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SAIL: Good performance but…

Oct 30, 2002

Steel Authority of India Limited (SAIL), the public sector steel behemoth, announced encouraging September quarter results. The company has reported a 5% growth in its topline while its net losses have fallen by 52% YoY. What is commendable though, is the fact that the company has managed to post operating profits in 2QFY03. Operating margins of the company have gone up to 11% compared to -0.6% in the same period last year.

(Rs m)2QFY022QFY03Change
Net Sales 33,993 35,622 4.8%
Other Income 3,793 669 -82.4%
Expenditure 34,210 31,828 -7.0%
Operating Profit (EBDIT) (217) 3,793 -1852.1%
Operating Profit Margin (%)-0.6%10.6% 
Interest 4,022 3,349 -16.7%
Depreciation 2,842 2,813 -1.0%
Profit before Tax-3,287-1,699-48.3%
Extraordinary items - -  
Tax - 116  
Profit after Tax/(Loss) (3,287) (1,584)-51.8%
Net profit margin (%)-9.7%-4.4% 
No. of Shares 4,130.0 4,130.0  
Diluted Earnings per share*-3.2-1.5 
(* annualised)   

Topline growth seems to be the consequence of better export volumes and healthy realisations. Realisations which have been improving since the beginning of this year, have been holding ground since the last 2-3 months. Operationally, the company has managed to reduce its raw material and power costs considerably. This has led to a 7% drop in operational expenses. Operating margins have consequently improved.

Significant improvement in operating margins have helped the company pare down its losses in the September quarter. Considerably lower other income figures have however prevented SAIL from actually recording profits.

SAIL has equity investments of Rs 3.8 bn in its subsidiary company, the Indian Iron & Steel Co. Ltd., a sick company. Its revival proposal has recently been approved by the government, including employee compensation and the same is under detailed evaluation. SAIL has not provided for permanent diminution in the value of these investments, which it should have ideally done as per prudent accounting norms. Also, the company is treating a sum of Rs 865 m (towards employee family benefit scheme), as deferred revenue expenditure to be written-off in five years.

While SAIL's performance has been improving in the recent past, any adverse news on the realisations front is likely to severely impact its performance. Steel realisations have improved in the last 6-8 months and the company expects the prices to remain at the current levels for the full year. There is no doubt that performance in FY03 will be much better as compared to FY02, but there are too many negatives haunting the company. The stock currently trades at Rs 7 levels.

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