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SAIL: Profits surge - Views on News from Equitymaster

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SAIL: Profits surge
Aug 11, 2014

SAIL has announced its June quarter results. The company has reported a 10.8% YoY growth in topline while bottomline has increased by 17.5% YoY for the quarter ended June 2014. Here is our analysis of the results.

Performance summary
  • Topline grows by 10.8% YoY during the quarter
  • Operating profits expand at a faster pace of 33.7% YoY
  • PBT rises 17.6% YoY on the back of strong operating performance. However, significantly higher interest charges (59% YoY) curtailed profitability growth to an extent.
  • Bottomline manages to grow by 17.5% YoY.

Financial Snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 102,338 113,412 10.8%
Expenditure 93,885 102,114 8.8%
Operating profit (EBDITA) 8,453 11,298 33.7%
EBDITA margin (%) 8.3% 10.0%  
Other income 2,603 1,958 -24.8%
Interest (net) 1,918 3,050 59.0%
Depreciation 3,929 4,080 3.8%
Profit before tax 5,209 6,127 17.6%
Tax 700 828 18.4%
Profit after tax/(loss) 4,509 5,299 17.5%
Net profit margin (%) 4.4% 4.7%  
No. of shares (m)   4,131  
Diluted earnings per share (Rs)   1.28  
Price to earnings ratio (x)*   12.8  
(* on trailing twelve months earnings)

What has driven performance in 1QFY15?
  • During the quarter the company reported sales volume of 2.8 million tons (MT), up 7.7% YoY, as compared to 2.6 MT in 1QFY14. The EBITDA per ton during the quarter came in at Rs 4,035, compared to Rs 3,251 per ton in 1QFY14, higher by 24.1% YoY. The steel production came in at 2.95 MT during the quarter.

  • Operating profits expanded on the back of strong topline growth.

  • Capex incurred during 1QFY15 was Rs 14.3 bn. For FY15, management plans to incur a capex of Rs 90 bn. After the ongoing expansion plan which is currently in place the company's saleable steel production capacity shall rise to 20.2 MT and crude steel production capacity shall rise to 21.4 MT.

  • Profitability growth was curtailed by fall in other income and rise in interest expenses. The interest expenses increased due to rise in debt which is being taken to fund the existing expansion plan. Management intends to fund the ongoing capex with a target D/E mix of 1:1. The D/E as of 30th June 2014 stood at 0.56x.
What to expect?
Concerns over delay in capacity expansion are gradually easing as the projects gather momentum. Also, expansion resuming pace (commissioning of new furnaces at Rourkela, IISCO, Bhilai plants) gives an indication that the demand scenario is also likely to improve later in the fiscal. Further, improvement in margins during the quarter is an indication of better signs to come. If coking coal and iron ore costs remain subdued margins may get a boost. However, higher debt (target D/E of 1:1 for the new capex planned) remains a concern.

At the current price of Rs 83 the stock is trading at a multiple of 12.8x its trailing twelve month earnings. In light of strong capacity expansion plans, reasonable valuations and evading cost pressures we maintain our HOLD view on the stock.

Lastly, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio.

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