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SAIL: Bottomline in red - Views on News from Equitymaster
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SAIL: Bottomline in red
Sep 7, 2015

SAIL has announced its June quarter results. The company has reported a 10% growth in topline and flat bottomline for the quarter ended June 2015. Here is our analysis of the results.

Performance summary
  • Topline falls by 16% YoY during the quarter
  • The company suffers a loss at the operating level, led mostly by higher staff costs
  • Losses get bigger at the bottomline level as higher interest and depreciation charges also impact profits negatively

(Rs m) 1QFY15 1QFY16 Change
Net sales 113,412 95,028 -16.2%
Expenditure 102,114 95,845 -6.1%
Operating profit (EBDITA) 11,298   (817)  
EBDITA margin (%) 10.0% -0.9%  
Other income 1,958 1,743 -11.0%
Interest (net) 3,050 4,430 45.3%
Depreciation 4,080 4,261 4.4%
Profit before tax 6,127 (7,765)  
Extraordinary income/(expense) - -  
Tax 828 (4,549)  
Profit after tax/(loss) 5,299 (3,216)  
Net profit margin (%) 4.7% -3.4%  
No. of shares (m) 4,130.5 4,130.5  
Diluted earnings per share (Rs)*   3.0  
Price to earnings ratio (x)**   15.9  
(* annualised, ** on trailing twelve months earnings)

What has driven performance in 1QFY16?
    Company's topline came in lower by 16% on a YoY basis during the quarter. It should be noted that production of saleable steel was up by 6% YoY. However, what led to the fall in topline was the near 16% dip in net sales realisation. The quarter saw an unprecedented increase in imports from countries like China, Japan, Korea, Russia etc of the magnitude of 54% YoY and this severely affected domestic steel production. Besides, exports from India fell by 31% YoY and this further impacted steel off take. With the Government's support to the steel industry in the form of an upward revision in customs duty on imports, some price stability should return going forward

    Cost break-up...
    (Rs m) 1QFY15 1QFY16 Change
    Raw materials 43,828 36,711 -16.2%
    % sales 38.6% 38.6%  
    Staff cost 24,585 24,189 -1.6%
    % sales 21.7% 25.5%  
    Power and fuel 13,223 13,466 1.8%
    % sales 11.7% 14.2%  
    Other expenses 20,478 21,501 5.0%
    % sales 18.1% 22.6%  

  • There was more bad news in store on the margins front as the same collapsed as compared to similar quarter last year. In fact, margins not just collapsed but went into the negative, leading to a loss at the operating level. In addition to higher staff cost as a percentage of sales, what also hurt margins negatively were higher royalty charges, increase in purchased power rate and other expenses.

  • Losses got bigger at the bottomline level aided by higher interest as well as depreciation charges. In fact, had it not been for a tax credit on account of investment allowance, the losses could have been even worse. The company's bottomline came in the red to the extent of Rs 3.2 bn as opposed to profit of Rs 5.3 bn during same quarter last year
What to expect?
At the current price of Rs 47, the stock trades at around less than half of its expected FY17 book value per share. The company is down more than 50% from its 52-week high and is around 20% shy of levels the stock has not seen in more than 10 years. The sector is indeed going through tough times and the situation doesn't look like improving in the near term at least. However, with most of the negatives already priced in, it could turn to be a good contrarian bet. We will come out with an updated view on the stock soon.

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