Steel Authority of India Ltd (SAIL) has reported a commendable growth of 33% in revenues for the June quarter. Improving steel demand and a sharp turnaround in steel prices boosted the company's revenue growth. The company's bottomline however, stayed in the red with net loss of Rs 3 bn.
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During the quarter, the company's operating margins were down by 90 basis points despite better sales realizations. This is due to the fact that last year a steep decline in raw material stock lowered the total operating expenses. Total raw material consumption (including the stock) increased by over 100% in the current quarter, forming 38% of revenues (24% in 1QFY02). SAIL however, managed to control other key costs including power and employee cost.
The company also managed to restructure its debt which, brought down its interest cost by 7% in 1QFY03. SAIL is expected to continue this exercise in the current year as interest rates are still on the lower side. This would lower its interest cost further, curtailing the loss.
SAIL has equity investments of Rs 3.8 bn in its subsidiary company, India Iron and Steel Company Ltd., which is a sick company as per BIFR. Its revival proposal has recently been approved by the government, including employee compensation and the same is under detailed evaluation. SAIL has not provided for permanent diminution in the value of these investments. However, applying the prudent accounting policy of providing for this dimunition, SAIL's net loss would actually increase to Rs 6.9 bn for the quarter. Apart from this, SAIL has also not fully provided for expenses of Rs 866 m related to staff cost (employee family benefit scheme). The company treats this cost as a deferred revenue expenditure and writes it off in five years.
The stock is currently trading at Rs 9. Steel prices have firmed up in the last four months and the company expects the prices to remain at the current levels for the full year. This is likely to fuel its revenues in the current year and lower its net loss. It will however, take atleast 2-3 years to the company before its starts making profits.
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