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SAIL: Raw material prices spoil the show
May 28, 2009

Performance summary
  • Net sales grow by 9.9% YoY basis during FY09 backed by higher sales realizations during the first half of the fiscal.
  • EBITDA margins contracts by 8.6% YoY as operating expenses come in significantly higher than the topline growth.
  • Bottomline declines by 18.1% YoY during FY09 mainly on account of fall in operating profits.
  • Net profits decline by 38.1% YoY during 4QFY09, while topline falls by 10.5% YoY during the quarter
  • Has recommended a final dividend of Rs 1.3 per share in addition to the interim dividend of Rs 1.3 already paid for the financial year 2008-09.


Financial performance: A snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 134,779 120,578 -10.5% 402,142 442,084 9.9%
Expenditure 98,210 99,481 1.3% 285,619 351,850 23.2%
Operating profit (EBDITA) 36,569 21,097 -42.3% 116,523 90,235 -22.6%
EBDITA margin (%) 27.1% 17.5%   29.0% 20.4%  
Other income 3,774 5,323 41.1% 13,029 19,023 46.0%
Interest (net) 522 412 -21.1% 2,509 2,532 0.9%
Depreciation 3,171 3,298 4.0% 12,355 12,851 4.0%
Profit before tax 36,650 22,711 -38.0% 114,687 93,874 -18.1%
Exceptional item   160     160  
Tax 12,883 8,164 -36.6% 39,320 32,286 -17.9%
Profit after tax/(loss) 23,768 14,707 -38.1% 75,368 61,748 -18.1%
Net profit margin (%) 17.6% 12.2%   18.7% 14.0%  
No. of shares (m) 4,130.4 4,130.4   4,130.4 4,130.4  
Diluted earnings per share (Rs)*         14.9  
Price to earnings ratio (x)**         11.0  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in FY09?
  • The company was able to grow its net sales by 9.9% YoY during the fiscal led by higher realizations during the first half. However, the volumes of saleable steel decreased by 8% YoY to 11.3 m tonnes during FY09. This was mainly on account of sudden slump in the demand during the second half of the fiscal due to the global credit crisis. In fact, volumes declined by 12% YoY in 2HFY09. On the prices front, they definitely seemed to have come higher on a YoY basis as evident from the 10% growth in topline for the full year despite 8% drop in volumes. As per CMIE, CRC prices in Mumbai were higher by 17% in FY09 on a YoY basis and since most of the other products also following a similar pattern, average realizations for SAIL must have also come in higher than previous year by a similar rate.

    Cost breakup
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Raw materials 44,274 63,641 43.7% 122,896 168,021 36.7%
    % sales 32.8% 52.8%   30.6% 38.0%  
    Staff cost 32,701 13,369 -59.1% 79,190 84,015 6.1%
    % sales 24.3% 11.1%   19.7% 19.0%  
    Consumption of stores and spares 7,603 7,153 -5.9% 28,448 30,211 6.2%
    % sales 5.6% 5.9%   7.1% 6.8%  
    Power and fuel 7,498 7,648 2.0% 28,223 31,146 10.4%
    % sales 5.6% 6.3%   7.0% 7.0%  
    Other expenses 6,134 7,670 25.0% 26,862 38,456 43.2%
    % sales 4.6% 6.4%   6.7% 8.7%  

  • Operating profits declined by 22.6% YoY, causing EBITDA margins to fall by 8.4% YoY to 20.4% in FY09. This was mainly on account of greater than proportionate rise in operating expenses as compared to topline growth. Operating expenses grew by 23.2% YoY, mainly led by higher raw materials costs and other expenses (as % sales) during the fiscal. Raw material costs grew significantly due to the impact of coking coal prices contracts entered by the company during July 2008 when their prices were at the peak.

  • The bottomline declined by 18.1% YoY during FY09 mainly on account of fall in operating profits. However, benign growth in depreciation and interest cost prevented the bottomline from bleeding further. Moreover, higher other income also helped restrict the decline in bottomline.

What to expect?
At the current price of Rs 175, the stock is trading at price to book value multiple of 2.0 times our FY11 expected book value per share. The company has surpassed our bottomline projections by 9%. As far as the near term outlook is concerned, the management expects to log in a positive growth in the current fiscal. Realisations however may remain on the lower side. But with raw material prices also coming off significantly, margins are expected to remain stable or even increase a bit from the current levels. We will come out with an updated report shortly.

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