CLSA slashes SAIL's target price on bleak margin outlook

MUMBAI: The recent correction in rupee, iron prices, subdued steel prices and higher wages are likely to hit the margins of SAIL, says CLSA. The brokerage cut down SAIL's FY14-15 EPS by 38-47 per cent and has slashed its target price to Rs 35 from Rs 60.

At 10:50 a.m.; the stock was at Rs 48.55, up 1.78 per cent, on the BSE. It touched a high of Rs 48.65 and a low of Rs 47.70 in trade today.

"The sharp weakness in the rupee will sharply increase SAIL's imported coaking coal costs. Theoretically, the weaker rupee should boost Indian steel prices, but in reality, steel prices always weaken in USD terms during periods of USD appreciation. This, together with the weak Indian steel demand-supply situation, makes us believe that India business is unlikely to see any top-line benefit from the rupee weakness," the report said.

According to the report, the company is making provisions for a 15 per cent hike in on-going wage negotiations with workers and it sees a risk of actual hike higher than the estimate.

It also raises concerns that the company's margins may come under pressure because of decline in iron-ore prices.

"SAIL does not get any benefit from lower iron ore prices but gets hurt by the subsequent drop in steel prices," the report added.

"We cut the FY14-15 EPS by 38-47 per cent factoring in lower volumes and margins. Given the rapid worsening of the margins of existing capacities, visibility of the eventual margins of expanded capacities has deteriorated. Balance sheet will weaken further over FY13-15 and we forecast net debt to rise 86 per cent by FY15 with net D/E rising to 0.8x by FY15 from 0.5x in FY13," the report said.

CLSA is of the view that despite over 48 per cent correction, valuations at 7.2x FY15EV/EBitda are still expensive. It has maintained a 'Sell' rating on the stock.