Citigroup upgrades SAIL rating to 'Hold'

RESEARCH: CITIGROUP
RATING: HOLD
CMP: Rs 203

Citigroup upgrades the rating of Steel Authority of India to `Hold' with a target price of Rs 234. SAIL has risen 75% in the past 12 months but has underperformed Tata Steel/JSW Steel. SAIL has 100% captive iron ore, but only 5% coking coal.

Based on flat steel prices, rising trend in coal prices, and SAIL's sluggish volume growth until FY12, Citigroup does not expect Sensex outperformance. SAIL has the advantage of a largely Indian exposure. The new target multiple is higher than SAIL's 3-year average but lower than the highs of 7-9 x. At a targer price of Rs 234, it would trade 11.9x June11 PE.

Citigroup is raising PAT by 2-36% for FY10-12. The rise in estimates is largely due to a revision in HR coil dollar price estimates by 10-29 %, domestic price trends and 2-4% increase in volumes versus earlier.

The government has approved a 20% equity sale in two tranches of 10% each. Each time, 5% will be through FPO and 5% through sale of government holding. On completion, share capital will rise to Rs 4,540 crore and government stake will fall to 69% from 86%.