Nomura upgrades SAIL to 'BUY'

MUMBAI: Nomura Equity Research has upgraded its recommendation on SAIL to ‘BUY’ from its earlier view of reduce. It has set a revised price target of Rs 250 on the stock.

“We upgrade SAIL from Reduce to BUY with a revised 12-month target price of Rs 250 (from Rs 132) due to increased global steel price forecasts, greater visibility on the company’s expansion plan, substantial improvements in the profitability of existing plants on modernization and improving product mix.

We believe SAIL should see continuous earnings growth until FY14F, driven by strong steel prices and significant volume growth. We have valued SAIL’s existing business at Rs 76 billion at 10x FY12F core earnings.

We expect SAIL to have invested a total of Rs 420 billion by FY12, and have total debt of Rs 238 billion and cash of Rs 155 billion. We have valued the capex less net debt at book value. We have discounted the overall value of Rs 1,095 billion by six months to arrive at our revised target price of Rs 250/share.

We have valued SAIL at a premium to our valuation of Tata Steel’s India business. This is primarily because of SAIL’s stronger balance sheet. SAIL has significant net cash, while Tata Steel has high debt on its books. Therefore, we believe SAIL deserves to trade at a premium to Tata Steel. We had earlier valued SAIL at 10x FY11E EPS of INR11.4 and added capex until FY11 at its book value,” the recommendation said.