SAIL - A really long term opportunity

(Ashish Pandey) #1


I checked for SAIL’s thread on VP, couldn’t find it so starting one myself. The VP page on it was created 4 years back and has since been untouched so it is of very minimal relevance. The case for SAIL is simple and neat:

MCap = 30000 Crores

Debt = 25000 crores

Cash = 3157 Crores --> EV = 30000+25000-3157 = 51843 crores.

CFO avg in the last 2 years = 4100 crores

So the company is selling at 4100/49345 = 8.3% yield, if it DOESN’T DO anything. Its installed capacity is close to 12.5 mn tonnes and it proposes to increase it to 4 times of current capacity by 2025 and by 2016 it wants to increase its capacity by 100%. For 2018 capacity increase, it has already incurred capex cost of 53000+ crores.

Current replacement cost of steel plant = 83,880 INR/ton (Tata Steel is setting up a 3 MnTonnes greenfield plant, total outlay would be 25,164 crores)

Here is the comparison:

Company Cap.(MTPA 2014) Cap.(MTPA 2016) EV(Cr.) EV/Ton(In 2016)

Tata Steel 28 31 106846 34,466

SAIL 12.5 24 5184320,737

JSW 14.3 15 46040 30,693

SAILâs MEP which envisaged increase in capacity from 12.5 mn tonnes to 24 mn tones will be over in next 15-24 months, most of the orders have been placed and construction work is in progress. Yes, there is huge delay in the project, it was supposed to be completed in 2-13-14 but still not over but I think it happens with most of the plans and that is the thing of past, we should think about right now and future. The biggest advantage with SAIL is that they have sufficient ore to fulfil future requirements too, yes they will have to import coal, right now they import 82% of their need, in future they would be importing 90+% if CIL doesnât increase its production. They r taking all the right steps for that, recent acquisition of Rio-Tintoâs mine in Mozambique thru ICVL is an example. I guess similar is the case with JSW too, they r based in India mostly, they have ore but coal they have to import. Most pathetic situation is of Tata Steel. Its India plants have same situation as of SAIL but in EU, where they have major capacity, they have neither ore nor coal, everything is bought!!!

Now no one is increasing capacity like SAIL, if tomorrow someone decides on that too, it will be late before capacity gets commissioned. Also, raw material security should have been there. SAIL has 75000 acres of its own, no forest/environmental clearances r required for developing anything there, this is not available to anyone in India.

As can be read from the table above, valuations wise SAIL is damn cheaper than Tata Steel and JSW, but is even cheaper if we take the case of greenfield plant being set up by Tata steel, for 3mn tons, they have to fork out 25,164 crores. From this calculation, SAIL should have been [email protected]/3*25,164 = 200,000 crores EV. If we apply discount of even 50% for being it sarkari company, EV comes around 100,000 crores INR. Assuming debt goes up from 24,000 crores currently to 36,000 crores in2016, Mcap should be 100,000-36,000 = 64,000 crores. Right now its close to 31,000 crores. So potential is >100% returns.

There are additional triggers like new plants would be modern ones and old ones are also getting refurbished/automated so less manpower will be needed so there would be savings on salaries so margins wont go down because of that if they donât go up. Raw material prices are going down, but we need to keep track of the steel prices too.

The biggest disadvantage I see is that itâs a sarkari company and due to some stupid decisions of govt like disinvest and other crap, it can see short term turmoils like the current ones but I think we have already taken 50% discount on replacement cost for that. Also, think about SAIL when it has 50mn tons capacity, do the above calculations again, I think opportunity is huge. Yes, there would be delays in projects, management says 2025, take it 2030 but then if calculation is done for FCF/CFO/EV per tonnes for that situation, with appropriate discounting, I think opportunity is huge. Views invited, especially negative.

Disclaimer: Invested and hence I m biased.

(CommonStocks) #2

Hi Ashish, Not to undermine your work, but SAIL remains a commodity business owned by government. Rather than fundamentals one has to buy this at the low end of the cycle and sell it near the top, which is what makes it difficult because it involves timing the market.

(Ashish Pandey) #3

Hi CommonStocks,

U r entitled to ur opinion so please don’t feel that u r underminig my work:).

Yes, agree it is a commodity and its govt owned, its cyclical. I think its a commodity, brand value is nothing here, and it is govt owned thats why it is never sold at huge valuation. Is life time high is 260/-, it reached there in 2007-08 and that time too its valuations were P/E = 14.5 and P/BV = 4.72. It always gets low valuations and should get because of commodity nature and govt owned business.

And yes, it is cyclical, and one should buy it at low levels of cycle. My calculations show that only i guess. Right now P/BV = 0.65 and P/E for TTM is 16.77 but if we look two years down the line, book value doesn’t change much but earnings can shoot up if infrastructure/auto comes up, no?

(Ashish Pandey) #4

Good results by SAIL. Same profits in H1 FY15 as of H1 of FY14 but in FY14 they got 105 crores as extra ordinary income. More capacities are coming soon.

(Hemant V Bhatia) #5

Highlights of the Concall by Capital Mkt;

  • Salebale steel production fell to 6.2 million tonne in H1FY’15 compared to 6.5 million tonne in H1FY’14.Salebale steel sales rose to 5.7 million tonne in H1FY’15 compared to 5.6 million tonne in H1FY’14.Salebale steel production from 5 integrated steel plants fell to 6 million tonne in H1FY’15 compared to 6.2 million tonne in H1FY’14. Value added steel formed 44% of total production & commodity formed 56%.Flat products formed 61% of total production from 5 integrated steel plants while long products formed 25% and semis formed 14% in H1FY’15.In Retail sales, 5% growth was achieved over H1 FY14 with a total supply of 0.25 million tonne. As on 1.07.2014, SAIL had 2,837 dealers.
  • Co.saw improvement in its margins as stable currency helped raw material costs to decline & while decline in dearness Allowance owing to moderating inflation resulted in lower employee expenses.All the expansion projects are progressing on schedule & production volume guidance by the company has been maintained at 14 million tonne for FY’15 & 16 million tonne for FY’16.Co.has capitalized assets worth Rs 2580 crore during H1FY15 of which Rs 2200 crore pertains to Blast furnace 5 at Rourkela.
  • The recently commissioned blast furnace in Rourkela is producing at 6,500 â 7,000 tonne a day which going forward the company targets to ramp upto 8,000 tonne. Blast furnace at IISCO is also expected to be commissioned in Dec’14.The management indicated that its coke utilization rate will improve as projects start commissioning resulting in further operational efficiencies.
  • The Co has received lease renewals (on extended capacity) for mines in Odisha with signing of mining lease is currently pending while Jharkhand mines should receive clearance in the next few days from the state government failing which mining can restart on deemed renewal basis.First coking coal (36000 tonne) shipment from Mozambique is expected to arrive by end of November or early December; however no cost benefits are expected to accrue
  • Coal cost for the company in Q2FY15 was around $ 115 per tonne which is expected to remain largely unchanged in Q3FY15.The company is feeling price pressure on long products since imports from China have started to increase. The company has taken price cuts cumulating to Rs 1,200 â 1,300 per tonne since the start of Q3FY15 on long products while the same on flats has been lower at Rs 500 per tonne. Management expects price pressure to continue in domestic markets on increasing imports from China along with dull demand scenario. Management is hopeful that government of India will impose various trade barriers for Chinese imports to safeguard domestic industry and create a level playing field
  • Mgt expects depreciation for FY15 to be around Rs 2100 crore while employee expenses are expected to be in the range Rs 9900 â 10000 crore. The company will remain under MAT with tax rate at 16-17% till FY17.The company expects capex of Rs 750-800 crore in FY’16. Capex for the raw material division for H1 FY15 was Rs 914 crore and orders worth Rs 3500 crore have been placed. Net debt is expected to be around Rs 28000 crore in FY15 and Rs 30000 crore in FY16

(Varadharajan Ragunathan) #6

net debt of 7 x operating cash flow. Does’nt that sound incredibly dangerous ? at a 12 % average cost, the company is barely just about covering interest cost.

Looks a story that still is on the brink and might not have a margin of safety. Infact, looks an asymmetric downside equation - sort of like me taking paying a Rs. 1 lakh EMI on a take home salary of Rs. 1 lakh and hoping for a salary hike to set things right.

(Ashish Pandey) #7


Look at the capacity which is coming up + steel cycle is at low point now, prices low right now. And also, look at the replacement cost. Right now replacement cost a 1MTPA plant is 6000 crores, SAIL would have 25 MTPA capacity in next 6 months. so EV should be 150,000 Crores, right now EV is just 38,000 Crores. Add the ore mines value.

(Ashish Pandey) #8

Consolidated cash flows were 3500 crores in the last 2 years. Net Debt 21750 crores @12.5 MTPA Capacity. Do the maths with 25 MTPA capacity when steel prices are low. It is selling at low valuations because of so much debt for capex AND low steel prices. @12.5 MTPA capacity it had earned 6200 crores a year some years back.

(Varadharajan Ragunathan) #9

Replacement cost is only notional - by the same logic, king fisher airlines today should be worth $ 200 mn after all the debt is paid off. Most important is to figure out if the cash flows are enough to meet debt - right now it is very tough.

Remember that in a commodity industry, everyone adds capacity - also even if Indian demand picks up, slack in global capacity might keep down prices.

At this price, this looks very susceptible.

(Ashish Pandey) #10

:slight_smile: Value lies in the eyes of investor, lets wait for things to pan out.

(Raj) #11


Absolutely. They have a huge capacity coming in stream and if the cycle turns around they will do very well. Only question is how soon?

(Hemant V Bhatia) #12

Highlights of the Concall by Capital Mkt;

  • Salebale steel production fell to 9.4 million tonne in 9MFY’15 compared to 9.6 million tonne in 9MFY’14.Salebale steel sales rose to 8.7 million tonne in 9MFY’15 compared to 8.6 million tonne in 9MFY’14.Salebale steel production from 5 integrated steel plants fell to 9 million tonne in 9MFY’15 compared to 9.3 million tonne in 9MFY’14. Value added steel formed 43% of total production and commodity formed 57%.
  • Flat products formed 57% of total production from 5 integrated steel plants while long products formed 25% and semis formed 18% in 9MFY’15.In Retail sales, 2% growth was achieved over 9MFY14 with a total supply of 0.43 million tonne. As on 1.01.2015, SAIL had 1027 rural dealers.The company did not procure any ore from markets during Q3FY15.
  • Coking coal contracts for Q4FY’15 have been finalized at USD 115 per tonne which were flat on a q-o-q basis with current coking coal prices (premium hard coking coal) being around USD 109 per tonne.
  • The company said that prices of flux namely dolomite etc have been increasing marginally negating the benefits of lower coking coal prices
  • Net sales realizations for both flats and long products declined sequentially during the quarter by around 3-5%. Current prices are further lower to Q3FY’15 averages.
  • The company expects Q4FY’15 sales volume to be higher on the back of inventory liquidation and has reduced its FY15 full year sales volume guidance to 12.2 million tonne.The company has capitalized CWIP of Rs 2500 crore during the quarter leading to increase in depreciation.
  • Current inventory with the company is 1.354 million tonne (including semis). The finished steel inventory mainly includes slabs and HR, demand for which has been subdued over the past several quarters. The steel industry added around 3 million tonne of inventory alone in Q3FY15 indicating severe weakness in demand
  • SAIL ongoing expansion is in advance stages of completion with major capex already spent. All modernization and expansion plans are expected to be complete by December 2015 post which the management expects the benefits of to come in
  • The company procured coal from Mozambique is of apt quality with marginally higher ash content. Currently around 110000 tonne per month of shipment is being received by SAIL.Capex during 9M FY15 was Rs. 5133 crore. Capex Plan for 2014-15 is Rs. 7,500 crore.
  • Current borrowings of the company stand at Rs 27800 crore while investments are Rs 2500 crore. Current Debt to equity is 0.65.The company intends to participate in the ongoing coal auctions and plans to bid for the Parbatpur coal block.

(Vishnu Ch) #13

CONFERENCE CALL - from Capital Markets


Expects steel prices to increase gradually post the implementation of MIP

SAIL held conference call to discuss the performance for the quarter ended December 2015. Senior Management of the company addressed the call.
Highlights of the Concall

The company incurred a net loss of Rs 1529 crore for Q3FY’16 as against a net profit of Rs 579 crore over Q3FY’15, primarily due to a 24% decline in Net Sales realisations Sales were adversely impacted by huge surge in imports of low priced steel.
Global Steel prices have registered a steep fall over the last year falling from around $460 to $280 mainly due to slowing Chinese consumption which is leading to oversupply of cheap steel into the market. Imports into India are at an annualized rate of 12 million tonne, which is 20% up over a very high base of FY’ 15 when they had surged by 75% over the previous year. The domestic market continues to suffer from the rising imports particularly from China, Japan & Korea at prices which are much lower than the domestic cost of production, affecting the margins of steel producers operating in India.
Domestic steel prices decreased due to higher imports
Finished Steel production for the year has been at 53 mt for YTDFY16 which fell by 1 mt compared to last year. Consumption for Steel rose by 5% at 59mt
Imports have gone up by 29%, while exports have come down by around 30% for YTDFY16
Management feels there is no incentive in exporting at low prices outside India due to poor global market conditions
Tata Steel sales volume were higher by 1.4% yoy and 5.8% qoq to 2.9 mn tonne while production was higher by 15.7% qoq to 3.1 mn tonne led by higher production at its new capacities
Tata steel exports have come down by 73% YoY. Net sales realizations fell by 24% on YoY due to pressure on product prices from cheaper imports and subdued domestic demand leading 19% fall in turnover.
Salary increased due to start of block year for employees for LTC (Rs 120 crore)
MMDR impact on performance stood at Rs 342 crore for 9MFY16
Bokaro steel plant (hot rolled) completed in Oct’15 has started producing HRC upto 12000 tonnes per day.
IISCO has started ramping up fast and already operating at 35% and have target of 60% for next year
Rourkela has also started utilizing new BF at 85% of capacity and getting hot metal of 7000 tonnes per day. Plate mill production is 50% of capacity, target of 75%
Bhilai steel plant’s URL (Rail line) will start giving production to market from April onwards
Target of spending Rs 6500 crore on modernization and extension and also on some new steels, of that Rs 4500 crore have already been spent and FY17 target is Rs 4000 crore
SAIL’s Net debt stands at Rs 34400 crore (Gross debt- Rs 36400 crore)
Company expects steel prices to increase gradually over the next few months post the implementation of MIP.
The company expects volume to jump to 16mn tons in FY17 from 12mn tonne in FY16 due to lower pressure from imports and ramp up of new facilities
As per management government is still to finalize on the operating modalities. More than 50% of SAIL’s products will be covered under MIP.
Long product’s net sales realization down by Rs 29700 (Apr- Dec) while Flat was down by 27900 (April- Dec). Both 20% down YoY
Networth of company stands at Rs 40600 crore
FY17 debt repayment as guided by company will be Rs 1700 crore

(vpwadhwa) #14

This post has gone dry, which shows that there is apathy towards the stock.

If one sees quarterwise performance, losses after interest, which were in excess of 1000 cr per qtr for the last four quarters, have come down to 442 cr in Q2. This company will enjoy operational leverage, with turnover hitting new highs over the next 6-8 quarters, and profitability will slowly climb.

Its an ideal turnaround story to be invested in for a 3-5 year horizon.

Disclosure - Invested.

(sivaprakasamp) #15

Yes I agree too. Sometime back i searched for the thread and it was long since anyone posted. Yes, with new capacity kicking in and steel prices stabilising, this is a perfect turnaround story. If we see fixed asset turnover we will understand that their plants are very underutilised. And as steel prices have stabilised profitability is a given thing in the years to come. However I prefer JSPL, given the quality of execution and exposure to power.
Disl: invested in JSPL

(Devaki Nandan Tripathy) #16

Even in case of turnaround, it’s very difficult to invest in a company that’s not dedicated to increasing shareholder value. SAIL needs massive tailwinds to generate reward for its shareholders, but in case of a headwind, it will be the first one to break down.

(vpwadhwa) #17

The main promoter here, the Government of India, has delivered great value in HPCL, BPCL, NBCC, BEML, Powergrid etc. One must take note of the determination of the Government to turn around the companies. SAIL is now in a great place, having just completed its expansions in time for the demand revival.

Steel Secretary gave an interview highlighting the growth in per capita consumption, and the fact that India may turn a nett importer of steel.

(SBT) #18

Happy new year to all.
SAIL, and to some extent TATA STEEL, is very different from other steel companies in the country. Almost 100% of its Iron ore and limestone-Dolomite need; and to some extent its coal need is fulfilled by captive mines.With Iron ore prices on fire, steel companies are forced to increase the prices. But a company like SAIL does not have to bear the burden of increased prices, while it enjoys the benefit of steel price rise to the fullest.
The current spike in raw material prices and corresponding rise in steel prices will very soon get reflected in the results of coming quarters.
Besides, the company has huge assets which is not reflected truly in its book value or current EV

(vinaynagori) #19

SAIL has massive tailwinds going for it.
1)It has 30 years iron mines and with iron ore prices increasing it will greatly benefit SAIL.
2)Major expenses for steel companies are coming down.e.g-:Power, gas, logistics, coal.Govt has shown great interest towards it.Anti dumping duty and MIP are also examples of it.(Favourable situations for steel will only help government fulfill its goal of recovering 1 lac crore + NPAs at favourable rate and ambitious infra plan)
Current Tata steel bid for Bhushan steel of 35000 crore validates the above point.
3)Major Capex done by SAIL to increase its capacity to 21MT from 14MT BY 2020.Also Capex done to imcrease the percentage of value added products.These things should increase topline and bottomline gradually over the steel cylce with operating leverage coming into play over time.
4)Employee efficiency is increasing and VRS is being used to cut down employee costs.
5)Q3 results have shown profits after a long time in SAIL.Also employee costs are continuosly falling and management has guided for improving employee efficiency in future.
6)There is a possibility of Divestment in SAIL with govt giving ambitious divestment targets(bonus)

(harishm) #20

Nice post. I found the below post which agrees with most of what you have told.

The caution is on the debt which is at 43900 Cr which is nearly as much as its total sales for the year 2016-17 (44k Cr).