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SAIL: Higher steel prices improve topline
Jun 5, 2012

Steel Athority of India Limitted (SAIL) has announced its results for the quarter and full year ended March 2012. The company has reported a growth of 12.7% YoY and 3% YoY in net sales and net profits for the quarter ended March 2012. Here is our analysis of the results.

Performance Summary
  • The topline of the company improved by 12.7% YoY because of better realizations due to price hikes during the quarter and higher volume growth.
  • Operating profits declined by 20.3% YoY mainly due to high other expenditure. Operating margins declined by 5% YoY to 14%.
  • At the bottomline level, profits for the quarter improved marginally by 3% YoY, mainly on account of lower interest cost. Net profit margin declined by 1.1% YoY.
  • Other income during the quarter declined by 47.2% YoY.
  • For the full year ended March 2012, the company posted a 7% YoY growth in net sales and 27.8% YoY decline in net profits.
  • The Board of Directors have recommended a final dividend of Rs.0.8 per equity share, in addition to the interim dividend of Rs.1.20 per equity share already paid, for the financial year 2011-12, thus taking the total dividend to Rs.2 per equity share.

Financial performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 121,469 136,920 12.7% 433074 463418 7.0%
Expenditure 97,996 118,207 20.6% 357186 402399 12.7%
Operating profit (EBDITA) 23,474 18,713 -20.3% 75888 61019 -19.6%
Operating profit margin (%) 19% 14%   17.5% 13.2%  
Other income 4,080 2,156 -47.2% 14,406 15,557 8.0%
Depreciation 3,871 3,891 0.5% 14,858 15,670 5.5%
Interest 1,769 1,210 -31.6% 4,748 6,777 42.7%
Profit before tax 21,914 15,767 -28.0% 70,689 54,129 -23.4%
Exceptional item 335 7,246 NA 1,254 (2,620) NA
Tax 6,943 7,244 4.3% 22,896 16,082 -29.8%
Profit after tax/(loss) 15,306 15,770 3.0% 49,047 35,427 -27.8%
Net profit margin (%) 12.6% 11.5%   11.3% 7.6%  
No. of shares (m)         4130.4  
Diluted earnings per share (Rs)         9  
P/E ratio (x)         10.6  
*trailing twelve month earnings

What has driven performance in 4QFY12?
  • SAIL registered a topline growth of 13% YoY on the back of marginal improvement in sales volume and better realization during the quarter. Sales volumes were 3.2 m tonne in 4QFY12 as against 3.1 m tonne in 4QFY11. Realizations were up 9% YoY to Rs 41,866/tonne whereas cost of production stood at Rs 36,939/tonne.

    Break-up of operating costs
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw Materials 54087 68659 26.9% 188995 216572 14.6%
    % of sales 44.5% 50.1%   43.6% 46.7%  
    Staff costs 20478 18206 -11.1% 76233 79321 4.0%
    % of sales 16.9% 13.3%   17.6% 17.1%  
    Power & fuel 9155 11556 26.2% 35581 44697 25.6%
    % of sales 7.5% 8.4%   8.2% 9.6%  
    Other Expenditure 14276 19786 38.6% 56376 61809 9.6%
    % of sales 11.8% 14.5%   13.0% 13.3%  

  • As far as operating profits are concerned, they have taken a hit to the tune of 20.3%.YoY during the quarter. Such YoY decline was attributable to higher costs (higher by 20%). With coking coal prices coming off, we expect raw material costs to decline going ahead. However such decline in raw material cost would be nullified by higher employee costs which are due for revision in 1QFY13. In FY12, the company witnessed a massive increase in costs, primarily on account of higher average coking coal prices (USD $288/tonne as compared to USD $213/tonne in FY11). The volatility in dollar-rupee valuations also resulted in an adverse impact of around Rs 9 bn for the year.

  • Net profit increased marginally by 3% YoY to Rs 15770 m as against Rs 15306 m in 4QFY11. Despite the significant decline at EBITDA level, it posted a marginal growth at bottomline due to the exceptional gains. The company reported exceptional gain of Rs 7.2 bn due to write back of disputed amount towards entry tax for Bhilai Steel plant and forex gain.

What to expect?
SAIL production fell on account of the issues related to the availability of coke with maximum decline of 7% in Bhilai Steel plant. The company has incurred a capex of Rs 110 bn in FY12 on account of ongoing modernization and expansion plans. The company has reduced capex guidance to Rs 120 bn against earlier Rs145 bn for FY13. The company plans to start providing higher non-executive wage provision from 1QFY13 onwards. This would increase employee cost further.

The company's expansion plans are running behind schedule. SAIL expects to commission various facilities in the much delayed IISCO steel plant like BF, sinter plant, and casters. We are likely to see some of the benefits of the capital spend program start flowing through in 2HFY13, with the volume benefits coming in FY14E.

At the current price of Rs 90, the stock trades at around 1.3x our estimated FY14 book value per share. We maintain a positive view on the stock.

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