EQUINOX

Steel Industry - SAIL

Steel Authority of India(SAIL)

Fundamental Analysis
A top down approach was followed in analyzing the Stock Steel Authority of
India (SAIL)

Steel Industry Analysis

Steel is the backbone of all industries and is one of the basic ingredients
of growth and development of a country.
Traditionally, the fortunes of the steel industry have been linked to the
economic cycle of a country.
Steel is also the most commonly traded commodity across the globe.
The per capita consumption of steel speaks volumes about the relative
position of a country on the development front.
Based upon its composition, steel is classified as:
a) Carbon steel and
b) Alloy steel
Carbon Steel
Carbon steel is also known as non-alloy, plain carbon, or un-alloyed steel.
These steel types by definition do not contain any alloying element in
specified proportions (i.e. beyond the usual proportion present in the
commercially produced steel).
Carbon steel is composed simply of iron and carbon and accounts for 90
per cent of the steel production.

ALLOY STEEL
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Steel Authority of India(SAIL)

Alloy steel contains varying proportions of carbon and other elements.

Alloy steel comprises a wide variety and grades of steel having varying
proportions of carbon and other elements. These elements determine the
property of the steel.
The different types of alloy steel are used for diverse purposes, for instance, hard
abrasion resistant steel is used for tool steels, heat resistant steel for high
temperature applications, and fatigue resistant steel for mechanical applications.
These are specific purpose compositions and cannot be generalized as a
commodity.
Although this category consists of high value steel alloys, volumes of this
segment are very low as compared with those of the mild steel products.
The most widely used alloy steel is the stainless steel.
Stainless steel is a corrosion resistant metal and contains chromium and nickel as
major alloying elements in proportions that depend upon the properties required
for a particular usage.

Semi-finished carbon steel products are converted into finished carbon steel
products, which can be further classified into two basic types according to their
shape:
Flat steel and
Long steel
Global Steel Industry
The recovery in the global steel industry became evident from June 2009 when the
crude steel production crossed 100 million tones after a gap of 8 months. The
capacity utilization which had dropped from 86% in July 2008 to 58% in December
2008, recovered to 80% in February 2010. It has become stagnant around this level
for last 6 months. World Steel Association (WSA) in its latest demand forecast has
projected a world-wide steel consumption growth of 10.7% during 2010 and 5.3% in
2011. The year 2011 is projected to take the global steel consumption to a new
peak of 1.3 billion tonnes.

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Steel Authority of India(SAIL)

Company Analysis
SAIL is Indias largest steel producing company
The company is among the top five highest profits earning corporate of the
country.
It is a fully integrated iron and steel maker, producing both basic and special
steels for domestic construction, engineering, power, railway, automotive
and defense industries and for sale in export markets.
The company is planning to augment its annual production capacity from 14
million tons in 2008 to 23 million tonnes by 2012.
SAIL seeks full control of Chiria mines.
Steel Authority of India (SAIL), the prime stakeholder in Chiria mines, one of
the world`s largest source of good quality iron ore, has sought the full control
of the over 2 billion ton ore reserve estimated in the region.
The fresh move from the state-owned steel major is expected to dent plans of
companies such as ArcelorMittal, JSW Steel, Essar Steel and Tata Steel, which
have been eyeing a portion of Chiria mines to serve their proposed steel
projects in the state.
The Jharkhand government and SAIL have locked horns over the ownership of
the Chiria mines for more than three years.
In fact, the state government terminated three out of six mining lease of
IISCO in the Chiria to release iron ore resources for meeting the captive
requirements of other steel companies, including Arcelor Mittal.

STEEL INDUSTRY A Future Outlook

The medium to long term outlook for steel in India is robust. India has entered the
steel intensive phase of economic development, with sustained investment in
infrastructure, construction, urban renewal and high activity level in manufacturing.
While there may be short term fluctuations in response to domestic and global
concerns, the medium to long term prospects appear very bright.

CAPACITY ADDITIONS
China alone is expected to account for more than 50 per cent of the total
global capacity additions due to the relatively robust demand growth
expected in the country over the long term.
China is followed by India, with 32 million tonnes of capacity expected to be
added over the next 5 years on the back of the estimated strong demand
growth and the countrys resilience to the recent global economic slowdown.
There is no significant capacity addition in the US, with operating rates
already at low levels in the country and no indications of any major demand
recovery. However, there is some capacity expansions in other advanced
countries such as Europe and Japan.
Although Japan is already facing considerable pressure on operating rates,
some of the companies had previously announced capital expansion plans.

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Steel Authority of India(SAIL)

However, these expansion plans are at advanced stages are likely to
get completed, albeit with some delay.
DOMESTIC DEMAND OUTLOOK

ACTUAL EXPECTED CAPACITY ADDITION PLANS

GLOBAL STEEL PRICE FORECAST

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Steel Authority of India(SAIL)

SAIL Performance Review Q2FY11

SAIL registered a turnover of ` 43,935 crore.
EBIDTA of ` 11,871 crore - a growth of 8.5%.
Profit before Tax (PBT) of ` 10,132 crore, higher by 8% - second highest since
inception.
Profit after Tax (PAT) of ` 6,754 crore, higher by 9.5%.
Highest ever Net Worth of ` 33,317 crore, surpassing previous best of `
28,148 crore a growth of 18.4%.
Total Dividend payout (including interim dividend of 16%) at 33% (` 1,363
crore).
Earnings Per Share of ` 16.35 as compared to ` 14.94 of 2008-09.
Produced 14.5 million tonnes of Hot Metal, 13.5 million tonnes of crude steel
and 12.6 million tonnes of saleable steel.
Cost Reduction initiatives resulted in savings of around ` 1,082 crore.
Share of value added steel in overall production grew to 37% compared to
30% in 2008 09.
Record production of special quality and value added products of 4.62 million
tonnes, a growth of 24% over FY'09.
Best ever coke rate at 517 Kg/thm (1% improvement).
Best ever specific energy consumption at 6.72 Gcal/tcs (Previous best of 6.74
Gcal/tcs achieved in FY'09).
Highest ever labour productivity of 226 tonnes/ man/ year.
Highest ever converter lining life of 11,036 blows achieved in a converter at
BSP in September'09, surpassing previous best of 10,115 blows.
Best ever sales of 4.45 million tonnes of long products, higher by 3% over last
year.
Distribution network expanded to 630 districts of the country with around
2500 dealer in place.
Capex touched 10,606 crore more than twice the previous year (5,223 crore).

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Steel Authority of India(SAIL)

SWOT Analysis - Indian Steel Sector
Strength
-

The diversified product mix and multi location production units are an area of
strength for the company. SAIL as a single source is able to cater to the entire
steel requirement of any customer. Also, it has a nationwide distribution
network with a presence in every district in India. This makes quality steel
available throughout the length and breadth of the country.
SAIL has the largest captive iron ore operations in India, which takes care of
its entire requirement. With plans in place to expand the mining operations,
the company will continue to be self sufficient in iron ore after completion of
the on-going phase of expansion. SAIL's captive power plants take care of
about 70% of its total power need. With augmentation of capacities of power
plants operated under Joint Venture, the Company will continue to have
security in this key input in future as well.
SAIL's large skilled manpower base is a source of strength. There is emphasis
on skill based training in the company. The expanded capacity will be
operated with more or less similar number of employees in future. In fact,
with selective recruitment and regular attrition on account of superannuation,
the number of employees is likely to come down over time; while there will be
improvement in overall skill set.
The Company has one of the biggest in-house research and development
centers in Asia. SAIL's RDCIS (Research & Development Centre for Iron &
Steel) is a source of regular product and process innovation. Low overall
borrowings lend strength to the company's balance sheet as it can mobilize
resources while keeping the leveraging at manageable levels.

Weakness
-

SAIL is dependent on the market purchase for a key input coking coal. As
India does not have sufficient coking coal deposits, most of the supply is from
external sources. As international practice in purchase of coking coal is
through annual/quarterly price contract, it exposes the company to market
risk if the steel prices crash but input prices remain unchanged.
A large manpower base results in higher manpower cost as a proportion of
turnover for the company. Although there has been significant reduction in
manpower through natural and other separations, the manpower strength in
SAIL is still higher than the industry average.
A part of the operations in the company continues to be from energy
inefficient processes viz. open hearth and ingot route of production, which will
be eliminated only after the completion of the current expansion program.
At present around 20% of the products are in the form of semi-finished steel,
resulting in lower value addition. This will continue till new rolling mills
planned under expansion plan contribute to value addition as almost all
semis will be converted to finished steel.

Opportunities
India is likely to emerge as the fastest growing steel market globally. This will
provide opportunities for steel companies to grow and acquire scale of global giants.
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Steel Authority of India(SAIL)

SAIL being the dominant producer of steel in India is suitably poised to avail
opportunities offered by the expanding market.

Threats
-

Global economic recovery is fragile. The developed economies are under

pressure for reconstructing their financial sectors and achieving fiscal
consolidation without impacting growth.
Emerging economies, on the other hand, have to contend with the threat of
inflation. A slowdown in global economic recovery will impact overall steel
demand adversely. With significant excess capacity in the global steel
industry during 2009-10.
Cheap imports from China and CIS continue to pose threats for domestic
suppliers. With growth in developed countries somewhat shaky, India could
become the target for cheap steel exports.
Delays in environmental clearances and renewal of mining leases could lead
to uncertainty with regard to raw material linkages and delay fresh capacity
becoming operational.

Valuation
Reccomendation

Target Price
Current Market Price
Upside/Downside (%)

Rating
M Cap

INR 237
INR 189
25.6%

Buy
9,80,336

Valuation using Net Asset Value method & Price multiple ratios
Net Asset Value Per Share
Current P/NAV

INR 145.60
1.30

Target Price

P/NAV

Implied Target Price (Peak)

Implied Target Price (Base)
Implied Target Price (Trough)

Valuation Methodology
DCF Valuation
EV/Sales Exit Multiple
EV/EBITDA Exit Multiple
P/E Exit Multiple
Asset Based Valuation (P/NAV)

Intrinsic Value
2.00
1.50
1.00

Multiple
1.25%
1.00
2.50
1.00
1.50

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INR 291.19
INR 218.39
INR 145.60

Intrinsic Value
INR
INR
INR
INR
INR

249.37
236.04
242.48
240.44
218.39

Steel Authority of India(SAIL)

Valuation using Discounted Cash Flow & Sensitivity Analysis

Intrins
ic
Value

Terminal
Value
Sum of PV of FCF for
explicit forecast
WACC
Terminal
Growth

4,76,64
3

Enterprise Value

19.6%

-Debt
+Cas

1.25%

Present Value of
terminal value

4,76,35
5

Terminal Value as % of
Total Value

9,52,998

50%

1,65,113

2,24,364

Net
Debt

(59,251)

Equity Value ( Market

Capitalisation)

10,12,24
9

Diluted Shares

4,130

9,52,99
8

Total Value

Intrinsi
c Value

INR 245

Sensitivity-Varying WACC and

Terminal growth
PV of Terminal Value
WACC

PV of
FCF

0.3%

1.3%

2.3%

Intrinsic Value
0.3%

1.3%

2.3%

17.6%

5,50,0
66

6,29,218

6,67,800

7,11,423

300

309

320

18.6%

5,11,8
52

5,41,929

5,73,239

6,08,389

269

277

286

19.6%

4,76,6
43

4,68,513

4,94,103

5,22,650

243

20.6%

4,44,1
73

4,06,445

4,27,495

4,50,844

220

225

231

21.6%

4,14,2
01

3,53,724

3,71,141

3,90,363

200

204

209

INR 249

256

Sensitivity EV/Revenue Exit

Multiple
PV of Terminal Value
(EV/Revenue)
WACC
17.6%
18.6%

PV of
FCF

Intrinsic Value

0.8

1.0

1.3

5,50,0
66

4,55,679

5,87,821

7,19,964

243

275

307

5,11,8

4,20,410

5,40,797

6,61,183

226

255

284

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0.8

1.0

1.3

Steel Authority of India(SAIL)

52
19.6%

4,76,6
43

3,88,537

4,98,299

6,08,061

209

20.6%

4,44,1
73

3,59,708

4,59,860

5,60,013

195

219

243

21.6%

4,14,2
01

3,33,611

4,25,064

5,16,517

181

203

225

INR 236

263

Sensitivity EV/EBITDA Exit

Multiple
PV of Terminal Value
(EV/EBITDA)
WACC

PV of
FCF

Intrinsic Value

17.6%

5,50,0
66

5,07,738

6,19,860

7,31,982

256

283

310

18.6%

5,11,8
52

4,67,839

5,69,985

6,72,132

237

262

287

19.6%

4,76,6
43

4,31,780

5,24,912

6,18,044

220

20.6%

4,44,1
73

3,99,165

4,84,143

5,69,121

204

225

245

21.6%

4,14,2
01

3,69,640

4,47,237

5,24,834

190

209

227

INR 242

265

Sensitivity - P/E
Exit Multiple
PV of Terminal Value (P/E)

Intrinsic Value

Ke

PV of
EPS

20.4%

244

18

24

36

262

268

281

21.4%

232

17

22

33

248

254

265

22.4%

220

15

20

30

235

23.4%

210

14

18

28

223

228

237

24.4%

199

13

17

25

212

216

225

INR 240

251

Per Share Data & Key

Ratios

EPS diluted (reported)

EBITDA/sales (%)
EBIT/sales (%)

FY
2007A
15.02
23%
20%

FY
2008A
18.25
25%
22%

FY
2009A
15.26
19%
16%

FY
2010A
17.42
23%
20%

FY
2011E
20.87
20%
16%

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FY
2012E
44.23
27%
22%

FY
2013E
47.44
26%
20%

FY
2014E
58.17
27%
22%

Steel Authority of India(SAIL)

Net income/sales (%)
ROE

16%

17%

13%

16%
22%

15%
21%

18%
32%

18%
26%

19%
25%

EV/Sales

1.8

1.4

0.8

0.7

0.6

EV/EBITDA

7.1

6.1

2.7

2.5

2.1

P/E

10.9

9.1

4.3

4.0

3.2

P/Sales

2.3

2.0

1.8

1.9

1.5

P/BV

4.5

3.4

2.8

2.3

1.9

All the analysis are done in the excel sent along with the report. Assumptions are
made by going through the financial statements & call transcripts published by the
company.

Technical Analysis
Volume & Open Interest
Price is the most important measure of the trends. Volume and Open Interest (OI)
are of secondary importance. They are needed as confirming indicators. Volume is
more important among the two as OI is generally used in case of FUTURES market.
Best known & simplest volume indicator is OBV (On Balance Volume)
On Balance Volume Technical Indicator (OBV) is a momentum technical indicator
that relates volume to price change. OBV attempts to detect when a financial
instrument (stock, bond, etc.) is being accumulated by a large number of buyers or
sold by many sellers.
When the security closes higher than the previous close, all of the days volume is
considered up-volume. When the security closes lower than the previous close, all of
the days volume is considered down-volume.
Traders will use an upward sloping OBV to confirm an uptrend, while a downward
sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while
the price of an asset is trending upward can be used to suggest that the "smart"
traders are starting to exit their positions and that a shift in trend may be coming.

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Steel Authority of India(SAIL)

Here, we see that the price has been trending downwards over last few months
which is again been confirmed by the OBV. This performance in spite of SENSEX
moving up can be attributed to the below expectation performance of SAIL over the
last two quarters. The expectation of the performance over the next few quarters is
positive one and we will probably see a rally in coming days, which can be later
then strengthened by the OBV indicator.

Price Indicators
1) Moving averages:
Purpose is to track the trend. MA is the follower, not the leader. It never anticipates,
it only reacts. Shorter term averages are more sensitive to price action as compared
to longer term. For, short term view with high volatility the short term MA gives
clear picture. When trend is in process of reversing, two methods generally used are
- Double crossover method
- Triple crossover method
We have used Triple Crossover Method to identify trend reversals (as it is more
accurate and confirms the trend reversal), as seen below:
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Steel Authority of India(SAIL)

MA signals trend reversal when the short term MA cuts the long term MA. As in, we
can see that the 4 day MA cuts the 9 day MA around 28 th October, signalling the
downtrend. This is strengthened by the fact that 9D MA also cuts 18D MA from
above, thus confirming the trend reversal. As of now, we can see that all the 3
Moving Averages are aligned in the order and we may see the cuts in future. So, the
investors need to hold on and wait for any reversal pattern to take their position on
the stock.
2) Bollinger Bands:
The bands capture 20-days Moving average & (+/-) 2 standard deviations above and
below the price line. It represents the band within which 95% of the data will fall.
Prices are over-bought when they touch the upside and are over-sold when they
touch the lower band.
If prices bounces of the lower bound and crosses MA, the upper band becomes the
target.
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Steel Authority of India(SAIL)

In strong uptrend, price will fluctuate between upper band & 20 day MA. In that case
crossing below 20-day average warns of a trend reversal to the downside.

We can see that the encircled portions in the chart above have followed the pattern
as mentioned above. As soon as the price crosses the MA, upper band becomes the
target & the crossover of lower band signals down trend.
Currently we can see that the price lies between the down band and the MA. We
need to wait and see the pattern brewing up. Going ahead the price chart may cross
the MA, giving us the BUY signal with upper band as target. Hence, in the absence
of any clear signal again we need to wait and then make the Buy or Sell as per the
pattern. The findings of Bollinger Bands confirm those of the Moving Average.
3) Relative Strength Indicator (RSI)
Momentum measures the velocity of the price changes, but it doesnt take care of
the abrupt price change & also there is need for constant range for comparison.
Hence, to overcome the issues, RSI is used, where RSI is ratio of Avg of X days up
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Steel Authority of India(SAIL)

closes & Avg of X days of down closes. This indicator is better for small time
period and not that affective when used over a large period of time.
RSI over 70 Overbought
RSI below 30 Oversold
Divergence between RSI and price line when RSI is above 70 or below 30 is a
serious warning that should be heeded. Also, the mid-value of 50 acts as SUPPORT
during pullbacks & RESISTANCE during bounces.

Herein, we see that currently the RSI is hovering around the lower limit of 20%,
which signals the OVERSOLD. The stock has always respected the RSI and has been
synchronised with it. Hence the current signal hints us at the possible uptrend. We
need to wait for some time and when the correct signal is shown along being
strengthened by other indicators, the BUY action can be taken. Also, the chart below
(with RSI being below the 30% mark) clearly shows the OVERSOLD signal. Hence,
the investors can go for BUY position once RSI is supported by other indicators.

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Steel Authority of India(SAIL)

4) Stochastic (K%D)
A technical momentum indicator that compares a security's closing price to its price
range over a given time period. The oscillator's sensitivity to market movements
can be reduced by adjusting the time period or by taking a moving average of the
result. This indicator is calculated with the following formula:
%K = 100[(C - L14)/(H14 - L14)]
C = the most recent closing price
L14 = the low of the 14 previous trading sessions
H14 = the highest price traded during the same 14-day period.
%D = 3-period moving average of %K
The theory behind this indicator is that in an upward-trending market, prices tend to
close near their high, and during a downward-trending market, prices tend to close
near their low. Transaction signals occur when the %K crosses through a threeperiod moving average called the "%D"
We should watch out for the divergence between D Line and price when line is overbought or over-sold.
Buy or sell signal signals occur when the D-Line is crossed by the faster K-Line.
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Steel Authority of India(SAIL)

-

Buy: K-Line crosses from below the D-Line below 20 Level.

Sell: K-Line crosses from above the D-Line above the 80 Level.

Here, the signal is judged by the crossovers between %K and %D lines as

mentioned above. The encircled portions show the BUY and SELL signals being
generated by the same. Currently we can see that there has been a Buy signal
recently and the stock has advanced to some level, but again we can see that the
lines are moving towards the lower level of 20%. Hence, there may be another BUY
signal, which again suggests investors to wait for the moment.
5) WILLIAM'S % R
Williams %R (pronounced "percent R") is a momentum indicator that measures
overbought/oversold levels The scale ranges from 0 to -100 with readings from 0 to
-20 considered overbought, and readings from -80 to -100 considered oversold.
William %R, sometimes referred to as %R, shows the relationship of the close
relative to the high-low range over a set period of time. The nearer the close is to
the top of the range, the nearer to zero (higher) the indicator will be. The nearer the
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Steel Authority of India(SAIL)

close is to the bottom of the range, the nearer to -100 (lower) the indicator will be. If
the close equals the high of the high-low range, then the indicator will show 0 (the
highest reading). If the close equals the low of the high-low range, then the result
will be -100 (the lowest reading).
Typically, Williams %R is calculated using 14 periods and can be used on intraday,
daily, weekly or monthly data. The time frame and number of periods will likely vary
according to desired sensitivity and the characteristics of the individual security.
It is important to remember that overbought does not necessarily imply time to sell
and oversold does not necessarily imply time to buy. A security can be in a
downtrend, become oversold and remain oversold as the price continues to trend
lower. Once a security becomes overbought or oversold, traders should wait for a
signal that a price reversal has occurred. One method might be to wait for Williams
%R to cross above or below -50 for confirmation. Price reversal confirmation can
also be accomplished by using other indicators or aspects of technical analysis in
conjunction with Williams %R.

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Steel Authority of India(SAIL)

In the chart above we can see that the Williams %R is hovering around the -80 level
and the level between -80 to -100 is considered to be over-sold. Hence we can see
that the BUY signal is approaching and we should wait for some time to confirm the
signal and then take the position.
6) Moving Average Convergence-Divergence (MACD)
Divergence (MACD) is one of the simplest and most effective momentum indicators
available. MACD turns two trend-following indicators, moving averages, into a
momentum oscillator by subtracting the longer moving average from the shorter
moving average. As a result, MACD offers the best of both worlds: trend following
and momentum.
MACD fluctuates above and below the zero line as the moving averages converge,
cross and diverge. Traders can look for signal line crossovers, centre line crossovers
and divergences to generate signals. Because MACD is unbounded, it is not
particularly useful for identifying overbought and oversold levels.
Standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day
EMA. Closing prices are used for these moving averages. A 9-day EMA of MACD is
plotted alongside to act as a signal line to identify turns in the indicator. The MACDHistogram represents the difference between MACD and its 9-day EMA, the signal
line. The histogram is positive when MACD is above its 9-day EMA and negative
when MACD is below its 9-day EMA.
MACD oscillates above and below the zero line, which is also known as the
centreline. These crossovers signal that the 12-day EMA has crossed the 26-day
EMA. The direction, of course, depends on direction of the moving average cross.
Positive MACD indicates that the 12-day EMA is above the 26-day EMA. Positive
values increase as the shorter EMA diverges further from the longer EMA. This
means upside momentum is increasing. Negative MACD indicates that the 12-day
EMA is below the 26-day EMA. Negative values increase as the shorter EMA diverges
further below the longer EMA. This means downside momentum is increasing.
Signal line crossovers are the most common MACD signals. The signal line is a 9-day
EMA of MACD. As a moving average of the indicator, it trails MACD and makes it
easier to spot turns in MACD. A bullish crossover occurs when MACD turns up and
crosses above the signal line. A bearish crossover occurs when MACD turns down
and crosses below the signal line. Crossovers can last a few days or a few weeks, it
all depends on the strength of the move.
Centreline crossovers are the next most common MACD signals. A bullish centreline
crossover occurs when MACD moves above the zero line to turn positive. This
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Steel Authority of India(SAIL)

happens when the 12-day EMA of the underlying security moves above the 26-day
EMA. A bearish centreline crossover occurs when MACD moves below the zero line
to turn negative. This happens when the 12-day EMA moves below the 26-day EMA.

The encircled part shows the correct crossover and hence the respective price
action taken up by the stock. We see the price uptrend when MACD cuts from below
and the price downtrend as MACD cuts from the above. Thus, the stock follows the
pattern as suggested by the MACD lines. Now currently we see that the MACD is
moving along and there might be a cut from below signalling the uptrend. Hence,
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Steel Authority of India(SAIL)

the investors need to wait for the exact BUY signal to occur, which when
strengthened by other indicators will provide an exact position to be taken .

21 Equity Research Report - Team Chakravyuh