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SAIL: Another strong quarter

Jan 30, 2008

Performance summary
  • Topline grows by 12% YoY as the company’s output reaches record levels of 3.4 m tonnes during the quarter.

  • Expenses grow at a lower rate than the topline, resulting into an EBITDA margin expansion of 280 basis points (2.8%) in 3QFY08.

  • Net margins improve by 310 basis points (3.1%) as bottomline grows 32% YoY, led by higher other income and lower interest expenses.

  • For the nine-month period, the company has recorded a 20% jump in bottomline on a YoY basis and this has come on the back of an 11% YoY growth in topline.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 85,371 95,333 11.7% 240,830 267,363 11.0%
Expenditure 61,054 65,499 7.3% 175,377 187,409 6.9%
Operating profit (EBDITA) 24,316 29,834 22.7% 65,453 79,953 22.2%
EBDITA margin (%) 28.5% 31.3%   27.2% 29.9%  
Other income 2,231 3,143 40.9% 6,004 9,255 54.1%
Interest (net) 906 598 -34.0% 2,767 1,988 -28.2%
Depreciation 3,299 3,160 -4.2% 9,293 9,184 -1.2%
Profit before tax 22,342 29,219 30.8% 59,398 78,037 31.4%
Extraordinary items       5,582    
Tax 7,630 9,873 29.4% 21,975 26,437 20.3%
Profit after tax/(loss) 14,712 19,347 31.5% 43,004 51,600 20.0%
Net profit margin (%) 17.2% 20.3%   17.9% 19.3%  
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)**         12.6  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in 3QFY08?
  • Company’s capacity utilisation reached a record 121% during 3QFY08 and greater than the 112% achieved during same quarter last year. This signifies a production jump in the region of 8% and fits well with the topline growth of 12% during the quarter if one assumes a marginal increase in realisations. The fact that the company was able to sell more value added products also seem to have helped the topline. Just to give an indication, substantial growth was recorded in products like high corrosion resistant TMT bars for coastal areas (326%), LPG grade steel (24%), TMT bars (32%), plates (18%), medium structurals (11%), 90 UTS rails (13%), wheels & axles (6%), CRNO (5%), etc. SAIL also achieved record domestic sales of 3 million tonnes during Q3.

  • On the operating performance front, growth in operating profits has come in at 23%, almost double the growth witnessed in topline during the quarter. While better realisations have helped, continued improvement in major techno economic parameters also contributed significantly towards the improved operating performance. Barring staff costs and other expenses, all the other cost heads have grown at a slower rate than the topline, thus resulting in substantially improved operating performance. In absolute terms, cost savings during the quarter has stood at Rs 1.4 bn.

    Cost break-up…
    (Rs m) 3QFY07 3QFY08 Change
    Raw materials 29,386 26,969 -8.2%
    % sales 34.4% 28.3%  
    Staff cost 12,273 17,097 39.3%
    % sales 14.4% 17.9%  
    Consumption of stores and spares 6,638 6,724 1.3%
    % sales 7.8% 7.1%  
    Power and fuel 6,536 7,125 9.0%
    % sales 7.7% 7.5%  
    Other expenses 6,222 7,585 21.9%
    % sales 7.3% 8.0%  

  • The company has continued to generate robust cash flows and has utilized the same towards reducing its borrowings. This has been reflected in the savings on the interest expenses front, which has fallen by 34% YoY during the quarter. The debt equity level of the company has also come down to the lowest-ever level of 0.13:1 at the end of the third quarter.

  • Thus, all round buoyancy has helped the company put up another impressive performance during 3QFY08, resulting into a bottomline growth of 32% on a YoY basis.

What to expect?
At the current price of Rs 262, the stock is trading at a multiple of 2.9 times our FY10 estimated book values. This is significantly higher than the 2 times book value we consider ideal for a company like SAIL. Although the company is embarking on a huge capex plan, we believe that the benefits are likely to accrue in the long-term. Furthermore, it is the largest expansion plan that the company has taken to date and given the past track record of cost overruns, we advise investors to remain cautious at the current juncture.

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