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SAIL: Strong turnaround continues

Oct 30, 2003

Steel Authority of India Limited (SAIL), the public sector steel behemoth, had yet another encouraging quarter as the company continues on a strong path towards turning around on a full year basis. SAIL has declared its September quarter (2QFY04) results wherein it has reported a 43% YoY growth in its topline. Further, for the quarter, the company has posted a profit of Rs 5 bn as compared to a loss of Rs 1.6 bn in the corresponding period last year. What is commendable here is the fact that the company has managed to improve its operating margins substantially by a substantial 930 basis points during the September quarter as compared to the same period last year, which led to a 167% YoY growth in operating profits for the company. Further, the story for the first half of the current fiscal is not much different.

(Rs m) 2QFY03 2QFY04 % Change 1HFY03 1HFY04 % Change
Net Sales 35,629 50,882 42.8% 73,748 93,631 27.0%
Other Income 669 280 -58.1% 722 318 -56.0%
Expenditure 31,836 40,754 28.0% 66,542 75,546 13.5%
Operating Profit (EBDIT) 3,793 10,128 167.0% 7,206 18,085 151.0%
Operating Profit Margin (%) 10.6% 19.9%   9.8% 19.3%  
Interest 3,349 2,400 -28.3% 7,030 5,032 -28.4%
Depreciation 2,813 2,777 -1.3% 5,686 5,594 -1.6%
Profit before Tax (1,699) 5,231   (4,788) 7,778  
Extraordinary items - -   - -  
Tax (116) 180   (116) 180  
Profit after Tax/(Loss) (1,584) 5,052   (4,672) 7,598  
Net profit margin (%) -4.4% 9.9%   -6.3% 8.1%  
No. of Shares 4,130 4,130   4,130 4,130  
Diluted Earnings per share*   4.9     3.7  
P/E Ratio         12.2  
(* annualised)            

While the company has not provided the volume sales figures, strong growth in topline is a factor of both – higher volume sales and improvement in realisations owing to significant higher steel prices. However, reportedly, SAIL has managed to improve its volume sales by about 10%. Also, it must be noted that steel prices have improved by an average 10% in 2QFY04 as compared to the corresponding quarter last year and this has benefited the company immensely, helping it to continue to turnaround. Further, exports have played an important role in propelling the topline of SAIL, which seems to have increased by over 100% YoY. The company, similar to other steel companies in the industry, has continued to target China for its exports.

Cost break-up
(% of net sales) 2QFY03 2QFY04
Raw materials 39% 31%
Staff costs 24% 20%
Stores 10% 8%
Power & Fuel 15% 11%
Other expenditure 13% 10%

SAIL continues to improve its operating efficiencies substantially, which is evident from the table of cost break-up above. On all of the cost aspects, the company has managed to improve its performance. These efforts have helped its operating margins to improve from 11% in 2QFY03 to 20% in 2QFY04. Further, the company continues to benefit from the low interest rate scenario as its interest outgo has declined by 28% YoY. After paring debts considerably in FY03, SAIL has continued to bring the debt down further and also restructure some other, so as to bring down its debt servicing liability. This effort is likely to continue for some more quarters considering the huge debts on the balance sheet of the company.

At Rs 45, the stock is trading at a P/E multiple of 12.2x its annualised 1HFY04 earnings. This valuation is significantly on the higher side of the spectrum considering the fact that the growth of the sector and the companies per se are largely linked to the economic growth. Moreover, we feel that, being a public sector company, it is very difficult for SAIL to match the operating efficiencies of private players like Tisco and, as such, it commanding a premium valuation to Tisco (9.6x) is in itself a cause for concern. Moreover, the concerns over the steel prices weakening in FY05 could mar SAIL’s plans of sustaining its growth story.

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