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SAIL: Operating costs spoil the show - Views on News from Equitymaster
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SAIL: Operating costs spoil the show
Jan 27, 2009

Performance summary
  • Topline declined by 6.4% YoY on account of lower realizations and volumes due to slow down in demand during the quarter.
  • Expenses grew at a higher rate as compared to topline, causing EBITDA margins to decline by 18.6% to 12.7% during the quarter.
  • Net margins fell by 10.8% as bottomline declined 56.4% YoY mainly on account of lower operating profits and higher interest costs.
  • For the nine-month period, the company has recorded a 20.3% YoY jump in topline, while bottom line declined by 9.1%


Financial performance snapshot…
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 95,333 89,206 -6.4% 267,363 321,506 20.3%
Expenditure 65,499 77,920 19.0% 187,409 252,369 34.7%
Operating profit (EBDITA) 29,834 11,287 -62.2% 79,953 69,138 -13.5%
EBDITA margin (%) 31.3% 12.7%   29.9% 21.5%  
Other income 3,143 5,550 76.6% 9,255 13,700 48.0%
Interest (net) 598 1,078 80.4% 1,988 2,121 6.7%
Depreciation 3,160 3,194 1.1% 9,184 9,553 4.0%
Profit before tax 29,219 12,566 -57.0% 78,037 71,164 -8.8%
Extraordinary items            
Tax 9,873 4,132 -58.1% 26,437 24,283 -8.1%
Profit after tax/(loss) 19,347 8,433 -56.4% 51,600 46,881 -9.1%
Net profit margin (%) 20.3% 9.5%   19.3% 14.6%  
No. of shares (m) 4,130.4 4,130.4   4,130.4 4,130.4  
Diluted earnings per share (Rs)*         17.1  
Price to earnings ratio (x)**         4.3  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in 3QFY09?
  • Company recorded a lower production of 3.02 m tonnes, while its sales volume was at 2.4 m tonnes, lower as compared to corresponding period last year. This was mainly on account of slowdown in the demand for steel and alignment of production in accordance with the market demand during the quarter. Adverse market conditions led the topline to decline by 6.4% YoY during 3QFY09.

  • On the operating performance front, operating expenses grew by 19% YoY on the back of higher prices of imported and domestic coking coal and ferro-alloys, thus causing the operating profits to decline by 62.2% YoY during the quarter. Furthermore, lower realizations also impacted the operating profits and thus the EBITDA margins during the quarter fell by 18.6%.

    Cost break-up…
    (Rs m) 3QFY08 3QFY09 Change
    Raw materials 26,969 38,882 44.2%
    % sales 28.3% 43.6%  
    Staff cost 17,097 17,459 2.1%
    % sales 17.9% 19.6%  
    Consumption of stores and spares 6,724 6,647 -1.1%
    % sales 7.1% 7.5%  
    Power and fuel 7,125 7,128 0.1%
    % sales 7.5% 8.0%  
    Other expenses 7,585 7,786 2.6%
    % sales 8.0% 8.7%  

  • The bottomline of company declined by around 56.4% YoY mainly on account of lower operating profits and higher interest costs. Furthermore, lower sales volume and realizations during the quarter also impacted the bottomline adversely.

What to expect?
At the current price of Rs 74, the stock is trading at a multiple of 0.9x the company’s expected FY11 book value per share. The company’s performance has mostly come in line with our estimates and as such, we do not feel the need to change the same. We remain positive on the stock as it is trading at a significant discount to its projected intrinsic value from a medium term perspective.

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