Edelweiss: Maintain ‘reduce’ on SAIL with target price of Rs 33

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Published: September 18, 2019 3:04:16 AM

In our view, the government’s decis-ion brings to the fore the larger issue of potential delays in the scheduled bidding process in the domestic iron ore market. If the bidding process is delayed, we es-timate a shortfall of at least 30–35 mtpa even if SAIL manages to ramp up produ-ction.

SAIL, target price, market news,  SAIL mine, merchant iron ore sale, Donimalai, Steel Authority of IndiaIn our view, the government’s decis-ion brings to the fore the larger issue of potential delays in the scheduled bidding process in the domestic iron ore market.

The government has allowed Steel Authority of India (SAIL) to sell iron ore to third parties from its captive mines for two years. In our view, the government’s decision stems from the need to address iron ore supply issues in the event of delays in the bidding process due in March 2020; and improve SAIL’s profitability. We, however, believe: Infrastructure constraints and beneficiation issues at customers’ end would constrain potential gains. That said, we do not rule out near-term relief for the stock, particularly considering the 35% falloff over the past three months. Maintain ‘REDUCE’ with a target price of INR33 (exit 5.8x FY21E EBITDA).

The government’s decision to allow merchant iron ore sales would generate additional revenue for SAIL from, expected iron ore sales volume (60–64% Fe content) of 4–5mtpa; and destocking of existing 41.5mt of low-grade inventory (estimated to be 54–58% iron ore grade). Despite the seeming windfall, we see risks from limiting evacuation infrastructure for additional iron ore (~10mtpa) at SAIL mines; and utilisation of beneficiation/pelletisation capacities for low-grade iron ore. Hence, we believe net gains would be fairly limited for the company.

In our view, the government’s decis-ion brings to the fore the larger issue of potential delays in the scheduled bidding process in the domestic iron ore market. If the bidding process is delayed, we es-timate a shortfall of at least 30–35 mtpa even if SAIL manages to ramp up produ-ction. We also expect the decision on Donimalai mine (NMDC) shortly; this would add about 7mtpa of supply, pot-entially ameliorating the shortfall further.

The latest development spells relief for the stock in the near term considering potential benefits from merchant iron ore sales. However, in the medium-to-longer term, we remain circumspect about the actual gains accruing to the company.

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