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SAIL: Coking coal worsens the woes - Views on News from Equitymaster

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SAIL: Coking coal worsens the woes

Jul 30, 2009

Performance summary
  • Topline declines by 17% YoY mainly on account of lower realisations during the quarter.
  • Operating profits decline by 32.4% YoY on account of a lower than proportionate fall in expenses. EBITDA margins witness a decline of 4.7%.
  • Bottomline falls 27.7%YoY, reflecting the fall in operating profits. Net profit margins contract by 2.1%.

Financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 110,294 91,528 -17.0%
Expenditure 82,559 72,772 -11.9%
Operating profit (EBDITA) 27,736 18,756 -32.4%
EBDITA margin (%) 25.1% 20.5%  
Other income 3,926 5,400 37.6%
Interest (net) 568 828 45.8%
Depreciation 3,165 3,269 3.3%
Profit before tax 27,928 20,059 -28.2%
Extraordinary income/(expense) - -  
Tax 9,577 6,798 -29.0%
Profit after tax/(loss) 18,352 13,261 -27.7%
Net profit margin (%) 16.6% 14.5%  
No. of shares (m) 4,130.4 4,130.4  
Diluted earnings per share (Rs)*   13.7  
Price to earnings ratio (x)*   12.8  
(* on trailing twelve months earnings)

What has driven the performance in 1QFY10?
  • The company’s topline declined by 17% YoY during the quarter. This can be attributed to lower realisations on account of subdued steel prices. As a matter of fact, the steel prices had reached their all time highs during 1QFY09. However, due to the economic crisis, the prices have fallen significantly and are still down by more than 25% as compared to last year’s peak. While the production of saleable steel grew by 4.4% YoY to 3.1 m tonnes, sales volumes of same grew by 4% YoY to 2.8 m tonnes during the quarter. SAIL continued its thrust on production of value-added and special steels that resulted in a growth of 21% YoY to 1.1 m tonnes of these products during the quarter.

  • On the operating front, the operating profits declined by 32.4% YoY during the quarter. This was mainly on account of lower than proportionate decline in the operating expenses, which in turn was due to increase in raw material costs (as % of sales). Coking coal prices remained higher during the quarter. It may be noted that the prices of coking coal grew by 49% YoY, thus impacting the operating profits by nearly Rs 8.7 bn during the quarter. Thus, EBITDA margins declined by 4.7% to 20.5% in 1QFY10. However, continuous focus on improving operational efficiency by certain techno economic parameters resulted in savings to the extent of Rs 5.7 bn, thereby partially offsetting the increase in raw material prices during the quarter.

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 32,031 41,194 28.6%
    % sales 29.0% 45.0%  
    Staff cost 22,154 10,709 -51.7%
    % sales 20.1% 11.7%  
    Consumption of stores and spares 7,988 6,530 -18.3%
    % sales 7.2% 7.1%  
    Power and fuel 7,792 8,148 4.6%
    % sales 7.1% 8.9%  
    Other expenses 12,594 6,192 -50.8%
    % sales 11.4% 6.8%  

  • Net profits declined by 27.7% YoY, lower than the operating profits during the quarter. This was mainly on account of significant rise in the other income. However, higher interest cost and depreciation charges impacted the net profits negatively.

What to expect?
At current price of Rs 178, the stock is trading at a multiple of 1.6 times our expected FY12 book value per share. As far as the performance of the company is concerned, the growth in steel volumes has been nearly in line with our assumptions, however realisations have come in lower than our estimates. We may not factor the same in our projections right now as we believe steel prices may harden in the coming quarters. If they indeed fail to do so, we may also have to finally revise them downwards. As far as our outlook on SAIL stock is concerned, we remain cautious at these levels.

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