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SAIL: A muted quarter - Views on News from Equitymaster
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SAIL: A muted quarter
Feb 25, 2015

SAIL has announced its December quarter results. The company has reported a 3.2% YoY decline in topline while bottomline has increased by 8.7% YoY for the quarter ended December 2014. Here is our analysis of the results.

Performance summary
  • Topline declines by 3.2% YoY during the quarter. During 9MFY15 saleable steel production stood at 9.4 million tons (MT).
  • Despite a fall in topline, operating profits expand by 3.6% YoY as expenditure fell by 4.0% YoY.
  • Bottomline increases by 8.7% YoY due to a 77.6% YoY increase in other income and 18.3% YoY fall in tax expenses. Other income rose sharply as it included a profit of Rs 2 bn arising from sale of investments in one of the JV ventures. Tax expenses fell as some of the tax demands made by the government are under dispute and hence not provided for but treated as contingent liabilities.
  • The D/E ratio stood at 0.64x at the end of 9MFY15.
  • The board has declared an interim dividend of Rs 1.75 per equity share for the fiscal under consideration.

Financial Snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 114,731 111,073 -3.2% 332,216 341,257 2.7%
Expenditure 103,068 98,992 -4.0% 304,321 304,529 0.1%
Operating profit (EBDITA) 11,663 12,081 3.6% 27,895 36,728 31.7%
EBDITA margin (%) 10.2% 10.9%   8.4% 10.8%  
Other income 1,944 3,452 77.6% 6,282 7,045 12.1%
Interest (net) 2,468 3,666 48.5% 6,551 10,273 56.8%
Depreciation 4,087 4,667 14.2% 12,004 12,663 5.5%
Profit before tax 7,052 7,201 2.1% 15,623 20,837 33.4%
Exceptional item - - NA 10,563 - -100.0%
Tax 1,726 1,410 -18.3% 4,546 3,253 -28.5%
Profit after tax/(loss) 5,326 5,791 8.7% 21,639 17,585 -18.7%
Net profit margin (%) 4.6% 5.2%   6.5% 5.2%  
No. of shares (m)         4,131  
Diluted earnings per share (Rs)           4.3  
Price to earnings ratio (x)*         13.8  
(* on trailing twelve months earnings)

What has driven performance in 3QFY15?
  • During 9MFY15 the company reported sales volume of 8.6 MT, as compared to 8.7 MT in 9MFY14. The EBITDA per ton during the first nine months came in at Rs 4,271 per ton, compared to Rs 3,206 per ton in 9MFY14, higher by 33.2% YoY. During 9MFY15, production of value added steel from the 5 integrated steel plants stood at 43%.

  • Operating profits expanded 3.6% YoY on the back of fall in expenditure. This led to a margin expansion of 70 bps YoY during 3QFY15.

  • Capex incurred during 9MFY15 stood at Rs 51.33 bn. For FY15, management has pegged its capex guidance at Rs 75 bn.

  • Net profits increased 8.7% YoY due to rise in other income and fall in tax expenditure. However, the growth was curbed to an extent by rise in interest expenses (+48.5% YoY) which increased due to rise in debt that is being taken to fund the existing expansion plan & meet working capital requirements.
What to expect?
The expansion plan seems pretty much on track. It shall add new products to the company's portfolio (galvanized coils/sheets, plates/pipes, products catering to railways etc) that shall help improve product mix. Towards expansion, new facilities have already been added at the 5 integrated steel plants. As far as the raw material requirement is concerned, the capacity of the existing mines is being ramped up to meet the requirement of iron ore amidst ongoing expansion.

At the current price of Rs 74 the stock is trading at a multiple of 13.8x its trailing twelve month earnings. In light of strong capacity expansion plans, reasonable valuations and evading cost pressures (witnessed by a fall in expenditure and rise in margins) we maintain a BUY on the stock.

Lastly, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio.

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