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SAIL: Coking coal hurts margins - Views on News from Equitymaster

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SAIL: Coking coal hurts margins
Aug 2, 2011

SAIL has announced its results for the quarter ended June 2011. The company has reported a topline growth of 19.6% YoY and 28.8% YoY fall in net profits for the quarter ended June 2011. Here is our analysis of the results.

Performance summary
  • Led by strong volumes growth, topline grows by 19.6% YoY during the quarter.
  • Operating profits decline by 28.8% mainly due to high raw material cost, especially, high coking coal prices.
  • At the bottomline level, profits for the quarter declined by 28.8% YoY, mainly on account of poor operating performance.


Financial performance snapshot
(Rs m) 1QFY11  1QFY12  Change
Sales 91,333 109,260 19.6%
Expenditure 72,905 96,146 31.9%
Operating profit (EBDITA) 18,429 13,114 -28.8%
Operating profit margin (%) 20.2% 12.0%  
Other income 3,862 4,630 19.9%
Depreciation 3,505 3,742 6.7%
Interest 1,296 1,710 31.9%
Profit before tax 17,489 12,293 -29.7%
Tax 5,723 3,913 -31.6%
Profit after tax/(loss) 11,767 8,381 -28.8%
Net profit margin (%) 12.9% 7.7%  
No. of shares (m)   4,130.4  
Diluted earnings per share (Rs)   11.0  
P/E ratio (x)   10.7  
*trailing twelve month earnings

What has driven performance in 1QFY12?
  • SAIL has registered a robust topline growth of 19.6% YoY for the quarter ended June 2011. This was due to higher domestic demand which clocked an impressive 17% growth and exports which grew by a staggering 131% over the corresponding period last year. The company also expanded its countywide dealer network which contributed to 21% of sales.

    Break-up of operating costs
    (Rs m) 1QFY11 1QFY12 Change
    Raw Materials 30246 49499 63.7%
    % of sales 33.1% 45.3%  
    Staff costs 20117 22512 11.9%
    % of sales 22.0% 20.6%  
    Consumption of stores and spares 5734 6178 7.7%
    % of sales 6.3% 5.7%  
    Power & fuel 8784 10171 15.8%
    % of sales 9.6% 9.3%  
    Other Expenditure 9928 10423 5.0%
    % of sales 10.9% 9.5%  

  • As far as operating profits are concerned, they have taken a hit to the tune of 28.8%.YoY during the quarter. The reason for the decline was the increase in the raw material costs. Amongst raw materials, coking coal which accounts for more than half of the raw material cost saw its prices continue to rise from US$ 200 per tonne in Q1 last year to US$ 330 in Q1 of FY12. This led to an increase of 65% in coking coal cost which hurt margins.

  • At the bottomline level, profits declined by 28.8% YoY during the quarter. The net profit margins declined from 12.9% in 1QFY11 to 7.7% in 1QFY12. The impact of higher cost was, however, partially neutralised by better product-mix, higher sales and savings achieved through management initiatives which led to lower decline in net profits.

What to expect?
Though current coking coal prices are hovering around US$ 330 per tonne, the management of the company believes that the same is not sustainable The Australian mines which were affected by floods have resumed production, so coking coal prices are expected to ease in the coming quarters. The company is in the process of raising its capacity by 5.5 m tonnes which is expected to get commissioned towards the end of the financial year 2011-12. Although the prices of steel have remained stable, demand for steel is slowing down due to inflation, higher interest rates and slowdown in Chinese demand. This could be a worrying factor.

At the current price of Rs 118, the stock trades at around 1x its expected FY14 book value per share. The stock has fallen 42% from its 52 week high. This could make it an attractive buy in the medium term. We will come out with our update on numbers shortly.

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