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SAIL: Profits dip on high costs
Feb 13, 2013

SAIL has announced its results for the quarter ended December 2012. The company has reported a decline of 0.5% YoY and 23.4% YoY in net sales and net profits for the quarter ended December. 2012. Here is our analysis of the results.

Performance summary
  • The topline of the company declined by 0.5% YoY due to lower demand.
  • Operating profits declined by 28% YoY. Operating margins declined by 4% YoY.
  • At the bottomline level, profits for the quarter increased by 23.4% YoY due to higher interest rate. Net profit margin declined by 1.4% YoY and stood at 4.5%.
  • For the nine month ended December 2012, the company reported a 1.2% YoY and 12.3% YoY decline in net sales and net profits respectively.
  • The company has also declared an interim dividend of Rs 1.6 per share for the financial year 2012-13.

Financial performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 107,288 106,701 -0.5% 326,498 322,678 -1.2%
Expenditure 91,478 95,317 4.2% 284,194 285,048 0.3%
Operating profit (EBDITA) 15,810 11,384 -28.0% 42,305 37,630 -11.0%
Operating profit margin (%) 14.7% 10.7%   13.0% 11.7%  
Other income 3,837 2,209 -42.4% 13,402 7,248 -45.9%
Interest (net) 1,853 2,220 19.8% 5,566 5,331 -4.2%
Depreciation 4,093 4,049 -1.1% 11,779 12,094 2.7%
Profit before tax 13,700 7,323 -46.5% 38,362 27,454 -28.4%
Exceptional Item (4,663) (307) -93.4% (9,867) (2,458) -75.1%
Tax 2,716 2,173 -20.0% 8,838 7,758 -12.2%
Profit after tax/(loss) 6,321 4,843 -23.4% 19,657 17,238 -12.3%
Net profit margin (%) 5.9% 4.5%   6.0% 5.3%  
No. of shares (m)         8,452  
Diluted earnings per share (Rs)         3.9  
P/E ratio (x)*         20.7  
*trailing twelve month earnings

What has driven the performance in 3QFY13?
  • The topline of the company reported a decline of 0.5% YoY mainly due to lower realizations, although they were partially offset by higher volumes. SAIL's average realizations fell 5% YoY and 6% QoQ. Domestic HRC prices have corrected from Rs 36,000/t in Apr12 to Rs 32,000/t now (discount to import parity). While a price hike has been taken in January 2013, there are concerns around sustainability.

  • Saleable steel production rose 2% YoY to 3.1 mt (million tonne), while saleable steel sales were 2.75 mt (up 5% YoY), SAIL's April-December 2012 sales are down 4% YoY. Weakness in demand has resulted in continued inventory buildup. India's steel consumption rose 1% YoY during the October-December 2012.

    Break-up of operating costs
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Raw Materials 47,335 45,831 -3.2% 147,723 135,317 -8.4%
    % of sales 44.1% 43.0%   45.2% 41.9%  
    Power & fuel 11,220 11,140 -0.7% 32,994 36,119 9.5%
    % of sales 10.5% 10.4%   10.1% 11.2%  
    Employee cost 18,645 20,815 11.6% 61,115 61,638 0.9%
    % of sales 17.4% 19.5%   18.7% 19.1%  
    Other Expenditure 14,278 17,531 22.8% 42,363 51,974 22.7%
    % of sales 13.3% 16.4%   13.0% 16.1%  

  • The operating profit of the company declined by 28% YoY. Operating margin declined by 4% YoY. This was despite lower raw material cost. Raw material costs are likely to decline further as the full benefit of lower coking coal prices flows through. SAIL has been providing revised wages for non-executive employees' wef 1 January 2012; however, negotiations have not concluded yet. 3QFY13 employee costs were Rs 21 bn. Employee cost and other expenditure increased by 11.6% YoY and 22.8% YoY.

  • Net profit of the company declined by 23.4% YoY. Net profit margins declined by 1.4% YoY. This was due to lower other income and higher expenditure. The company reported an exceptional item related to forex loss of Rs 307 m in 3QFY13, compared to exceptional loss of Rs 4663 m in 3QFY12.

What to expect?
SAIL reported disappointing sales volumes for 9MFY13 in the midst of lower steel demand. Lower-than-expected volumes reflect lower demand in India as well as lack of focus on marketing by SAIL, in our view. Given the slowdown in steel demand in India, and rising imports from FTA (Free Trade Agreement) countries (which attract lower import duty), we remain skeptical over SAIL's sales volume growth during FY14.

SAIL is increasing its saleable steel production capacity from 12.4 m tonne to 20.2 m tonne by FY15. We expect strong profitability from these plants, with captive iron ore backing the upcoming steel expansion. Also, we expect SAIL's older loss-making plants to be modernized as part of its modernization program. However, the company has reported delays in its expansion projects over the last few quarters. Going forward, we do not rule out further delays and cost over-runs in its expansion plans. At the current price of Rs 82, the stock trades at around 1.4x our estimated FY15 book value per share. We maintain a 'Buy' view on the stock.

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