MOSL: SAIL (Sell)-Operating loss increases on RM cost-Net debt will continue to rise eroding equity value

​SAIL: Operating loss increases on RM cost; Net debt will continue to rise eroding equity value; Maintain Sell

(SAIL IN, Mkt Cap USD3.7b, CMP INR57, TP INR30, 47% Downside, Sell)

SAIL's EBITDA loss increased from INR0.4b in 3QFY17 to INR2.6b in 4QFY17 (est. profit of INR0.3b) as higher raw material cost offset the benefit of higher realization and lower employee cost. Adj. loss after tax of INR7.7b (est. INR13b, due to tax credits) was down from INR7.9b in 3Q on FX gains in other income. For FY17, EBITDA improved from a loss of INR33b in FY16 to just break-even of INR0.4b. Adj. loss after tax reduced from INR38b in FY16 to INR27b in FY17.

• ​Steel sales declined 9% YoY to 3.4mt (est. of 3.5mt), on a strong base and some impact of demonetization of currency notes. Crude steel production was marginally higher YoY to 3.8mt.
  
• Pure steel sales realization increased ~3% QoQ to INR32,700/t, lower than the peers on account of higher mix of long-products.
  
• EBITDA/t declined INR640 QoQ to negative INR767 on higher raw material cost.
  
• Borrowings increased by ~INR26b QoQ to ~INR414b. Number of employees has reduced by 5.6k YoY to 82.9k002E