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SAIL: Coking coal spoils the show - Views on News from Equitymaster
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SAIL: Coking coal spoils the show
Jan 14, 2011

SAIL has announced its December quarter results. The company has reported a 15% growth in topline and 34% YoY fall in net profits for the quarter ended December 2010. Here is our analysis of the results.

Performance summary
  • Led by strong volume growth, topline grows by 15% YoY during the quarter
  • Margins suffer a huge decline of more than 10% as coking coal prices rise abnormally. Operating profits go down by 30% YoY
  • Bottomline suffers a decline of 34% YoY, mainly on account of poor operating performance
  • Profit for the nine month period suffer a fall of 28% YoY on the back of an 8% growth in topline
  • Announces an interim dividend of Rs 1.2 per share (yield of 0.7% at the current stock price)


(Rs m) 3QFY10 3QFY11 Change 9mFY10 9nFY11 Change
Net sales 98,787 113,128 14.5% 290,775 312,523 7.5%
Expenditure 73,002 95,172 30.4% 222,293 259,190 16.6%
Operating profit (EBDITA) 25,784 17,957 -30.4% 68,482 53,333 -22.1%
EBDITA margin (%) 26.1% 15.9%   23.6% 17.1%  
Other income 4,068 2,711 -33.4% 14,831 10,327 -30.4%
Interest (net) 1,101 592 -46.2% 2,673 2,979 11.5%
Depreciation 3,390 3,793 11.9% 9,988 10,987 10.0%
Profit before tax 25,361 16,282 -35.8% 70,652 49,694 -29.7%
Extraordinary income/(expense) - -   - -  
Tax 8,605 5,207 -39.5% 23,957 15,953 -33.4%
Profit after tax/(loss) 16,756 11,075 -33.9% 46,695 33,741 -27.7%
Net profit margin (%) 17.0% 9.8%   16.1% 10.8%  
No. of shares (m) 4,130.4 4,130.4   4,130.4 4,130.4  
Diluted earnings per share (Rs)*         13.2  
Price to earnings ratio (x)*         12.4  
(* on trailing twelve months earnings)

What has driven performance in 3QFY11?
  • A buoyant economy has led to the company’s topline growing at a healthy rate of 15% YoY during the quarter. SAIL registered record sales of 3.25 m tonnes during the quarter, a jump of nearly 11% over the same quarter last year. As a result, the remaining growth in topline seems to have been driven by improvement in realisations as well as better product mix. It should be noted that the company took a price reduction in October whereas in the month of December and January, it again hiked prices. We expect the volume growth story to remain buoyant in the forthcoming quarters as well.

    Cost break-up...
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Raw materials 36,135 52,991 46.6% 120,417 134,908 12.0%
    % sales 36.6% 46.8%   41.4% 43.2%  
    Staff cost 15,712 18,635 18.6% 37,787 55,756 47.6%
    % sales 15.9% 16.5%   13.0% 17.8%  
    Consumption of stores & spares 5,826 5,808 -0.3% 18,979 17,618 -7.2%
    % sales 5.9% 5.1%   6.5% 5.6%  
    Power & fuel 7,710.80 8,876 15.1% 24,680 26,426 7.1%
    % sales 7.8% 7.8%   8.5% 8.5%  
    Other expenditure 7,619 8,862 16.3% 20,429 24,483 19.8%
    % sales 7.7% 7.8%   7.0% 7.8%  

  • As far as operating margins are concerned, they have a taken a hit to the tune of 10.2% and consequently, operating profits have fallen 33% YoY. The decline has been attributed mainly to rise in raw materials cost, which have increased by a huge 10% as a percentage of sales. Amongst raw materials, coking coal, which account for more than half of the total raw material costs, saw its prices go up by more than 60% and hence, this affected the company’s margins. With floods disrupting supply in the key sourcing region of Australia, coking coal prices are likely to rule at high levels in the near term.

  • Out of the total requirement of 14 m tonnes, the company’s dependence on imported coal stands at around 70%. Among other cost heads, staff costs also recorded a strong growth of 18% YoY on account of higher wage benefits.

  • Bottomline for the quarter has come in lower by 34% YoY, mainly on account of the poor operating performance. While lower interest costs have helped, they have been more than offset by rise in depreciation charges and fall in other income.

What to expect?
At the current price of Rs 163, the stock trades at around 1.4 times its expected FY13 book value per share (ResearchPro subscribers, please click here. Even after the current decline in the stock price, we believe that the medium term fundamentals of the company are priced into the stock.

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