SAIL: A peep into the past - I - Views on News from Equitymaster

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SAIL: A peep into the past - I

Jun 10, 2008

It is a well-known fact that fortunes of steel companies rise and fall with the strength and weakness in steel cycle. In other words, whenever steel prices are on an upswing, profitability of steel companies usually takes a quantum leap. Furthermore, whenever prices start abating, profitability comes under pressure. Integrated companies from the Indian steel sector are no different. Led by record realisations and improved demand, these companies have been raking up huge profits over the past few years. In this article, let us have a look at the journey of SAIL, one of India's biggest steel producers from the lows of 1999-2003 to the highs of 2003-2007 and trace the company's financial performance during these two explicit periods. Let us first have a look at the financial performance of the company between 1999 and 2003

The total revenues of the company during this period grew at a moderate CAGR of 6%. This was led by 4% CAGR each in volumes and realisations of saleable steel (Saleable steel accounts for nearly 90% of company's total sales). As seen from the chart below, the growth in realisations was rather polarized, as it was largely a result of a 19% growth in FY03. Excluding the same, growth in realisations actually fell by half a percent on a CAGR basis in the earlier years. The four year period under consideration was a challenging period for the world economy especially towards the latter half, as in the aftermath of the Sept 11 attacks, consumer spending slowed down leading to depressed commodity prices including steel. Volumes though remained buoyant as the Indian economy continued to expand.

On the operating performance front, operating profits grew at a CAGR of 8% in the period under consideration. However, the trend once again was not that of stable growth as majority of the growth took place in FY03, with operating profits improving from a negative Rs 2.8 bn to a positive Rs 13.6 bn. But FY03 was not the best year of the lot as the honours went to FY01, where led by a 7% growth in realisations and a 10% fall in expenditure, operating profits jumped nearly five fold and stood at Rs 15 bn. What an impact a small growth in realisations and fall in expenses can have! This could be attributed to the high operating leverage that commodity companies typically enjoy. Since these companies have low margins and since most of the incremental benefits of price rise directly flow to the profits, a small price rise can indeed result in a huge jump in profits. For e.g. a company with 5% operating margins can as much as double its operating profits with only a 5% growth in realisations everything else remaining constant. No wonder, SAIL could increase its operating profits more than five fold on a lot lesser operating margin and a higher growth in realisations.

As far as net profits are concerned, between FY99 and FY03, the company did not have a single year of profit and accumulated total losses to the tune of Rs 60.3 bn. This sorry state of affairs could be attributed to its high depreciation and interest charges during the period under consideration. However, what was comforting was the fact that in FY03, led by improved realisations, total losses had come down drastically to settle at Rs 3 bn as opposed to Rs 17 bn in the previous year. Thus, while performance indeed improved in FY03, the company was still some distance away from recording profits, which had eluded it for the past five years.

Did the company succeed? Let us find out in the next article in the series.

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