valuation report

1. STEEL AUTHORITY
OF INDIA LIMITED
METALS STEEL SECTOR - INDIA
Investment Theme :
With the recent stock price correction, we believe that the worst case
scenario is already priced in and valuations have become quite
reasonable. Any price increases in steel prices globally post July 2008
will provide further room for an upside. Thus, given that SAIL
business model is reasonably de-risked due to its captive iron ore
mines and 30% of its coking coal requirements being sourced from
CIL, the worst case scenario is already been factored in and valuations
are quite reasonable.
Government Policies
The government of India finally acted on steel in a bid to contain
rising steel prices. Import duty on pig iron and steel has been brought
COVERAGE - BUY down to zero while export duty of 5-15% has been imposed on various
steel products. To compensate, import duty on steel inputs like zinc
CMP – 135 INR and metallurgical coke has been lowered to 0%. We now expect focus
to start moving towards steel sector fundamentals.
US $ 13 BILLION
MARKET CAP INR 554 BILLION Key Developments
AVERAGE VOLUME NSE 13,329,239 Import duty on pig iron and mild steel reduced to 0% from 5%
previously
(Shares) BSE 4,250,450 TMT/structural bars are now exempt from 14% countervailing
52 WEEK: HIGH – 293 / LOW - 117.35 duty
Import duty on key inputs for steel like metallurgical coke, Ferro-
s
alloys and zinc brought down to 0% from 5% previously.
Export duty of 15% imposed on primary/semi finished steel & HR
coils/sheets, 10% on rolled products including CR coils/sheets,
pipes & tubes and 5% on galvanized coils and sheets.
ARANEGON
Telecom 470 CLP
Group – 6 I
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

2. METALS STEEL SECTOR - INDIA
SECTOR OUTLOOK
A US$ 200 per ton increase in the price of coking coal will erode the profits of the
non-integrated producers. Consequently, an increase in steel prices is imminent. In
the international market, steel billet and HR coil prices have risen by about US$
150/tonne to reach more than US$ 1000/tonne.
In India, steel producers will make zero profits as the rise in contract coking coal
prices will eliminate profits for the non-integrated producers. Only Tata Steel
(Indian operations) and SAIL have captive iron ore, and these two account for only
one third of total industry volume. Currently, based on the last three quarter’s
financials, on an average the industry makes blended PBT of USD 200/ ton. A price
increase in Jan-March 2008 will be neutralized by a sharp rise in iron ore cost for
non-integrated producers.
The Indian government has urged the steel industry not to raise prices and further
given inflationary concerns. We believe the industry has a strong case to raise
prices in order to restore profitability and invest in the long-term interests of the
industry. We believe controlling steel prices would be the worst possible outcome
since the industry would make no profits and government revenues would fall as a
result. Allowing steel price to increase based on free market factors is the ideal case.
However, given inflationary concerns, we believe that fiscal measures would
probably be in the best interest of everyone concerned.
Top Steel Producing Companies 2006
Rank Capacity Company
1 117.2 ArcelorMittal
2 32.7 Nippon Steel
3 32.0 JFE
4 30.1 Posco
5 22.5 Bao Steel
SAIL
TATA STEEL
JSW INDIA
Group – 6 II
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

3. METALS STEEL SECTOR - INDIA
IMPACT ON OTHER Focus on Fundamentals
With the near-term uncertainty of government action now out of
STEEL PLAYERS the way, we expect attention to once again start moving towards
steel sector fundamentals.
With domestic steel prices 10% lower If inflation continues to rise, drastic steps could happen going
than landed price of imports, we see forward; but the fact that the government has not taken these steps
little chance of steel companies now after a lot of internal deliberation indicates its reluctance and
cutting prices due to cut in import thought process on the same.
duty to 0% from 5% Steel pricing environment has improved in most regions with HRC
. steel prices now approaching US$1,100/ton. Moreover, with China
JSW Steel: JSW gets impacted most by likely to implement a quota system on steel exports, steel price
the imposition of 5-15% export duty strength could extend into 2HFY09 & FY10 too.
on steel but benefits to some extent The most benefited stock still remains Tata Steel, which will benefit
from the cut in import duty on zinc from a robust pricing environment in Europe and is relatively less
and coke. impacted by government action.
VALUATIONS
Other stocks: The import duty cut on
2008 EPS P/E RATIO P/BV
zinc to 0% hits Hindustan Zinc and
consequently Sterlite. Gujarat NRE SAIL 18 7.4 3.32
Coke gets impacted due to cut in TATA STEEL 200 3.1 2.61
import duty on coke to 0%. JSW 83 9.40 1.92
Tata Steel: Exports from India
constitute just 2-3% of total volumes. SAIL EPS P/E RATIO P/BV EV/EBITDA
2007 18.00 7.44 3.32 4.40
Sail: Exports from India constitute just 2008E 18.60 7.20 2.61 5.60
1-2% of total volumes. 2009E 23.70 5.65 1.92 4.10
2010E 25.50 5.25 1.86 3.70
Group – 6 III
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

4. METALS STEEL SECTOR - INDIA
EXPANSION PLANS
SAIL plans to increase its saleable steel capacity from the current
13mn tonnes to 23mn tonnes by FY12. It has also embarked on a
modernization plan to drive internal margin expansion. The
company plans to achieve entire production through BOF steel
making (currently at 78% of production) and continuous casting
route (currently at 64% of production).
Further, it plans to enable full application of coal dust injection fuel
and de-sulphurisation of hot metal; this will enable it to lower the
coke rate in its blast furnaces and produce low content sulphur steel
respectively.
SHORT TERM EARNINGS GROWTH
To improve realizations, over a period of 4-5 years, SAIL plans to
increase the proportion of value-added steel and completely
eliminate semi-finished steel from its product portfolio. The
company also plans to increase the production of auto grade CR
products, galvanized coils/sheets, plates, pipes, universal
beams/heavy beams, rails and wheels, and achieve a significant
jump in rounds and structural production to consume the entire
semi-finished steel.
This expansion and modernization plan, expected to now cost above
Rs540bn due to high business inflation, is likely to be funded in a
manner that the company’s debt-equity ratio remains within 1:1. At
the current steel prices, the company is self sufficient in meeting the
equity contribution for the expansion through internal accruals.
LONG TERM EARNINGS GROWTH
Group – 6 IV
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

5. METALS STEEL SECTOR - INDIA
2007-08 2008-09 2009-10 2010-11 2011-12 2012 onwards
Terminal
values
NOPAT 1538.06 1941.94 2744.55 3736.51 5923.44 9690.31
Return on NOA (RNOA) 6.21% 7.17% 9.15% 11.06% 14.98% 19.75%
Growth Rate 5.50% 5.50% 5.50% 5.50% 5.50% 4.00%
Reinvestment Ratio (RR) 88.55% 76.74% 60.09% 49.73% 36.71% 20.25%
Risk Free Rate (Rf) 7.00% 7.00% 7.00% 7.00% 7.00% 5.50%
Market Return (Rm) 12.00% 12.00% 12.00% 12.00% 12.00% 11.50%
Cost of Equity (Ke) 14.40% 14.40% 14.40% 14.40% 14.40% 14.38%
WaCC ( same as Ke, no debt) 14.40% 14.40% 14.40% 14.40% 14.40% 14.38%
Return on Equity (ROE) 10.19% 10.62% 12.49% 14.21% 18.63% 24.43%
Published Beta 1.48 1.48 1.48 1.48 1.48 1.48
FCFF 4640.23 4698.23 4756.96 4816.42 4876.63 4937.59
VALUATIONS
FCFF Method 2007-08 2008-09 2009-10 2010-11 2011-12 2012 onwards
Terminal
values
FCFF 4640 4698 4757 4816 4877 4938
Discounting Factor 1 1 1 1 1 10
Present Value of FCFF 4056 3590 3177 2812 2489 47568
TOTAL VALUE OF EQUITY (In
Cr) 63692
No of Shares (crore) 413
Value of Equity Per Share 154
Group – 6 V
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

6. METALS STEEL SECTOR - INDIA
Residual Income Method 2007-08 2008-09 2009-10 2010-11 2011-12 2012 onwards
Terminal
values
Book values (BV) 17606.95 21113.48 25151.33 30027.10 36910.06 47428.42
Residual Earnings (RE)= (ROE-
KE)*BV -740.87 -799.00 -479.92 -57.45 1560.03 4768.30
Discounting Factor 0.8741 0.7641 0.6679 0.5838 0.5104 9.6339
Present Value of RE -647.62 -610.51 -320.55 -33.54 796.17 45937.38
Book Value (Base Year-2006-07) = 17467.02
TOTAL VALUE OF EQUITY (In Cr) 62588.35
No of Shares (in crores) 413.04
Value of Equity Per Share 151.53
Group – 6 VI
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

7. METALS STEEL SECTOR - INDIA
Consolidated Profit & Loss Account
Projections (All Years)
2007-08 2008-09 2009-10 2010-11 2011-12 2012 onwards
INCOME Terminal values
Sales 46227 54086 64903 77883 97354 102222
Less : Excise Duty 8321 9735 11682 14019 17524 17378
37906 44350 53220 63864 79830 84844
Finished products internally consumed 493 577 692 830 1038 1103
Interest earned 4 4 5 5 6 7
Other revenues 831 856 881 908 935 963
Provisions no longer required written back 54 49 44 39 34 29
39288 45836 54843 65647 81844 86946
EXPENDITURE
Depletion to stocks 223 227 230 233 237 241
Raw materials consumed 22189 25961 31153 37384 46730 42933
Purchase of semi/finished products and others 231 270 325 389 487 307
Employees’ Remuneration & Benefits 5917 6804 7825 8999 10349 11694
Stores & Spares consumed 3455 3973 4569 5254 6042 6707
Power & Fuel 3477 4380 5519 6954 8762 10340
Repairs & Maintenance 440 462 485 509 535 561
Freight outward 717 742 768 794 822 851
Other expenses 1823 2005 2206 2427 2669 2883
Interest & finance charges 371 349 328 308 290 272
Depreciation 1077 1070 1146 1227 1315 783
Total 39919 46244 54553 64480 78238 77572
Less : Transferred to Inter Account 2595 3006 3546 4191 5085 5042
37325 43238 51007 60288 73152 72529
Adjustments
Loss for the year 1963 2598 3836 5359 8691 14417
Net Loss for the year 1963 2598 3836 5359 8691 14417
Provision for current tax -668 -883 -1304 -1822 -2955 -4902
Profit / Loss (-) after tax 1296 1715 2531 3537 5736 9515
Minority Interest 0 0 0 0 0 0
1296 1715 2531 3537 5736 9515
Balance brought forward from previous year (Net) 10955 9409 8546 8510 9253 11507
Amount available for Appropriation 12250 11123 11077 12046 14989 21022
Group – 6 VII
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

8. METALS STEEL SECTOR - INDIA
APPROPRIATIONS
Provision towards long term service awrds -15 -15 -15 -15 -15 -15
Amount transferred from Bonds Redemption Reserve(Net) 38 38 38 38 38 38
Transferred to General reserve -1225 -1112 -1108 -1205 -1499 -2102
Interim Dividend -1225 -1112 -1108 -1205 -1499 -2102
Proposed dividend -368 -334 -332 -361 -450 -631
Tax on Dividend -48 -43 -43 -47 -58 -82
Loss carried over to Balance Sheet 9409 8546 8510 9253 11507 16128
Re-Formative Profit & Loss Statement
2007-08 2008-09 2009-10 2010-11 2011-12 2012 onwards
Terminal
values
Operating Revenue 39284 45832 54838 65642 81837 86939
Operating Expense 36954 42889 50679 59980 72863 72257
Operating Income (Before tax) 2330 2942 4158 5661 8975 14682
Taxes -668 -883 -1304 -1822 -2955 -4902
Add: Tax on financial items -125 -117 -110 -103 -96 -90
Operating Income (After tax) 1538 1942 2745 3736 5923 9690
Financial Income 4 4 5 5 6 7
Financial Expense 371 349 328 308 290 272
Less: Tax on financial items -125 -117 -110 -103 -96 -90
Net Financial Expense 242 227 213 200 187 175
Net Earnings 1780 2169 2958 3936 6111 9866
Group – 6 VIII
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

9. METALS STEEL SECTOR - INDIA
Consolidated Balance Sheet
Projections (All Years)
SOURCES OF FUNDS 2007-08 2008-09 2009-10 2010-11 2011-12 2012 <
Shareholders’ Funds Terminal values
Share Capital 4130 4130 4130 4130 4130 4130
Reserves and Surplus 16303 19546 23573 28676 36247 48177
20434 23677 27704 32806 40377 52307
Share Application Money
Loan Funds
Secured Loans 1893 1779 1673 1572 1478 1389
Unsecured Loans 2468 2320 2180 2050 1927 1811
24794 27776 31557 36428 43782 55507
APPLICATION OF FUNDS
Fixed Assets
Gross Block 32153 34726 37504 40504 43744 49869
Less: Depreciation -20260 -21996 -23872 -25897 -28084 -30577
Net Block 11893 12729 13632 14607 15660 19291
Capital Work-in-Progress 3550 5405 6612 8442 11786 21977
15444 18135 20244 23049 27446 41268
Investments 41 45 49 54 60 66
Current Assets, Loans & Advances
Inventories 12481 13521 16226 19471 24338 27600
Sundry Debtors 1895 2218 2661 3193 3992 4242
Cash & Bank Balances 3791 4435 5322 6386 7983 10181
Loans & Advances 1503 1551 1606 1718 1790 1802
19670 21725 25814 30768 38103 43825
Less: Current Liabilities & Provisions
Current Liabilities 6726 7869 9443 11332 14165 21620
Provisions 3791 4435 5322 6386 7983 8484
10517 12304 14765 17718 22148 30104
Net Current Assets 9153 9421 11049 13050 15955 13721
Miscellaneous Expenditure 157 176 214 275 322 453
(to the extent not written off or adjusted)
24794 27776 31557 36428 43782 55507
Group – 6 IX
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

10. METALS STEEL SECTOR - INDIA
Re-Formulation of Balance Sheet
2007-08 2008-09 2009-10 2010-11 2011-12 2012 onwards
Operating Assets Terminal values
Net Block 11893.30 12729.29 13632.16 14607.26 15660.37 19291.15
Capital Work-in-Progress 3550.29 5405.48 6612.02 8442.07 11785.86 21976.69
Inventories 12481.28 13521.39 16225.67 19470.80 24338.50 27599.86
Sundry Debtors 1895.31 2217.51 2661.01 3193.21 3991.51 4242.20
Cash & Bank balances 3800.00 3800.00 3800.00 3800.00 3800.00 3800.00
Interest Receivable/Accrued 0.00 0.00 0.00 0.00 0.00 0.00
Loans & Advances 1502.76 1551.14 1605.60 1717.89 1789.65 1801.54
Miscellaneous Expenditure 156.69 175.66 214.43 274.78 321.55 453.21
Deferred Tax Assets 0.00 0.00 0.00 0.00 0.00 0.00
Total Operating Assets 35279.64 39400.47 44750.89 51506.02 61687.44 79164.65
Operating Liabilities
Current Liabilities 6726.02 7869.45 9443.34 11332.01 14165.01 21619.89
Provisions 3790.61 4435.02 5322.02 6386.42 7983.03 8484.40
Deferred Tax Liability 0.00 0.00 0.00 0.00 0.00 0.00
Total Operating Liabilities 10516.64 12304.46 14765.36 17718.43 22148.03 30104.29
Net Operating Assets 24763.00 27096.01 29985.54 33787.59 39539.41 49060.36
Financial Assets
Excess Cash & Cash Equivalents -9.39 635.02 1522.02 2586.42 4183.03 6381.28
Investments 40.69 44.76 49.23 54.16 59.57 65.53
Financial Obligations
Share application Money 0.00 0.00 0.00 0.00 0.00 0.00
Loan Funds 0.00 0.00 0.00 0.00 0.00 0.00
Secured Loans 1892.93 1779.36 1672.60 1572.24 1477.91 1389.23
Unsecured Loans 2467.64 2319.58 2180.41 2049.58 1926.61 1811.01
Net Financial Asset -4329.27 -3419.17 -2281.75 -981.24 838.09 3246.57
Total Net Assets 20433.73 23676.84 27703.78 32806.34 40377.49 52306.93
Common Shareholder's Equity
Share Capital 4130.40 4130.40 4130.40 4130.40 4130.40 4130.40
Reserves and Surplus 16303.33 19546.44 23573.38 28675.94 36247.09 48176.53
Minority Interest 0 0 0 0 0 0
Profit & Loss Account Debit Balance 0 0 0 0 0 0
Total Common Shareholder's Equity 20433.73 23676.84 27703.78 32806.34 40377.49 52306.93
Group – 6 X
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008

11. METALS STEEL SECTOR - INDIA
Certification of Research Analyst
We hereby certify that the views expressed in the attached research report accurately reflect our
personal views about SAIL and its securities, related to the specific views or recommendations
expressed in the research report.
Disclaimer Clause
The information and opinions contained herein have been compiled or arrived at based upon
information obtained in good faith from sources believed to be reliable. Such information has not been
independently verified and no guarantee, representation or warranty, express or implied is made as to
its accuracy, completeness or correctness. All such information and opinions are subject to change
without notice. This report has been produced independently of any company or companies
mentioned herein, and forward looking statements, opinions and expectations contained herein are
entirely those of researchers and given as part of its normal research activity.
This document is for information purposes only and is provided on an “as is” basis. Descriptions of any
company or companies or their securities mentioned herein are not intended to be complete and this
document is not, and should not be construed as an offer, or solicitation of an offer, to buy or sell any
securities or other financial instruments. We are not soliciting any action based on this research report.
Sources
• www.wikipedia.com
• www.equitymaster.com
• www.bseindia.com
• www.nseindia.com
• www.worldsteel.org
• http://indiabudget.nic.in/
http://indiabudget.nic.in/
• http://finmin.nic.in/
• http://www.worldsteel.org/
• http://www.worldsteeldynamics.com/
Group – 6 XI
Navin Bafna; Pratk Kumar; Punit Biyani; Mohd Ibrahim Said; Saurabh Bhalotia
SPJCM – January 2008 Finance Batch
Singapore – July 2008