MOSL: SAIL (Upgrade to Neutral)-Op. performance continues improving led by demand tailwind; Raising estimates

SAIL: Op. performance continues improving led by demand tailwind; Raising estimates and upgrading to Neutral

(SAIL IN, Mkt Cap USD4.6b, CMP INR76, TP INR85, 12% Upside, Upgrade to Neutral)

SAIL’s operating performance continues improving, driven by the tailwind of strong demand and significantly better steel prices. 4QFY18 EBITDA increased 68% QoQ to INR26b (20% beat), driven by higher steel prices (+12%; 6% beat), partially offset by increased other operating expenses. EBITDA per ton increased 69% YoY to INR6,945. Interest and depreciation, too, increased due to capitalization of projects. INR5.8b provision toward an increase in cap on gratuity had a negative impact and INR3.3b w/back had a positive impact on the wage bill and PAT. Adj. PAT increased 3x QoQ to INR6b.

For FY18, adj. EBITDA was INR52b (v/s INR380m in FY17) and adj. loss before tax reduced from INR27b to INR1.3b. Net debt increased by INR40b, while capex stood at INR51b for the full year.

Tailwinds of operating leverage and demand; upgrading to Neutral

• SAIL has done a commendable job in containing the wage bill from ballooning. Head count is down by net 13%, led by natural attrition and VRS. Expensive retirees have been replaced by cheaper younger employees. Wage bill has declined by 17%, while sales have increased 16%. This has reduced average cost by INR2,300/t over two years to INR5,872/t in FY18.
• Two blast furnaces have been added in last six months. New SMS at Bhilai, too, is likely to be fully ramped up in six months. We expect sales volume CAGR of 8.5% to 16.6mt over FY18-20.