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SAIL: Lower sales cap gains

Nov 9, 2012

SAIL has announced its results for the quarter ended September 2012. The company has reported a decline of 1.5% YoY in net sales and 11.9% YoY increase in net profits for the quarter ended September. 2012. Here is our analysis of the results.

Performance summary
  • The topline of the company declined by 1.5% YoY due to lower volumes.
  • Operating profits declined by 15.8% YoY. Operating margins declined by 1.7% YoY. Increased fuel costs and other expenses plus higher wage expenses, from a new salary agreement applicable since January 1, 2012 also contributed to lower operating margins.
  • At the bottomline level, profits for the quarter increased by 11.9% YoY due to forex gains and lower interest. The company reported a forex gain of Rs 418 m as compared to a loss of Rs 5,087 m in the corresponding quarter last year. Net profit margin improved by 0.6% YoY and stood at 5.0%.
  • For the half year ended September 2012, the company reported a 1.5% YoY and 7.1% YoY decline in net sales and net profits respectively.

Standalone performance summary
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 109,795 108,202 -1.5% 219,210 215,977 -1.5%
Expenditure 96,613 97,109 0.5% 192,716 189,731 -1.5%
Operating profit (EBDITA) 13,181 11,093 -15.8% 26,495 26,246 -0.9%
Operating profit margin (%) 12.0% 10.3%   12.1% 12.2%  
Other income 4,904 2,255 -54.0% 9,565 5,039 -47.3%
Interest (net) 1,999 1,862 -6.9% 3,712 3,110 -16.2%
Depreciation 3,938 4,026 2.2% 7,686 8,045 4.7%
Profit before tax 12,148 7,460 -38.6% 24,661 20,131 -18.4%
Exceptional Item (5,087) 418 NA (5,204) (2,151) NA
Tax 2,209 2,448 10.8% 6,121 5,584 -8.8%
Profit after tax/(loss) 4,853 5,431 11.9% 13,336 12,395 -7.1%
Net profit margin (%) 4.4% 5.0%   6.1% 5.7%  
No. of shares (m)         8,451  
Diluted earnings per share (Rs)         4.1  
P/E ratio (x)*         20  
*trailing twelve month earnings

What has driven performance in 2QFY13?
  • The topline of the company reported a decline of 1.5% YoY mainly due to lower volumes which were down 8.8% YoY to 2.6 m tonne. Lower sales volumes reflect SAIL's inadequate focus on marketing its product in wake of declining steel demand in India. Realization stood at Rs 37,210/tonne, compared to Rs 36,230/tonne in 2QFY12 and Rs 39,369/tonne in 1QFY13. The company earlier reported a saleable steel production of 3.17 mt. Thus, lower sales resulted into further addition to the inventory. As per the management, current finished steel inventory stands at 1.4 mt. As SAIL is on the verge of commissioning new capacities, especially in a bleak demand scenario, higher inventory build-up might compel the company to compromise on the volume from new capacities in the immediate future.

    Break-up of operating costs
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Raw Materials 50,836 46,133 -9.3% 100,388 89,487 -10.9%
    % of sales 46.3% 42.6%   45.8% 41.4%  
    Power & fuel 11,602 12,739 9.8% 21,773 24,979 14.7%
    % of sales 10.6% 11.8%   9.9% 11.6%  
    Employee cost 19,808 20,898 5.5% 42,469 40,823 -3.9%
    % of sales 18.0% 19.3%   19.4% 18.9%  
    Other Expenditure 14367 17339 20.7% 28085 34443 22.6%
    % of sales 13.1% 16.0%   12.8% 15.9%  

  • Power and fuel costs and other expenditure increased 9.8% and 20.7% YoY. Operating profits therefore decreased 15.8% YoY and operating profit margin margin contracted by 1.7% YoY to 10.3%. Driven by volume the operational performance of the company remained weak, as it reported an EBITDA/ tonne of Rs 4267 or USD $77 against Rs 6061 (USD $112) reported during 1QFY13. While volume led the weak performance on YoY basis, lower realizations have been the key reason behind the poor show on a sequential basis. Raw material costs as a percentage of sales meanwhile rose 2.4% to 42.6% due to costs inflation. The average coking coal price stood at USD $220/tonne during the quarter. Though there is scope of improvement due to lower coking coal prices, however, pressure on the steel prices is likely to restrict the benefits to flow in.

  • The company reported a forex gain of 418 m in 2QFY13 and hence, its reported net profit increased by 11.9% YoY to Rs 5431 m. However, the adjusted net profit declined substantially by 50.0% YoY in 2QFY13.

What to expect?
SAIL has reported a capex spending of Rs 44 bn in 1HFY13 out of the total FY13 capex of Rs 120 bn. SAIL is expanding its saleable steel production capacity from 12.5 m tonne to 24 m tonne by FY15. However, the company has reported delays and cost overruns in several of its expansion plans during the past one year. Going forward, we do not rule out further delays and cost over-runs in its expansion plans.

At the current price of Rs 82, the stock trades at around 1.4x our estimated FY15 book value per share. We maintain a 'Buy' view on the stock.

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