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SAIL: Lustrous year - Views on News from Equitymaster
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SAIL: Lustrous year
May 16, 2008

Performance summary
  • Backed by record production and turnover, the standalone topline grows 15% YoY for the full year
  • Marginal expansion in operating margins leads to 15% YoY growth in operating profits in FY08

  • Bottomline growth comes in at 21% YoY for the full year, aided not only by the operating performance but also higher other income and reduced interest expenses

  • Net profits have grown 25% YoY during 4QFY08 on the back of a 30% YoY growth in topline

  • Has recommended a final dividend of Rs 1.8 per share in addition to the interim dividend of Rs 1.9 already paid for the financial year 2007-08

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 103,851 134,779 29.8% 350,262 402,142 14.8%
Expenditure 73,615 98,210 33.4% 248,992 285,619 14.7%
Operating profit (EBDITA) 30,236 36,569 20.9% 101,270 116,523 15.1%
EBDITA margin (%) 29.1% 27.1%   28.9% 29.0%  
Other income 2,388 3,774 58.0% 8,392 13,029 55.3%
Interest (net) 555 522 -5.9% 3,321 2,509 -24.4%
Depreciation 2,822 3,171 12.4% 12,115 12,355 2.0%
Profit before tax 29,247 36,650 25.3% 94,226 114,687 21.7%
Tax 10,228 12,883 26.0% 32,203 39,320 22.1%
Profit after tax/(loss) 19,019 23,768 25.0% 62,023 75,368 21.5%
Net profit margin (%) 18.3% 17.6%   17.7% 18.7%  
No. of shares (m) 4,130.4 4,130.4   4,130.4 4,130.4  
Diluted earnings per share (Rs)*         18.2  
Price to earnings ratio (x)**         10.2  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY08?
  • While the company was able to increase its saleable steel volumes by just 3% during the fiscal on account of capacity constraints, stronger realisations and better value addition enabled the company to record a 15% growth in topline during FY08 and consequently, its highest ever turnover. Average capacity utilisation of saleable steel stood at 118% for the full year. Volume growth for the fourth quarter stood at close to 9% YoY and with the company undertaking price increases during the quarter, topline in value terms stood at an impressive 30% yoy. With steel prices refusing to soften globally on account of demand supply imbalances and runaway increase in prices of raw materials, SAIL was able to end the fiscal on a high note as far as growth in revenues was concerned.

    cost break up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 36,681 44,274 20.7% 120,156 122,896 2.3%
    % sales 35.3% 32.8%   34.3% 30.6%  
    Staff cost 16,314 32,701 100.4% 50,874 79,190 55.7%
    % sales 15.7% 24.3%   14.5% 19.7%  
    Consumption of stores and spares 6,776 7,603 12.2% 26,055 28,448 9.2%
    % sales 6.5% 5.6%   7.4% 7.1%  
    Power and fuel 6,556 7,498 14.4% 25,788 28,223 9.4%
    % sales 6.3% 5.6%   7.4% 7.0%  
    Other expenses 7,289 6,134 -15.8% 26,119 26,862 2.8%
    % sales 7.0% 4.6%   7.5% 6.7%  

  • As far as operating performance is concerned, while margins remained largely stable for the full year, the same witnessed a 200 basis points reduction during 4QFY08 as compared to the corresponding previous quarter. It was impacted by more than two fold increase in staff costs as implementation of the sixth pay commission recommendations necessitated a huge increase in provisioning. Consequently, the wage costs for the full year too, witnessed a significant jump of 56% YoY, thus neutralizing the effect of higher operating leverage through price increases.

  • Growth in net profits for the full year came in higher than the operating profits. This was made possible on account of improved physical performance as well as cash flows. With the company operating at higher capacity, depreciation increase remained benign at 2% YoY. Further, with the company managing to reduce its borrowings and increase its investments, other income rose by 55% and interest costs came down by 24% for the full year on a YoY basis. Thus, these factors have combined together to enable the company to post a 22% YoY jump in net profits for the full year.

What to expect?
At the current price of Rs 186, the stock is trading at price to book value multiple of 2.5 times is FY10 expected book value per share. The company’s earnings have come in 5% more than our FY08 estimates. Despite capacity constraints, SAIL has done well to improve its physical performance and post a net profit growth of more than 20%. However, capacity should not be problem FY11 onwards as by then, the company would have nearly doubled its capacity by making an investment of Rs 540 bn. But profitability is likely to come under pressure post renewal of the long-term contracts, especially for coking coal and the hurdles it is likely to face when going in for a price increase. We will shortly revisit our estimated numbers for the company.

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