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SAIL: Weak demand hurts profits - Views on News from Equitymaster

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SAIL: Weak demand hurts profits
Aug 20, 2013

SAIL has announced its results for the quarter ended June 2013. The company has reported a decline of 4.7% YoY and 35.3% YoY in net sales and net profits for the quarter ended June. 2013. Here is our analysis of the results.

Performance summary
  • The topline of the company declined by 4.7% YoY due to lower demand.
  • Operating profits declined by 36.2% YoY. Operating margins declined by 4.7% YoY.
  • At the bottomline level, profits for the quarter decreased by 35.3% YoY due to higher interest rate. Net profit margin declined by 2.1% YoY and stood at 4.4%.

(Rs m) 1QFY13 1QFY14 Change
Net sales 107,775 102,679 -4.7%
Expenditure 92,622 93,007 0.4%
Operating profit (EBDITA) 15,153 9,673 -36.2%
Operating profit margin (%) 14.1% 9.4%  
Other income 2,785 2,262 -18.8%
Interest (net) 1,249 1,918 53.6%
Depreciation 4,018 3,929 -2.2%
Profit before tax 12,670 6,088 -52.0%
Exceptional Item (2,569) (879)  
Tax 3,137 700 -77.7%
Profit after tax/(loss) 6,964 4,509 -35.3%
Net profit margin (%) 6.5% 4.4%  
No. of shares (m) - 4,131  
Diluted earnings per share (Rs)   5.3  
P/E ratio (x)*   8.0  
*trailing twelve month earnings

What has driven performance in 1QFY14?
  • The topline of the company reported a decline of 4.7% YoY mainly due to lower realizations, although they were partially offset by higher volumes. The company's realizations stood at Rs 38,573/tonne, compared to Rs 42,563/tonne in 1QFY13. Its volumes however increased by 4.8% YoY to 2.6 m tonne. Although production stood at 3.2 m tonne, sales volumes stood at only 2.62 m tonne, indicating SAIL's inability to raise volumes amidst low domestic demand.

  • Flat steel prices during the quarter stood at Rs 33,634/tonne (13.5% YoY) whereas long steel prices during the quarter stood at Rs 36,845/tonne (8% YoY). During the quarter, SAIL exported 58,000 tonne of steel and maintained its guidance of 0.7 m tonnes of steel export during FY14.

    Break-up of operating costs
    (Rs m) 1QFY13  1QFY14 Change
    Raw Materials 43,354 40,566 -6.4%
    % of sales 40.2% 39.5%  
    Power & fuel 12,240 11,526 -5.8%
    % of sales 11.4% 11.2%  
    Employee cost 19,925 22,948 15.2%
    % of sales 18.5% 22.3%  
    Other Expenditure 17104 17967 5.0%
    % of sales 15.9% 17.5%  

  • The staff costs for the company increased 15.2% YoY and the other expenses increased by 5.0% YoY. The operating profit therefore decreased by 36.2% YoY and operating profit margin contracted by 4.7% YoY to 9.4%.

  • Net profit of the company declined by 35.3% YoY due to lower realizations, higher employee cost and interest cost. Net profit margins declined by 2.1% YoY. Lower tax rate of 13% due to MAT credit entitlement led to sequentially flat profits at Rs 4.5 bn.
What to expect?
SAIL also indicated that the market has not been able to pass on the increase in steel prices due to Rupee depreciation and weak demand across sectors. We also believe the pricing scenario will be further compounded due to increase in supply of steel domestically. SAIL has guided for 13.6 m tonne and 14.6 m tonne output in FY14 and FY15 respectively.

SAIL expects to incur capex of Rs 114 bn and Rs 90 bn in FY14 and FY15. However it for the first time it sounded cautious on increasing the capex post the modernization and completion of the current expansion plans. It expects sustenance capex of Rs 10 bn to Rs 15 bn for FY15. It expects to commission all its expansion plans by FY15.

We expect SAIL's operational and financial performance to be impacted by 1) inability to maintain/raise sales volumes amidst slower demand growth; 2) higher employee costs, and 3) delays/cost overruns in its brownfield expansion projects.

At the current price of Rs 42, the stock trades at around 8 times its trailing twelve month earnings. Looking at the attractive valuations, we maintain a Buy view on the stock. We are in the process of reviewing our estimates and will provide an update on the target price by August 31st, 2013.

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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