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SAIL: Salaries mar performance - Views on News from Equitymaster

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SAIL: Salaries mar performance
Jul 26, 2007

Performance summary
  • Topline grows by 8.4% YoY as the company achieves best ever volumes sales of 2.5 MT.

  • Expenses grow at a faster rate than topline, resulting into an EBITDA margin contraction of 190 basis points.

  • Net margins improve by 30 basis points as bottomline grows by 10%, led by doubling of other income and lowering of interest expenses

(Rs m) 1QFY07 1QFY08 Change
Net sales 74,164 80,395 8.4%
Expenditure 50,779 56,566 11.4%
Operating profit (EBDITA) 23,385 23,829 1.9%
EBDITA margin (%) 31.5% 29.6%  
Other income 1,513 3,069 102.9%
Interest (net) (937) (796) -15.0%
Depreciation 2,959 3,012 1.8%
Profit before tax 21,002 23,090 9.9%
Extraordinary income/(expense) - -  
Tax 7,138 7,839 9.8%
Profit after tax/(loss) 13,864 15,251 10.0%
Net profit margin (%) 18.7% 19.0%  
No. of shares (m) 4,130.5 4,129.8  
Diluted earnings per share (Rs)* 13.4 14.8  
Price to earnings ratio (x)**   10.0  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Steel Authority of India Ltd. (SAIL) is India’s second largest steel producer. The company holds nearly one-third of the domestic market with its 13 MTPA capacity. It operates 5 integrated steel plants (post merger of IISCO steel plant) and 2 specialty steel plants. After bleeding at the net profit level between FY99 and FY03 owing to an unfavorable steel cycle, the company turned around in FY04 and reported an astounding performance in FY05. Further, the company has embarked on a massive expansion plan (split into two phases), which will take its steel production capacity to 20 MTPA by FY12. The company accounts for nearly 26% of domestic finished steel production. It is the largest player in the flat products and second largest player in the long products segment.

What has driven performance in 1QFY08?
Steel cycle remains favorable: While the company has not provided the exact break-up, we believe that the growth in topline has been more volume than price driven. Further, increased sales of value added products also helped support the topline growth. During the quarter, the company achieved best ever first quarter sales of 2.5 MT with substantial growth in sales of products like TMT bars (60%), medium structurals (47%) and electrical sheets (15%). Exports during the quarter were also higher by 11%.

SAIL achieved record production of 3.8 million tonnes (MT) of hot metal and 3.4 MT of crude steel during 1QFY08 with capacity utilisation of blast furnaces going up to 110%. This was made possible on account of improved blast furnace productivity, higher production through continuous casting route, reduction in coke rate and various other measures. The company’s topline growth in the first quarter is indeed a testimony to the continued good times in the industry.

Cost pressures mount: Not withstanding the impressive topline performance, spiraling costs have dented the company’s operating performance as margins have contracted by 190 basis points as compared to same quarter last year. The wrecker in chief has been the staff costs, which grew by 22% YoY. Had it not been for the reduction in other expenses and savings on the power and fuel costs front, margins would have taken a further hit. Also, since the company satisfies most of its need for key raw materials like iron ore and coke through captive sources, it has remained insulated from the rise in prices being witnessed in these compounds.

Cost break-up…
(Rs m) 1QFY07 1QFY08 Change
Raw materials 19,792 21,457 8.4%
% sales 26.7% 26.7%  
Staff cost 11,876 14,481 21.9%
% sales 16.0% 18.0%  
Consumption of stores and spares 6,163 7,343 19.1%
% sales 8.3% 9.1%  
Power and fuel 6,324 6,740 6.6%
% sales 8.5% 8.4%  
Other expenses 6,624 6,544 -1.2%
% sales 8.9% 8.1%  

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 8.3 bn, thus lowering its debt equity ratio to 18% as compared to 24% in the corresponding previous quarter. This was also reflected in the interest expenses, which stood lower by 15% YoY. Further, the higher amount of cash diverted towards investments helped the company bring about a strong 102% YoY growth in other income, which along with better asset utilisation, helped the company post a decent 10% YoY growth in bottomline. Important to add that this was the best ever-quarterly performance by the company from a net profit perspective.

Over the last few quarters
As seen from the table below, while topline growth has been the lowest in the recent quarter, due largely to stable prices, growing balance sheet strength and improved productivity has helped the company register improved net profit margins.

Over the last few quarters…
  1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
Net sales (YoY growth %) 37.4% 21.7% 29.0% 15.7% 8.4%
OPM 31.5% 27.3% 28.5% 29.1% 29.6%
NPM 18.7% 16.9% 17.2% 18.3% 19.0%

What to expect?
At the current price of Rs 153, the stock is trading at a multiple of 10 times its trailing twelve-month earnings. We are in the process of updating our research report on the company and will soon come out with our revised estimates as well as the target price.

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