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SAIL: Exceptional gain boost - Views on News from Equitymaster

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SAIL: Exceptional gain boost

Nov 12, 2013

SAIL has announced its results for the quarter ended September 2013. The company has reported an increase of 6.7% YoY and 117.3% YoY in net sales and net profits for the quarter ended September. 2013. Here is our analysis of the results.

Performance summary
  • The topline of the company increased by 6.7% YoY due to higher volumes.
  • Operating profits declined by 21.5% YoY. Operating margins declined by 2.7% YoY.
  • At the bottomline level, profits for the quarter increased by 117.3% YoY due to one-time exceptional gain of Rs 10562.6 m. Net profit margin increased by 5.2% YoY and stood at 10.2%.
  • For the half year ended September, 2013, net sales and net profits increased by 1% YoY and 31.6% YoY respectively.

Financial performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 108,156  115,355 6.7% 215,931  218,034 1.0%
Expenditure 97,109  106,686 9.9% 189,731  199,693 5.3%
Operating profit (EBDITA) 11,047 8,669 -21.5% 26,199  18,342 -30.0%
Operating profit margin (%) 10.2% 7.5%   12.1% 8.4%  
Other income 2,302 1,527 -33.6% 5,086 3,789 -25.5%
Interest (net) 1,862 2,165 16.3% 3,110 4,083 31.3%
Depreciation 4,026 3,988 -1.0% 8,045 7,917 -1.6%
Profit before tax 7,460 4,043 -45.8% 20,131  10,131 -49.7%
Exceptional Item 418 9,881 2261.7% (2,151) 9,002 NA
Tax 2,448 2,121 -13.4% 5,584 2,820 -49.5%
Profit after tax/(loss) 5,431  11,804 117.3% 12,395  16,312 31.6%
Net profit margin (%) 5.0% 10.2%   5.7% 7.5%  
No. of shares (m)         4,131  
Diluted earnings per share (Rs)         4.7  
P/E ratio (x)*         13.5  
*trailing twelve month earnings

What has driven performance in 2QFY14?
  • The topline of the company increased by 6.7% YoY. During the quarter, the company reported a 8% YoY and 2% QoQ fall in realizations to Rs 37,907/tonne. This indicates that the company has probably compromised on the realizations to push for more volumes and also the poor domestic demand scenario. The management also indicated aggressive inventory liquidation even at the cost of realizations going forward if need be. Despite this believe, 2 mt incremental volume addition in FY14 is very unlikely.

  • Flat steel prices during the quarter stood at Rs 33634/tonne (13.5% YoY) whereas long steel prices during the quarter stood at Rs 36845/tonne (8% YoY). During the quarter SAIL exported 58000 tonne of steel and maintained its guidance of 0.7 m tonnes of steel export during FY14.

    Break-up of operating costs
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw Materials 46,133 51,483 11.6% 89,487 92,049 2.9%
    % of sales 42.7% 44.6%   41.4% 42.2%  
    Power & fuel 12,739 12,977 1.9% 24,979 24,503 -1.9%
    % of sales 11.8% 11.2%   11.6% 11.2%  
    Employee cost 20,898 24,954 19.4% 40,823 47,902 17.3%
    % of sales 19.3% 21.6%   18.9% 22.0%  
    Other Expenditure 17339 17272 -0.4% 34443 35239 2.3%
    % of sales 16.0% 15.0%   16.0% 16.2%  

  • Operational performance disappointed massively as EBITDA/tonne stood at Rs 2870/t. EBITDA margin of 7.5% was lower by 200 bps QoQ as raw material costs inched up (due to inventory cost adjustment) and employee costs also inched up further for higher provisioning of 20% expected wage hike (against 15% earlier) for non-executive class. The company is witnessing some pressure on margins on account of an increase in freight costs. Both domestic railway freight (busy season surcharge) and sea freight (from US $16-16.5/tonne to US $20-21.5/tonne for Panamax vessel).

  • Net profit of the company increased by 117.3% YoY. One off gain of Rs 10.6 bn on damages from coking coal suppliers for non-supply of contractual quantity lifted reported PAT.
What to expect?
The company has guided for an increase in capitalisation of depreciation and interest costs. Going forward. SAIL has guided for an additional capitalisation of Rs 108 bn of fixed assets in FY14 and an additional Rs 200 bn of fixed assets in FY15. Under the modernisation and expansion plan amounting Rs 72.2 bn, till date cumulative orders worth Rs 58.7 bn have been placed while an expenditure of Rs 49.5 bn has already been incurred until October 2013.

Uncertainties with respect to timely commissioning and stabilization of the projects continue to be there. Though, the company has commissioned blast furnace 5 at Rourkela (RSP), the same is not likely to contribute before December 2013 at least, as the converter is not yet commissioned. At IISCO, too commissioning of billet caster and converter are delayed and likely to be done during December 2013. The management expects 60% of 2.4 mtpa capacity to be available in FY15. Incremental volume addition thus would remain a concern till the commercial production starts from these projects.

At the current price of Rs 63, the stock trades at around 13.5 times its trailing twelve month earnings. Looking at the attractive valuations, we maintain a Buy view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio

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