SAIL's wait for positives continues

Steel Authority of India’s (SAIL) stock jumped 7.7 per cent on Friday after shareholders cleared its share buyback proposal, which if implemented, will lead to reduction in number of shares, and hence, will be EPS (earnings per share) accretive.

While the move will provide some cushion to the stock, which has been underperforming for a long time, many analysts are sceptical given the heavy investments being made in the on-going capacity expansions many of which are already facing delays.

The existing performance of the company and completion of these on-going expansions, holds the key for the stock. While some of the projects are nearing completion and after stabilisation should help improve growth rates, SAIL’s margins also remain a matter of concern and can be impacted by the implementation of pending wage revisions. Thus, analysts don’t rule out some downside for the stock before the positives on capacity expansions start accruing.

Share buyback: Will it help?
There has been talks of the government divesting its stake in SAIL for long. However, looking at the poor market conditions and the pressure on the stock prices, the same has not happened.

On September 21, during SAIL’s annual general meeting, a special resolution was passed wherein SAIL was authorised to purchase, acquire or hold its own shares or other specified securities as per the applicable statutes. This added a new dimension to the on-going talks for disinvestment of government’s stake. The buyback of shares from the government, if it happens, can result in reduction of shares (if cancelled from equity capital) and in turn EPS upgrades.

However, many analysts are sceptical of any buyback moves. SAIL has planned a capex of Rs 12,000 crore for FY 13 after incurring Rs 11,021 crore in FY12. The debt at the end of FY12 stood at Rs 11,587 crore while cash in hand was Rs 6,416 crore. Looking at this and also heavy funding requirement for capacity expansions, analysts like Ravindra Deshpande at Elara Capital do not see the buyback happening. He observes that SAIL has already spent Rs 40,300 crore till March 2012, with Rs 31,800 crore yet to be spent. He expects the company to generate operating cash flows of around Rs 13,300 crore during FY13-15, and hence, it would be required to borrow Rs 18,300 crore to fund the pending capex requirements.

Consequently, Deshpande expects SAIL’s net debt-equity ratio to rise to 0.62 by FY14 from 0.24 in FY12.

While only a resolution has been passed now, the results will depend on implementation of it as well as the quantum of the buyback.

Capacity expansions
The company currently is in midst of expanding its crude steel capacity from 13.7 million tonnes (mt) to 21.4 mt wherein saleable steel capacity is being expanded by 7.8 mt to 20.2 mt.

Nevertheless, the delay in the expansion plans is among major factors for impacting investor confidence and underperformance of the stock.

Girirraj Daga at Nirmal Bang says most expansions have been delayed by one-two years. For instance, 1.2 mt expansion at Bokaro plant, which was scheduled for completion in 2010, is to be completed by this October. The IISCO West Bengal expansion of 2.2 mt is also almost one year delayed and likely to be commissioned now by December this year.

Similarly, the Rourkela 2 mt expansion is now to be completed in 2013.

While these would add to growth from FY13 onwards, the commissioning of two coke oven batteries with total capacity of 1.6 mt at its plants at IISCO (West Bengal) and Rourkela (Odisha) should allow SAIL to reduce the power and fuel bill in FY13 (and offset some of the expected pressure on margins due to wages).

Wage revision overhang
Analysts says the steel production per employee is the lowest for SAIL.

Deshpande adds this is because SAIL has the largest headcounts among the steel mills in India. Hence, it earns Ebitda/tonne equivalent to non-integrated steel mills (JSW Steel) despite having captive iron ore. Considering the wage revisions that were to be implemented from January 2012, analysts feel that significant upwards revision in wages might dent the SAIL’s profitability in the near term.

This comes at a time when both demand and the pricing environment is weak.