to meet the increasing Requirements of Indian Railways.

The Joint venture magnese ore India Ltd for setting up a ferro alloy plant at Bhilai and joint venture agreement with Tata Steel for development of new coking coal mines which will help SAIL to reduce its raw material cost as coking coal is the one of the major raw material and 70% of it is imported from Australia & Newzeland.350 300 250 200 150 100 50 10/1/09 11/1/09 12/1/09 2/1/09 5/1/09 6/1/09 1/1/10 2/1/10 1/1/09 3/1/09 4/1/09 7/1/09 8/1/09 9/1/09 0 R elative P erform ance

SAIL

SE SE N X

BSE E -M TAL

Source: BSE INDIA

1. INVESTMENT RATIONALE........................................................................................7 1.1. Huge Demand to Drive the growth of Industry........................................................7 1.2.Steady volume growth expected................................................................................7 1.3. Relatively higher margins and EBITDA (Operationally good position)..................7 2. KEY RISKS ............................................................................................................7 2.1. Delay in renewal of leases for Iron ore mines..........................................................7 2.2. Government Ownership............................................................................................7 2.3. Technological Process..............................................................................................7 2.4. High Manpower Cost................................................................................................8 4. FINANCIAL FORECAST AND ASSUMPTIONS........................................................8 4.1. KEY ASSUMPTIONS.............................................................................................8 4.2. Revenue.....................................................................................................................8 4.3. Plant-Wise:................................................................................................................8 4.4. Product-Mix:.............................................................................................................8 4.5. Others:.......................................................................................................................8 4.6. Production Capacity and Sales:................................................................................9 4.6.1. For 2008-09........................................................................................................9 4.6.1.2 For 2009-10......................................................................................................9 4.7. Capex........................................................................................................................9 4.8. Financing of Capex...................................................................................................9 4.9. Operational Expense.................................................................................................9 4.10. Dividend distribution............................................................................................10 5. VALUATIONS..............................................................................................................10 DCF Sensitivity..............................................................................................................10 6. BUSINESS ANALYSIS ..............................................................................................12 6.1. Company Background............................................................................................12 6.2. Products and Services.............................................................................................12 7. Business model Analysis...............................................................................................13 7.1. Value Proposition....................................................................................................13 7.2. Target Customers....................................................................................................13 7.3. Distribution Channels.............................................................................................13 7.4. Promotion................................................................................................................14 7.5. Revenue Streams.....................................................................................................14 7.6. Core Capabilities.....................................................................................................14 7.7. Value Configuration................................................................................................14 7.8. Partner Network......................................................................................................14 7.9. Cost Structure..........................................................................................................15 8. SEGMENTAL ANALYSIS..........................................................................................15 8.1. Competition.............................................................................................................15 8.2. Issues, concerns and Challenges.............................................................................16 8.2.1. Cyclical nature of Steel Industry......................................................................16 8.2.2. Environmental regulation imposes additional costs and may affect the results of operations...............................................................................................................16 8.2.3. Infrastructural facilities of steel industry in India is not conducive to a sustainable growth.....................................................................................................16 8.2.4. High energy consumption................................................................................16 8.2.5. Dependence on import of Coking Coal...........................................................16 8.2.6. Low investment in R&D and inefficient technology leading to high carbon emission.....................................................................................................................16 9. INDUSTRY OVERVIEW.............................................................................................17 9.1. MARKET SIZE......................................................................................................17

9.2. KIND OF STEELS.................................................................................................17 9.3. Flat Products...........................................................................................................17 9.4. Long Products...................................................