MOSL: SAIL (Sell)-Turns PAT positive after 10 quarters

SAIL: Turns PAT positive after 10 quarters

(SAIL IN, Mkt Cap USD6.0b, CMP INR94, TP INR71, 24% Downside, Sell)

SAIL turned PAT positive – albeit marginally – after 10 quarters, driven by strong steel prices and higher volumes. EBITDA increased 58% QoQ to INR14.4b (ahead of est. of INR11.7b) on higher steel spreads and volumes. Adj. PAT improved from loss of INR3.2b in 2QFY18 to PAT of INR659m. Interest cost increased 10% YoY to INR6.7b and depreciation rose by 13% YoY to INR7.6b (both higher than estimates).

• Sales increased 14% YoY (6% QoQ) to 3.8mt on strong domestic demand.
• Net sales realization increased 6% QoQ to INR40,646/t. Steel realization rose ~5% QoQ to INR35,800/t. The differential was contributed by by-product sales, particularly coal chemicals.
• EBITDA per ton increased 48% QoQ to INR3,820 on higher steel spreads (+5% QoQ to INR20,773) and positive operating leverage. Employee cost was lower (-7% YoY), but offset by higher other operating expenses (+20% YoY).

Strong earnings momentum, but valuations are rich; Maintain Sell

• Operating performance has improved over the last few quarters, driven by a stronger steel market, stabilization of new capacities, and control over employee cost. The trend is likely to continue in 4QFY18.
• Bhilai: The recently commissioned new 3mtpa blast furnace will reverse the declining trend in the operating performance. Steel melt shop is likely to get commissioned in FY19, reducing operating cost.