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SAIL: Record shattering performance!

May 21, 2007

Introduction to results
Riding on the back of a strong steel cycle, SAIL, India’s largest steel producer has put up a sterling performance for the quarter and year ended March 31, 2007. During the quarter, while the topline has grown by 16% YoY, the bottomline has jumped 72% YoY, thanks mainly to an outstanding 1,250 basis points expansion in operating margins. For the full year, the bottomline has grown by 55% YoY, on the back of a 22% YoY growth in topline. Here again, it is the 550 basis points expansion in operating margins that has propelled the bottomline at a faster rate than the topline. Performance on the consolidated front has been quite similar, as the bottomline has grown by 54% YoY against a 22% YoY growth in topline for the full year.

(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 89,796 103,851 15.7% 287,586 350,262 21.8%
Expenditure 74,874 73,615 -1.7% 219,582 248,992 13.4%
Operating profit (EBDITA) 14,922 30,236 102.6% 68,004 101,270 48.9%
EBDITA margin (%) 16.6% 29.1%   23.6% 28.9%  
Other income 1,757 2,388 35.9% 5,805 8,392 44.6%
Interest (net) 1,060 555 -47.7% 4,678 3,321 -29.0%
Depreciation 3,041 2,822 -7.2% 12,073 12,115 0.3%
Profit before tax 12,578 29,247 132.5% 57,057 94,226 65.1%
Tax 1,546 10,228 561.8% 16,928 32,203 90.2%
Profit after tax/(loss) 11,032 19,019 72.4% 40,130 62,023 54.6%
Net profit margin (%) 12.3% 18.3%   14.0% 17.7%  
No. of shares (m) 4,130.5 4,128.4   288.9 4,128.4  
Diluted earnings per share (Rs)* 10.7 18.4   9.7 15.0  
Price to earnings ratio (x)**         9.7  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Steel Authority of India Ltd. (SAIL) is India’s largest and world’s 11th largest steel producer. The company holds nearly 1/3rd of the domestic market with its 13 MTPA capacity. It operates 5 integrated steel plants (post merger of IISCO steel plant) and 2 specialty steel plants. After bleeding at the net profit level between FY99 and FY03 owing to an unfavorable steel cycle, the company turned around in FY04 and reported an astounding performance in FY05. Further, the company has embarked on a massive expansion plan (split into two phases), which will take its steel production capacity to 20 MTPA by FY12. The company accounts for nearly 26% of domestic finished steel production. It is the largest player in the flat products and second largest player in the long products segment and uses the BOF process to manufacture steel.

What has driven performance in 4QFY07 and full year FY07?
All time high volumes: During the fourth quarter, the company recorded highest ever-saleable steel production of 3.3 m tonnes, thus taking the annual production to a new peak of 12.6 MT during FY07. Significant to add that this growth was achieved on the back of improved capacity utilization, which stood at an impressive 114%, as compared to 109% during FY06 (saleable steel). On the sales front, the company sold 5% more steel in FY07 over FY06, once again a new record. This indicates that the remaining growth in the topline during the year has come mainly from improved realizations and also, better product mix. The special steel plants of the company also recorded highest ever-saleable steel production of 0.5 m tonnes, a growth of 6% over FY06. Annual sales of value-added products also went up. The key ones being pipes (48%), electrical steel sheets (16%), as well as special products like LPG sheets/coils (93%), boiler quality and high-tensile plates (61%), etc. Thus, a strong demand for steel, market-driven product mix and higher value-added special steel production enabled the company to garner record revenues and grow its topline by 22% during FY07.

Improved efficiency – A double bonanza: During the year, the company not only benefited from a better macro environment, but also from significant improvement in its internal efficiency. No wonder, the operating margins vaulted by a staggering 1,250 basis points and 530 basis points during 4QFY07 and FY07 respectively, on a YoY basis. The company recorded substantially higher manpower productivity, achieved lowest ever coke rate and energy consumption and also saw its blast furnace productivity rise substantially. These measures, along with additional thrust on cost reduction, resulted in savings of around Rs 4 bn and enabled the company to partially negate the price increases of other inputs such as zinc, coal, nickel and freight charges.

Cost break-up…
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Raw materials 44,772 36,681 -18.1% 103,941 120,156 15.6%
% sales 49.9% 35.3%   36.1% 34.3%  
Staff cost 10,265 16,314 58.9% 41,567 50,874 22.4%
% sales 11.4% 15.7%   14.5% 14.5%  
Consumption of stores and spares 6,144 6,776 10.3% 23,116 26,055 12.7%
% sales 6.8% 6.5%   8.0% 7.4%  
Power and fuel 6,575.00 6,556 -0.3% 24,940 25,788 3.4%
% sales 7.3% 6.3%   8.7% 7.4%  
Other expenditure 7,118.70 7,289 2.4% 26,019 26,119 0.4%
% sales 7.9% 7.0%   9.0% 7.5%  

With cash flows remaining strong, the company seems to have retired a good amount of debt as interest expenses have fallen by a significant 48% during 4QFY07 and 29% during FY07, both on a YoY basis. Further, as SAIL has managed to increase production without any significant rise in capacities, depreciation outgo has also remained rather benign. These two factors have helped the PBT of the company to grow at a higher rate than the operating profit for both the periods under consideration. However, tax outgo has increased significantly, thus resulting in a tad lower but still hugely impressive bottomline growth of 72% YoY and 55% YoY during 4QFY07 and full year FY07 respectively.

What to expect?
At the current price of Rs 146, the stock is trading at a price to earnings multiple of 9.7 times its FY07 earnings. Over the past few years, the company has done well to improve its internal efficiency and its plans of expanding its capacity by another 75% by 2010 does transform it into an attractive long-term growth story. However, it should be remembered that steel is a cyclical industry and hence, one should always ensure that there is an adequate margin of safety involved.

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