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SAIL: SAILing ahead

May 28, 2003

India’s largest steel producer and public sector giant, Steel Authority of India (SAIL), has reported profits in 4QFY03 on the back of a strong topline growth. However, for the full year (FY03), the company continues to remain in the red. But the losses have been reduced considerably. The topline has registered a robust 31% growth in the March quarter pushing the bottomline into the black at Rs 2 bn compared to a loss of Rs 4 bn in the corresponding quarter last year.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net Sales 43,142 56,298 30.5% 140,645 174,472 24.1%
Other Income 2,062 417 -79.8% 6,622 1,439 -78.3%
Expenditure 42,820 48,510 13.3% 137,157 154,263 12.5%
Operating Profit (EBDIT) 322 7,787 2318.4% 3,488 20,209 479.4%
Operating Profit Margin (%) 0.7% 13.8%   2.5% 11.6%  
Interest 3,550 2,947 -17.0% 15,620 13,340 -14.6%
Depreciation 3,005 2,841 -5.5% 11,559 11,467 -0.8%
Profit before Tax (4,171) 2,417 - (17,069) (3,159) -
Tax - - - - (116) -
Profit after Tax/(Loss) (4,171) 2,417 - (17,069) (3,043) -
Net profit margin (%) -9.7% 4.3%   -12.1% -1.7%  
No. of Shares (m) 4,130 4,130   4,130 4,130  
Diluted Earnings per share (Rs)*   2.3         
*(annualised and before other adjsts.)            

The jump in the topline was primarily a factor of the steep rise in steel prices being witnessed in the sector coupled with a healthy demand. However, it must be noted here that there was some correction witnessed in steel prices during 4QFY03 due to pile of stock on Chinese ports (China is one of the largest importers of steel in the world). However, considering the fact that SAIL does not have a very strong presence in the exports markets (5% in FY02), the company seems to have guarded itself well against the fall in prices. Moreover, steel companies generally tend to get into medium-term contracts, which gives them some protection from the volatility in steel prices.

However, the most important and noteworthy fact is the sharp improvement in operating margins (improved from under 1% to almost 14% in 4QFY03 YoY). This is a commendable feat and is well in line with the company’s plans to turnaround in the current fiscal. This improvement in margins is a result of the company’s conscious efforts at reducing costs and improving efficiencies. Among other factors contributing to the company registering profits is the reduction in interest outgo by 17% and a 6% fall in depreciation.

For the full year also, operating margins showed a huge improvement from 3% in FY02 to 12% in FY03. Raw material as a percentage of sales went down from 36% to 34% YoY. Also, the company’s employee rationalisation (read VRS) seems to have paid off with staff costs declining from 23% (as % of sales) to 21.5% in FY03. On other parameters, the company was able to reduce its interest outgo by 15% (or Rs 2.3 bn) due to a reduction in debt by Rs 8 bn in FY03. Also, SAIL’s intensive cost reduction drive has saved Rs 4 bn for the company in the last one year.

On the back of continuous improvement in performance in the last few quarters, the stock has run up on the bourses from Rs 6 to the current Rs 11 levels. However, the sustainability of steel prices at higher levels seems unlikely. Any adverse news on the realisations front is likely to affect performance. Considering the company’s growth target of 6%-7% and assuming that steel prices will remain firm in the near future, there is no doubt that the company will turnaround in the current fiscal. But steel being a cyclical commodity, there could be some weakness in steel prices during 2HFY03. Though the performance is encouraging, it has to be remembered that SAIL is a PSU. The ability to foresee trend and take decisions based on the same is likely to be slower compared to its private sector peers. In this context, the risk profile of the stock is on the higher side.

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