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SAIL: Speed breaker, ahoy!

Oct 29, 2004

Introduction to results
Public sector steel behemoth, SAIL, has announced its 2QFY05 results. The company has reported a 200% jump in its bottomline on a strong 32% topline growth. It continues to show improvement in its operating margins, with these increasing nearly 1,140 basis points (11.4%) over the corresponding quarter last year. Strong realisation owing to firm steel prices continues to be the primary driver of this performance.

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net Sales 50,882 67,041 31.8% 93,631 119,750 27.9%
Expenditure 40,754 46,037 13.0% 75,546 82,597 9.3%
Operating Profit (EBDITA) 10,128 21,004 107.4% 18,085 37,153 105.4%
EBITDA margin (%)19.9%31.3% 19.3%31.0% 
Other income 280 853 204.5% 318 1,415 344.6%
Interest 2,400 852 -64.5% 5,032 2,721 -45.9%
Depreciation 2,777 2,773 -0.2% 5,594 5,563 -0.6%
Profit before tax 5,231 18,231 248.5% 7,778 30,284 289.4%
Tax 180 3,100   180 4,037  
Profit after Tax/(Loss) 5,052 15,132 199.5% 7,598 26,247 245.4%
Net profit margin (%)9.9%22.6% 8.1%21.9% 
No. of Shares (m) 4,130 4,130   4,130 4,130  
Diluted earnings per share* 14.7  12.7 
Price to earnings ratio (x) 3.4  3.9 
(* annualised)      

Company profile
Steel Authority of India Ltd. (SAIL), the domestic public sector steel behemoth, is India’s largest steel producer and is the world’s 15th largest. The company commands almost 1/3rd of the domestic market share with its 12 MTPA capacity. It operates 4 integrated steel plants and 2 specialty steel plants. After witnessing a severe deterioration in financial health during the period FY99 to FY03, the company turned around in FY04 and has continued its splendid performance in 1HFY05.

What has driven performance in 2QFY05?
Riding on the steel cycle: The topline has continued to register strong growth (up 32%), primarily led by upward spiraling steel prices. It must be noted that while in the domestic market, average steel prices during the quarter have strengthened in the region of 35%-40% YoY, international steel prices have surged by about 70%-75% during the same period. It must be noted that SAIL exports about 10% of its volumes.

Benefit from operating leverage: With all due credit to strong steel prices, margins continued to rise unabated for the company during the quarter. It must be noted that much of the operating profitability gets reflected in the bottomline of the company (see chart below) owing to steel companies’ having high operating leverage. Operating margins during 2QFY05 were at over 31% compared to about 20% in 2QFY04. However, due credit also needs to given to the company’s cost control measures, which has aided this impressive performance.

Cost break-up
(% of net sales)2QFY042QFY05
Raw materials30.5%31.5%
Staff costs20.4%16.4%
Stores8.1%6.8%
Power & Fuel10.5%8.2%
Other expenditure9.9%7.1%

Interest cost saves the day: SAIL clocked a bottomline growth of 200% during the September quarter, which could largely be attributed to the spill over effect of the operating level performance. Apart from a sharp 205% increase in other income, an impressive 65% reduction in interest outgo helped to prop up the bottomline. The lower interest expenses could be attributed to the company’s dedicated efforts at reducing its debt burden by consistently restructuring its existing high cost debt with lower interest bearing instruments and paring some of the excess debt flab. This has also led to an improvement in the company’s debt-equity ratio, which has come down below 1:1 at the end of the September 2004 quarter.

What to expect?
At Rs 50, the stock is trading at a price to earnings multiple of 3.9 times 1HFY05 annualised earnings. Going forward, with the company planning to increase its hot metal production by 1 m ton to 13 m tonnes in the near-term by de-bottlenecking, it would continue to benefit in terms of higher volume sales. However, we must caution investors here that much depends on the sustainability of international steel prices beyond this fiscal year, which in turn is considerably dependant on Chinese demand for the commodity. It must be noted that China has increased its efforts at reining its galloping economy by raising interest rates this week by 27 basis points (0.27%) and could prove to be a speed breaker on the road for SAIL going forward.

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