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SAIL: Profits tumble on foreign currency loss
Nov 4, 2011

SAIL has announced its results for the quarter ended September 2011. The company has reported a topline growth of 2.2% YoY and 54.6% YoY fall in net profits for the quarter ended September 2011. Here is our analysis of the results.

Performance summary
  • Led by subdued demand, topline grows by 2.2% YoY during the quarter.
  • Operating profits decline by 13.9% mainly due to high input cost especially high price of imported coal.
  • At the bottomline level, profits for the quarter declined by 54.6% YoY, mainly on account of foreign exchange fluctuation loss.
  • Other income during the quarter grew by 30.6%.

Financial performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 107474 109796 2.2% 198808 219210 10.3%
Expenditure 92,052 96,525 4.9% 164019 192716 17.5%
Operating profit (EBDITA) 15,423 13,271 -13.9% 34789 26495 -23.8%
Operating profit margin (%) 14.4% 12.1%   17.5% 12.1%  
Other income 3,754 4,903 30.6% 7,616 9,565 25.6%
Depreciation 3,688 3,938 6.8% 7,193 7,686 6.8%
Interest 1,090 2,000 83.4% 2,387 3,712 55.5%
Profit before tax 14,398 12,236 -15.0% 32,825 24,661 -24.9%
Exceptional item 1,525 (5,087) NA 587 (5,204) NA
Tax 5,023 2,203 -56.2% 10,746 6,121 -43.0%
Profit after tax/(loss) 10,900 4,946 -54.6% 22,667 13,336 -41.2%
Net profit margin (%) 10.1% 4.5%   11.4% 6.1%  
No. of shares (m)         4130.4  
Diluted earnings per share (Rs)         10  
P/E ratio (x)         11.4  
(*On a trailing 12-month basis)

What has driven performance in 2QFY12?
  • SAIL has reported topline growth of only 2.2 % YoY. This is because of slowdown in demand from domestic as well as international market. Rising interest rate and global uncertain economic situation has led to lower demand for steel.

    Cost break-up
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw Materials 51671 51556 -0.2% 81917 100557 22.8%
    % of sales 48.1% 47.0%   41.2% 45.9%  
    Staff costs 17004 19808 16.5% 37121 42469 14.4%
    % of sales 15.8% 18.0%   18.7% 19.4%  
    Consumption of stores and spares 6076 6521 7.3% 11810 12720 7.7%
    % of sales 5.7% 5.9%   5.9% 5.8%  
    Power & fuel 8766 11237 28.2% 17550 21857 24.5%
    % of sales 8.2% 10.2%   8.8% 10.0%  
    Other Expenditure 8535 7403 -13.3% 15621 15112 -3.3%
    % of sales 7.9% 6.7%   7.9% 6.9%  

  • As far as operating profits are concerned, they have taken a hit to the tune of 13.9%.YoY during the quarter. The reason for the decline was the increase in the raw material costs. Coking coal, a key raw material used to make steel, surged 40% during the period, compared with a 14% increase in the price of steel hot-rolled coils. SAIL imports about 70% of the coking coal it needs. Operating margins also declined by 2.3% YoY.

  • At the bottomline level, profits declined by 54.6% YoY during the quarter. The net profit margins declined from 10.1% in 2QFY11 to 4.5% in 2QFY12. The decline in net profit was because of steep Rupee depreciation against both Dollar and Euro which resulted in foreign exchange fluctuation loss of Rs 5 bn as compared to a profit of Rs 1.5 bn on short term foreign currency loans in the same quarter last year. Rupee depreciated by 8.7% during the quarter.

What to expect?
Steel prices have globally come down but have remained relatively stable in India. The management expects steel demand to pick up in the second half of this fiscal but at a slower pace as compared to last year due to rising interest rate which has lowered steel demand from auto and infrastructure companies. The steelmaker plans to spend just under USD $3 bn in the current fiscal year ending March on capacity expansion projects as part of a programme to swell total capacity at its five integrated plants to 21.4 m tonnes by March 2013.

At the current price of Rs 109, the stock trades at around 1x its expected FY14 book value per share. The stock has fallen 45% from its 52 week high. This could make it an attractive buy in the medium term.

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