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SAIL: Cost pressure mounts - Views on News from Equitymaster

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SAIL: Cost pressure mounts

Jul 21, 2008

Performance summary
  • Backed by rising steel prices, topline of the company has shown a growth of 37.2% on YoY basis.
  • Operating profits margin decline by 450 bps to 25.1% as compared to same quarter last year, led by higher raw material and staff expenses.

  • Net profit growth has come in at 20% YoY on the back of benign depreciation charges and robust growth in other income.


(Rs m) 1QFY08 1QFY09 Change
Net sales 80,395 110,294 37.2%
Expenditure 56,566 82,559 46.0%
Operating profit (EBDITA) 23,829 27,736 16.4%
EBDITA margin (%) 29.6% 25.1%  
Other income 3,069 3,926 27.9%
Interest (net) 796 568 -28.7%
Depreciation 3,012 3,165 5.1%
Profit before tax 23,090 27,928 21.0%
Extraordinary income/(expense) - -  
Tax 7,839 9,577 22.2%
Profit after tax/(loss) 15,251 18,352 20.3%
Net profit margin (%) 19.0% 16.6%  
No. of shares (m) 4,130.4 4,130.4  
Diluted earnings per share (Rs)*   19.0  
Price to earnings ratio (x)*   7.0  
(* on trailing twelve months earnings)

What has driven the performance in 1QFY09?
  • Company’s capacity utilization declined to 107%, less than the 121% achieved during the same quarter last year. This signifies a production decline of 3% as compared to same quarter of last year. However, production of value added products showed a growth of 41% on YoY basis. This helped the fact that the company was able to sale more value added products during the quarter, thus showing a topline growth of 37% on YoY basis.

  • On the operating front, the operating profits showed a growth of 16% on YoY basis. However the margins have shown a decline of 450 bps. This can be owed to the mounting cost pressures, where raw material prices increased by 49% and staff costs by 53% over corresponding quarter last year. This resulted in a 46% increase in operating expenses. Had the company not reduced its energy consumption and coke rate, the dent in margins would have been more.

    Cost break-up…
    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 21,457 32,031 49.3%
    % sales 26.7% 29.0%  
    Staff cost 14,481 22,154 53.0%
    % sales 18.0% 20.1%  
    Consumption of stores and spares 7,343 7,988 8.8%
    % sales 9.1% 7.2%  
    Power and fuel 6,740 7,792 15.6%
    % sales 8.4% 7.1%  
    Other expenses 6,544 12,594 92.4%
    % sales 8.1% 11.4%  

  • Robust cash flows has helped SAIL pare down its debt considerably and this quarter was no different as it was able to reduce its overall borrowings by Rs 2.6 bn, thus lowering its debt equity ratio to 11% as compared to 18% in the corresponding previous quarter. This was also reflected in the interest expenses, which stood lower by 29% YoY. Further, the higher amount of cash diverted towards investments helped the company bring about a 28% YoY growth in other income, which along with better asset utilisation, helped the company post a decent 20% YoY growth in bottomline. It is important to note that the company lowered its steel prices due to its commitment given to the government to curb the inflation. Otherwise, the growth would have been higher than what was witnessed.

What to expect?
At the current price of Rs 132, the stock is trading at a multiple of 1.5 times its FY11 expected book value per share. This, we believe, leaves scope for some upside in the medium term. While we have assumed company’s realisations to improve in the region of 8%-10%, any further upward revision would result into an improvement in the intrinsic value. The company’s huge expansion plan, entailing an investment in the region of Rs 540 bn is on track, post which, it will be able to take care of the industry growth story for quite some years to come.

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