Domestic steel sector behemoth and India’s largest public sector steel producer, Steel Authority of India Ltd. (SAIL), announced its 1QFY04 results, which were nothing less than impressive. The company’s topline grew by a strong 12% on the back of strong volume sales and continuing strength seen in steel prices. Exports, which grew 162% YoY, also assisted the company’s topline performance. Domestic demand ruled strong as a result of a buoyant automobile segment and the government’s infrastructure drive. Exports were strong as China continued to import steel to meet its requirements.
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On the bottomline front, SAIL posted yet another profitable quarter as compared to losses in the corresponding period last year. It must be noted that this is the second consecutive quarter of profits for the steel giant after registering losses for over 4 years. The company is aiming to end FY04 on a positive note.
SAIL managed to keep a close check on its expenses, which practically remained unchanged YoY despite the strong topline growth. The effect of this is visible in the huge improvement in operating margins of the company, which increased by 960 basis points. The company’s efforts at rationalizing its workforce and keeping a control on stores and power consumed and administrative expenses has all contributed to improving the company’s operating efficiency.
Further, the company’s bottomline was aided by a sharp reduction in interest outgo (down 29%). The company has been consistently paring down its debt and replacing high cost debt with lower interest costs, which has in effect reduced its interest outgo. Depreciation also reduced by a marginal 2%.
Going forward, the company plans to achieve a 6-7% growth in production. Increased production combined with improved product-mix and cost control measures should help the company achieve the goal of turning back into black in the current fiscal. However concerns remain in the form of its equity investments of Rs 3.7 bn in its subsidiary company, the Indian Iron & Steel Co. Ltd., a sick company. SAIL has not provided for permanent diminution in the value of these investments, which it should have ideally done, as per prudent accounting norms.
At Rs 23, the stock is trading at a P/E multiple of 9.3x its 1QFY04 annualized earnings. It must be noted that on the back of continuous reduction in losses and now realizing quarterly profits, the stock has already appreciated from Rs 7 levels to the current Rs 23 levels, an appreciation of 230% in the last three quarters alone. With the steel sector prospects remaining sound on the domestic as well as the exports front, the company seems well on target to achieve the much-awaited turnaround (on an annual basis). However, much depends on the sustainability of international steel prices, which in turn is considerably dependant on Chinese demand for the commodity. Moreover, steel being a cyclical commodity, there could be some weakness in steel prices during 4QFY04 as domestic players increase their capacities. Also, though the performance is encouraging, it has to be remembered that SAIL is a PSU. The ability to foresee trend and take decisions based on the same is likely to be slower compared to its private sector peers. In this context, the risk profile of the stock is on the higher side.
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