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SAIL: Lower taxes cushion the blow
Jun 2, 2014 | Updated on Jun 17, 2014

Sail has announced its March quarter results. The company has reported a 10% growth in topline and flat bottomline for the quarter ended March 2014. Here is our analysis of the results.

Performance summary
  • Topline grows by 10% YoY during the quarter led by a similar growth in volumes
  • Margins expand by 1.9% mainly on account of savings in staff costs
  • PBT falls 22% YoY despite a strong operating performance. This was mainly on account of lower other income and significantly higher interest and depreciation charges.
  • Bottomline manages to grow by a meagre 1.4% on account of 48% decline in tax costs.
  • Profit for the full year grows 21% YoY on the back of a 5% growth in topline

Financial snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 122,847 135,092 10.0% 444,406 466,984 5.1%
Expenditure 114,070 122,884 7.7% 399,084 425,825 6.7%
Operating profit (EBDITA) 8,777 †12,208 39.1% 45,322 41,160 -9.2%
EBDITA margin (%) 7.1% 9.0%   10.2% 8.8%  
Other income 2,551 1,751 -31.4% 10,884 †8,338 -23.4%
Interest (net) 2,146 3,126 45.7% †7,477 †9,676 29.4%
Depreciation 1,936 5,163 166.7% 14,030 17,167 22.4%
Profit before tax 7,246 5,671 -21.7% 34,700 22,654 -34.7%
Extraordinary income/(expense) 165 390   (2,293) †9,591  
Tax 2,946 1,535 -47.9% 10,703 †6,081 -43.2%
Profit after tax/(loss) 4,465 4,526 1.4% 21,704 26,165 20.6%
Net profit margin (%) 3.6% 3.4%   4.9% 5.6%  
No. of shares (m) 4,130.5 4,130.5   4,130.5 4,130.5  
Diluted earnings per share (Rs)*         6.3  
Price to earnings ratio (x)*         14.5  
*Based on trailing twelve months

What has driven performance in 4QFY14?
  • The topline of the company increased by 10% YoY. During the quarter, the company reported sales volumes at 3.5 MT (million tonne) as compared to 3.2 MT in 4QFY13. For the full year sales volumes stood at 12.1 MT, a jump of 9.0% YoY. The EBITDA/tonne during the quarter came in at Rs 3,488/tonne, compared to Rs 2,743/tonne in 4QFY13, higher by 27.2% YoY.

    Break-up of operating costs (Standalone)
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Raw materials 56,536 62,536 10.6% 191,824 201,658 5.1%
    % sales 46.0% 46.3%   43.2% 43.2%  
    Staff cost 24,734 25,206 1.9% 86,371 95,785 10.9%
    % sales 20.1% 18.7%   19.4% 20.5%  
    Power & fuel 12,185 12,621 3.6% 48,304 49,422 2.3%
    % sales 9.9% 9.3%   10.9% 10.6%  
    Other expenditure 20,615 22,522 9.2% 72,585 78,960 8.8%
    % sales 16.8% 16.7%   16.3% 16.9%  

  • At the operating level, operating profits of the company increased by 39.1% YoY in 4QFY14. However, the full year operating profits declined 9.2% YoY. The share of imported coking coal in the overall requirement stood at 70%. It may be noted that higher dependence on imported coking coal is fuelling costs and hurting margins. Further, SAIL is dependent on Coal India for its domestic sourcing requirement which has again led to scarcity in the input (coking coal) amidst environmental issues and resulted in higher raw material costs. With respect to power costs, roughly 60% of the requirement was met through JVís operating as captive power plants (CPPs), 33% was drawn from the grid while the balance 7% was consumed from owned CPPs.

  • Net profit of the company was flat despite strong show at the operating level due to a 31.4% YoY fall in other income. For the full year profits were up by 20.6% YoY. The taxes were lower by 47.9% YoY and 43.2% YoY during 4QFY14 and FY14 respectively. The taxes were lower as the company has not provided for certain tax liabilities since the matter relating to these payments is subjudice and in court of law.

  • SAIL witnessed a 6% YoY increase in share of value added products to 5.33 MT (best ever till date) in FY14.

  • The D/E ratio as at the end of FY14 stood at 0.6x. The board of directors declared dividend of Rs 2.02 per share for the fiscal under consideration.
What to expect?
SAIL incurred capex of Rs 98.9 bn in FY14 vis-ŗ-vis its guidance of Rs 115 bn. For FY15 management expects capex to be in the range of Rs 90 bn. The company is exploring various ways to fund its ongoing capacity expansion plan in order to minimize debt costs. The ongoing expansion is expected to not only increase SAILís capacity but also improve its technological efficiency. The company has already placed orders worth Rs 592.8 bn for its various modernization and expansion projects being undertaken. It plans to finance the ongoing capex with a targeted D/E of 1:1.

At the current price of Rs 95, the stock trades at around 15 times its trailing twelve month earnings. With FY14 coming to an end we are likely to roll over our estimates and target price one year forward. Until then we keep our target price under review and recommend investors to HOLD on to the stock.

Lastly, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio.

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