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SAIL: Margins soar - Views on News from Equitymaster
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SAIL: Margins soar
Nov 17, 2014

SAIL has announced its September quarter results. The company has reported a 1.4% YoY growth in topline while bottomline has declined by 45% YoY for the quarter ended September 2014. Here is our analysis of the results.

Performance summary
  • Topline grows by 1.4% YoY during the quarter. During 1HFY15 saleable steel production stood at 6.22 MT.
  • Operating profits expand at a faster pace of 70.7% YoY on the back of 3.7% YoY fall in expenditure.
  • Bottomline declines by 45% YoY despite strong performance at the operating level due to an absence of exceptional gain in 2QFY15 (a gain of Rs 10.5 bn was realized in 2QFY14 in the form of a compensation received from one Brazilian miner due to non-performance of a contract) which boosted the profits in that quarter). Tax expenses were down 52.2% YoY as the company did not provide for entry tax in states of UP, Chattisgarh and Odisha due to some dispute. Revision of depreciation policy led to a 1.8% YoY fall in depreciation expenses.
  • The D/E ratio stood at 0.56x at the end of 1HFY15.

Financial Snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 115,198 116,787 1.4% 217,485 230,184 5.8%
Expenditure 107,368 103,423 -3.7% 201,253 205,536 2.1%
Operating profit (EBDITA) 7,830 13,364 70.7% 16,232 24,647 51.8%
EBDITA margin (%) 6.8% 11.4%   7.5% 10.7%  
Other income 1,684 1,620 -3.8% 4,338 3,593 -17.2%
Interest (net) 2,165 3,558 64.3% 4,083 6,607 61.8%
Depreciation 3,988 3,917 -1.8% 7,917 7,996 1.0%
Profit before tax 3,362 7,509 123.4% 8,571 13,636 59.1%
Exceptional item 10,563 - -100.0% 10,563 - -100.0%
Tax 2,121 1,015 -52.2% 2,820 1,843 -34.7%
Profit after tax/(loss) 11,804 6,495 -45.0% 16,313 11,794 -27.7%
Net profit margin (%) 10.2% 5.6%   7.5% 5.1%  
No. of shares (m)         4,131  
Diluted earnings per share (Rs)         2.9  
Price to earnings ratio (x)*         16.2  
(* on trailing twelve months earnings)

What has driven performance in 2QFY15?
  • During 1HFY15 the company reported sales volume of 5.7 million tons (MT), as compared to 5.6 MT in 1HFY14. The EBITDA per ton during first half came in at Rs 4,324 per ton, compared to Rs 2,899 per ton in 1HFY14, higher by 49.2% YoY. During 1HFY15, production of value added steel from the 5 integrated steel plants stood at 44%.

  • Operating profits expanded 70.7% YoY on the back of fall in expenditure. Low cost inventory liquidation reduced material cost and thus boosted profits. A 5.2% YoY fall in employee expenses further cushioned operating profits.

  • Capex incurred during 1HFY15 stood at Rs 31.49 bn. For FY15, management plans to incur a capex of Rs 90 bn.

  • Net profits declined 45% YoY despite strong performance at the operating level due to a 64.3% YoY increase in interest expenses. Also, profits of 2QFY14 were boosted by an exceptional gain of Rs 10.56 bn. The interest expenses increased due to rise in debt which is being taken to fund the existing expansion plan & meet working capital requirements.
What to expect?
The expansion plan seems pretty much on track. New facilities have been added at the 5 integrated steel plants. As far as the raw material requirement is concerned, the capacity of the existing mines is being ramped up to meet the requirement of iron ore amidst ongoing expansion. Further, improvement in margins during the quarter is an indication of better signs to come. If coking coal and iron ore costs remain subdued, margins may get a boost. However, higher debt (target D/E of 1:1 for the new capex planned) remains a concern.

At the current price of Rs 84 the stock is trading at a multiple of 16.2x its trailing twelve month earnings. In light of strong capacity expansion plans, reasonable valuations and evading cost pressures we recommend a BUY on the stock.

Lastly, 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 and that no single large cap stock comprises more than 5% of your portfolio.

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