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SAIL: High coking coal prices dent margins - Views on News from Equitymaster

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SAIL: High coking coal prices dent margins
May 4, 2011

SAIL has announced its results for the quarter and year ended March 2011. The company has reported flat topline growth and 28% YoY fall in net profits for the quarter ended March 2011. Here is our analysis of the results.

Performance summary
  • While revenue for the quarter shows flat year-on-year growth, the same grows by 5% YoY for the full year ended March 2011.
  • Operating profits decline by 22.8% mainly due to high coking coal prices.
  • At the bottomline level, profits for the quarter and full year decline by 27.7% YoY each, mainly on account of poor operating performance.


Financial performance snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Sales 122,298 121,664 -0.5% 413,072 434,188 5.1%
Expenditure 91,327 98,261 7.6% 313,620 357,451 14.0%
Operating profit (EBDITA) 30,971 23,404 -24.4% 99,452 76,737 -22.8%
Operating profit margin (%) 25.3% 19.2%   24.1% 17.7%  
Other income 4,429 4,075 -8.0% 19,261 14,401 -25.2%
Depreciation 3,384 3,856 13.9% 13,372 14,843 11.0%
Interest 1,347 1,746 29.6% 4,020 4,725 17.5%
Profit before tax 30,668 21,877 -28.7% 101,320 71,571 -29.4%
Tax 9,819 6,805 -30.7% 33,777 22,758 -32.6%
Profit after tax/(loss) 20,849 15,071 -27.7% 67,544 48,813 -27.7%
Net profit margin (%) 17.0% 12.4%   16.4% 11.2%  
No. of shares (m)       26.7 4130.4  
Diluted earnings per share (Rs)         11.8  
P/E ratio (x)         13.1  
*trailing twelve month earnings

What has driven performance in FY11?
  • SAIL has registered a lacklustre topline growth of 5.1% YoY during the full year ended March 2011. The muted performance is attributable to the weakening of market demand for flat products and softening of steel prices.

    Break-up of operating costs
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Raw Materials 51567 54186 5.1% 171984 189094 9.9%
    % of sales 42.2% 44.5%   41.6% 43.6%  
    Staff costs 16381 20518 25.3% 54168 76274 40.8%
    % of sales 13.4% 16.9%   13.1% 17.6% 4.5%
    Consumption of stores and spares 6759 6307 -6.7% 25738 23925 -7.0%
    % of sales 5.5% 5.2%   6.2% 5.5%  
    Power & fuel 8963 9478 5.7% 33643 35904 6.7%
    % of sales 7.3% 7.8%   8.1% 8.3% 0.1%
    Other Expenditure 7658 7771 1.5% 28087 32254 14.8%
    % of sales 6.3% 6.4%   6.8% 7.4% 0.6%

  • At the operating level, rising input cost severely dented company’s margins. While the operating profits for FY11 dropped by 22.8% YoY, the operating margin for the same period stood lower at 17.7% from 24.1% in FY10. The main reason for the decline was the massive rise in coking coal prices which rose from US$ 128 in 2009-10 to US$ 222 in 2010-11. Further, the company had to bear additional cost of Rs 22 bn due to higher staff costs during FY11.

  • At the bottomline level, profits declined by 27.7% YoY for FY11. The net profit margins declined from 16.4% in FY10 to 11.2% in FY11. It is important to note here that the previous year’s profits were inflated due to write backs of excess provisions made during FY09.

What to expect?
Though current coking coal prices are hovering around US$ 330 per tonne, the management of the company opines that the same is not sustainable. Once the Australian mines resume production, coking coal prices are expected to ease. The company is in the process of raising its capacity by 5.5 m tonnes which is expected to get commissioned towards the end of the financial year 2011-12.

At the current price of Rs 155, the stock trades at around 1.3x its expected FY13 book value per share (Research pro subscribers can click here). We will update our numbers shortly. However, we do not see any significant upside coming through.

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