Fw: Company Report - Steel Authority of India Ltd and Express Idea - Midcap

 

Steel Authority of India Ltd: Not yet out of the woods – SELL CMP Rs83.2, Target Rs70.7, Downside 15% Steel Authority of India Ltd (SAIL) has underperformed the Sensex by 19.7% over the past one year, on account of concerns over the delays in the company's expansion projects, lower margins and availability of iron ore. SAIL's expansion plans have been facing delays in project implementation besides cost escalation. Projects which were earlier expected to be completed by FY12 are now estimated to get over in a phased manner by FY14E. Volume growth over the last five years has remained stagnant due to delay in capacity addition and technical issues at various plants. We believe these issues would continue over the next one year as benefits of the new capacities would set in only from H2 FY14. We expect sales volume growth to remain flat in FY13 and increase 9% yoy to 12.8mn tons in FY14 as the impact of incremental production from new capacities would be offset by the shutdown of old facilities. The full benefit of new capacities would be witnessed only by FY15, where we expect the company to register a volume growth of 14.6% yoy to 14.7mn tons. SAIL's Gua mines have remained closed since June '11 and its Bolani mines were also shut for a month due to expiry of forest clearance. The company's margins have been hit over the last two years on the back of high fixed costs, high coking coal costs, increase in consumption of externally purchased coke and degrading product mix. EBIDTA/ton in Q3 FY13 is expected to decline to its lowest level since FY04 as steel prices decline sequentially. Though we expect margins to improve going ahead, we believe it would remain below its 5-year historical average. Earnings growth would further decline on account of rising interest costs and depreciation. At the CMP, the stock is trading at 7.2x FY14E EV/EBIDTA, higher than its domestic as well as international peers. We assign no value to the company's CWIP, given the dismal track record of SAIL's execution capabilities. We value SAIL at 6.5x FY14E EV/EBIDTA and arrive at a fair value of Rs70.7. At the CMP, the stock is 15% above our fair value; Initiate coverage with a SELL rating. Click here for the detailed report on the same. Midcap Trades After underperforming in 2011, Indian equities have outperformed its global peers in 2012 year-to-date. Initially, the rally was limited to large caps. However, over the past 3 months, small and mid cap stocks (a jump of 17% in CNX Midcap) have recorded smart gains. Likelihood of continued Government action (most recent being passing of opening of FDI in retail in Lok Sabha) and a supportive global sentiment is expected to trigger further upside in the stock market. A possible cut in CRR in the upcoming RBI policy meet and Repo cuts from January 2013 are added triggers which can further accentuate the current momentum. Based on our reading of charts, the Nifty appears headed towards the 6,400 mark, which implies 8.5% upside from current level. We believe midcaps could rally even more, possibly 15-25 in case of many companies. We recommend 9 midcap ideas based on technical analysis. We have categorized our picks into the following three buckets based on technical indicators: Category Action advised Stocks I Momentum trades JB Chemicals, Divis Labs, Shriram Transport, IB Real Estate II Bottom fishing ideas Adani Enterprises, Punjab & Sind Bank, Phoenix Mills III Defensive bets DCB, Vijaya Bank Recommendation Stock Reco Price Target SL Exp. Returns (%) Momentum Trades J.B. Chem 86 98.5 75.5 15 Divis Labs 1162 1320 1120 14 IB Real Estate 75 89 65 19 Shriram Transport 691 750 640 9 Bottom Fishing Ideas Adani Ent 249 275 232 10 Phoenix Mills 233 300 195 29 PSB 72 81 66 13 Defensive Bets DCB 47 55 42 17 Vijaya Bank 61 71 51.5 16 Click here for the detailed report on the same. Warm Regards, Amar Ambani

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