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SAIL: Tough times continue
Jun 7, 2013

SAIL has announced its results for the quarter ended March 2013. The company has reported a decline of 9.9% YoY and 72.1% YoY in net sales and net profits for the quarter ended March. 2013. Here is our analysis of the results.

Performance Summary
  • The topline of the company declined by 9.9% YoY due to lower demand.
  • Operating profits declined by 50.5% YoY. Operating margins declined by 6.1% YoY.
  • At the bottomline level, profits for the quarter decreased by 72.1% YoY due to higher interest rate. Net profit margin declined by 7.9% YoY and stood at 3.6%.
  • For the full year ended March 2013, the company reported a 6.9% YoY and 28.1% YoY decline in net sales and net profits respectively.
  • The company has also declared a final dividend of Rs 0.4 per share in addition to an interim dividend of Rs 1.6 per share for the financial year 2012-13. This takes the total dividend for FY13 to Rs 2 per share.

Financial performance snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 136,853 123,304 -9.9% 458,822 426,976 -6.9%
Expenditure 118,203 114,066 -3.5% 402,668 379,971 -5.6%
Operating profit (EBDITA) 18,650 9,239 -50.5% 56,154 47,005 -16.3%
Operating profit margin (%) 13.6% 7.5%   12.2% 11.0%  
Other income 2,220 2,090 -5.9% 15,324 9,367 -38.9%
Interest (net) 1,211 2,146 77.1% 6,777 7,477 10.3%
Depreciation 3,891 1,936 -50.2% 15,675 14,048 -10.4%
Profit before tax 15,767 7,246 -54.0% 49,027 34,847 -28.9%
Exceptional Item 7,246 105 -98.6% (2,620) (2,293) -12.5%
Tax 7,244 2,946 -59.3% 16,085 10,749 -33.2%
Profit after tax/(loss) 15,770 4,405 -72.1% 30,322 21,805 -28.1%
Net profit margin (%) 11.5% 3.6%   6.6% 5.1%  
No. of shares (m)         4,131  
Diluted earnings per share (Rs)         5.3  
P/E ratio (x)*         11.3  
*trailing twelve month earnings

What has driven performance in 4QFY13?
  • The topline of the company reported a decline of 9.9% YoY mainly due to lower realizations, although they were partially offset by higher volumes. SAIL's average realizations fell 11% YoY and 2% QoQ. Flats accounted for 58% of sales, longs 33% in FY13. Net realisation was at Rs 37,539 per tonne, which was down by Rs 624 per tonne QoQ.

  • 4QFY13 saleable steel production fell 5% YoY to 3.2 mt; saleable steel sales were up 1% to 3.2 mt. FY13 production was flat at 12.4 mt, while sales were down 3% YoY to 11.1 mt (vs India's steel consumption growth of 3.3% in FY13). This is the third successive year of declining volumes for SAIL.

    Break-up of operating costs
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Raw Materials 68,849 56,539 -17.9% 216,621 191,955 -11.4%
    % of sales 50.3% 45.9%   47.2% 45.0%  
    Power & fuel 11,704 12,185 4.1% 44,697 48,304 8.1%
    % of sales 8.6% 9.9%   9.7% 11.3%  
    Employee cost 18,206 24,734 35.9% 79,355 66,494 -16.2%
    % of sales 13.3% 20.1%   17.3% 15.6%  
    Other Expenditure 19,444 20,608 6.0% 61,995 73,217 18.1%
    % of sales 14.2% 16.7%   13.5% 17.1%  

  • The operating profit of the company declined by 50.5% YoY. Operating margin declined by 6.1% YoY. This was despite lower raw material cost. Raw material costs are likely to decline further as the full benefit of lower coking coal prices flows through. SAIL's coking coal costs declined YoY (70% imported). 1QFY14 contracts have been settled at US $172/t vs. US $165/t in 4QFY13. 2QFY14 contract prices are likely to be lower (spot price is US $140/t). Employee cost increased sharply by 19% QoQ to Rs 24.7 bn. Out of this, Rs 3.3 bn was on account of increase in actuarial liabilities as return on government securities had fallen and the auditors have asked to make provisions on the same. The company is still negotiating for the wage settlement with non-executives which will be effective from 1Jan 2012. Currently, it is providing 15% increase in basic pay and dearness allowance for them. The company indicates that the final agreement of wage increase may increase marginally from this level.

  • Net profit of the company declined by 72.1% YoY. Net profit margins declined by 7.9% YoY. Higher tax rate and interest expenses drag bottom-line further down: The interest expense of the company increased by 77.1% YoY. The tax rate for the company also increased to 39.7% in 4QFY13 compared to 31.5% in 4QFY12.

  • SAIL commissioned projects worth Rs 55 bn, while spending a capex of Rs 97.3 bn during the year, significantly below the capex guidance of Rs 120 bn Under the modernization and expansion plan, a cumulative Rs 582 bn worth of orders have been placed and expenditure of Rs 445 bn has been incurred till April 2013. The company has given a capex guidance of Rs 115 bn for FY14. Further, the inventory build-up during the year has been to tune of Rs 22.6 bn.

What we expect?

SAIL reported disappointing sales volumes for FY13 in the midst of lower steel demand. Lower-than-expected volumes reflect lower demand in India as well as lack of focus on marketing by SAIL, in our view. Given the slowdown in steel demand in India, and rising imports from FTA countries (which attract lower import duty), we remain skeptical over SAIL's sales volume growth during FY14.

1HFY14 performance is expected to remain subdued due to virtually stable sales volumes and benefits of lower raw material cost (lower coking coal cost and low purchase of coke) more than neutralized by the weak steel prices. Any traction in earnings may happen only from 2HFY14. The company's expansion plans is expected to be completed by 1HFY15.

At the current price of Rs 59, the stock trades at around 11.3 times its trailing twelve month earnings. We maintain a 'Buy view on the stock. 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 mid cap stock comprises more than 3-4% of your portfolio

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