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SAIL: Raw material costs worsen the woes - Views on News from Equitymaster
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SAIL: Raw material costs worsen the woes
Oct 30, 2009

Performance summary
  • Topline declines by 16.8% YoY mainly on account of lower realisations during the quarter.
  • Operating profits declines by 20.7% YoY higher than topline led by higher raw material costs, thus EBITDA margins decline by 1.2% YoY to 23.8% in 2QFY10.
  • Net profits decline by 17.2% YoY lower than the operating profits on the back of higher other income and lower tax outgo.
  • Half yearly bottomline declines by 22.1% YoY on the back of 16.2% YoY decline in topline.


Financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 120,662 100,391 -16.8% 229,019 191,988 -16.2%
Expenditure 90,547 76,507 -15.5% 171,168 149,290 -12.8%
Operating profit (EBDITA) 30,115 23,884 -20.7% 57,851 42,697 -26.2%
EBDITA margin (%) 25.0% 23.8%   25.3% 22.2%  
Other income 4,224 5,362 26.9% 8,150 10,763 32.1%
Interest (net) 475 735 54.6% 1,043 1,572 50.7%
Depreciation 3,194 3,322 4.0% 6,359 6,598 3.8%
Profit before tax 30,670 25,189 -17.9% 58,598 45,291 -22.7%
Tax 10,574 8,554 -19.1% 20,150 15,352 -23.8%
Profit after tax/(loss) 20,096 16,635 -17.2% 38,448 29,939 -22.1%
Net profit margin (%) 16.7% 16.6%   16.8% 15.6%  
No. of shares (m) 4,130.4 4,130.4   4,130.4 4,130.4  
Diluted earnings per share (Rs)*         12.9  
Price to earnings ratio (x)**         12.8  
(* annualised, ** on trailing twelve months earnings)

What has driven the performance in 2QFY10?
  • The company’s topline declined by 16.8% YoY during the quarter. This can be attributed to lower realisations caused due to lower steel prices that are down by around 24% YoY. However, this was partially offset by a 14% YoY growth in volumes coupled with increased production of value added steel during the quarter.

  • On the operating front, the operating profits declined by 20.7% YoY during the quarter. This was mainly on account of lower than proportionate decline in the operating expenses, which in turn was mainly due to increase in raw material costs and power and fuel expenses (as % of sales). However, improved techno-economic parameters coupled with substantial reduction and other expenses helped the company save over Rs 10 bn during the quarter.

    Cost break-up…
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10
    Raw materials 32,167 41,299 28.4% 62,266 81,686
    % sales 26.7% 41.1%   27.2% 42.5%
    Staff cost 31,033 11,278 -63.7% 53,187 22,075
    % sales 25.7% 11.2%   23.2% 11.5%
    Consumption of stores and spares 8,423 7,093 -15.8% 16,412 13,154
    % sales 7.0% 7.1%   7.2% 6.9%
    Power and fuel 8,578 8,770 2.2% 16,370 16,969
    % sales 7.1% 8.7%   7.1% 8.8%
    Other expenses 10,346 8,067 -22.0% 22,933 15,407
    % sales 8.6% 8.0%   10.0% 8.0%

  • Net profits declined by 17.2% YoY, lower than the operating profits during the quarter. This was mainly on account of significant rise in the other income. However, higher interest cost and depreciation charges impacted the net profits adversely during the quarter.

What to expect?
At current price of Rs 165, the stock is trading at a multiple of 1.5x our expected FY12 book value per share. The performance of the company has been nearly in line with our estimates. Hence we don’t feel the need to revise our estimates. As far as our outlook on SAIL stock is concerned, we remain cautious at these levels.

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