SAIL December Quarter 2011 Earnings’ Review

SAIL, the country’s largest steel producer, declared its result on Monday, February 13, 2012. The performance of the company during the quarter remained quite weak. This was also seen in its stock price movement which has been down by 3 per cent in the past two days.

The company, during the quarter, has reported weak numbers on a YoY and QoQ basis. The consolidated net sales of the company were down by 5.16 per cent on a YoY basis to Rs 10,728 crore. The net profit of the company was down by 42 per cent on a YoY basis to Rs 632 crore. 

Particulars	Dec’11	Dec’10	YoY	9MFY12	9MFY11	YoY
Sales	10,728.78	11,312.84	-5.16	32,649.82	31,252.33	4.47
Raw Material	5,990.85	5,262.31	13.84	16,788.88	14,843.88	13.10
Power & Fuel	1,128.47	887.61	27.14	3,269.32	2,642.58	23.72
Operating Profit	1,581.10	1,795.69	-11.95	4,230.58	5,333.33	-20.68
Interest	185.46	59.24	213.1	556.69	297.92	86.85
Net Profit / Loss	632.12	1,107.47	-42.92	1,965.74	3,374.13	-41.74
Margins
OPM (%)	14.73	15.87	-1.1	12.95	17.06	-4.1
GPM (%)	16.01	17.33	-1.3	14.75	18.79	-4.0
NPM (%)	5.68	9.56	-3.9	5.78	10.45	-4.7

The weak numbers during the quarter were mainly on account of the lower steel sales volume coupled by higher raw material and power & fuel cost due to higher rupee depreciation on a YoY basis which made the imports more expensive for the company.  The sales volume of the company during the quarter has declined by 21.2 per cent on a YoY basis to 2.6 million tonnes. However, its realisation remained firm and was in fact up by 20.7 per cent to Rs 40,746 per tonne.

Particulars	Q3FY12	Q3FY11	YoY	9MFY12	9MFY11	YoY
Production	3	3.4	-11.8	9.1	9.5	-4.2
Sales (Rs Crore)	10,593.8	11,143.2	-5	32,257	30,775	5
Sales Volume (Million Tonnes)	2.6	3.3	-21	8.2	8.6	-5
Realisation/Tonne	40,746	33,767	21	39,338	35,785	10
EBITDA	1,581.1	1,795.7	-12	4,231	5,333	-21
EBITDA/Tonne	6,081.2	5,441.5	12	5,159.2	6,201.5	-17

On the operating side, the EBITDA margin declined by 100 bps to 14 per cent on a YoY basis due to higher raw material and power & fuel prices, up by 13.84 per cent and 27 per cent on a YoY basis respectively. However, due to increase in the realisation, the EBITDA per tonne during the quarter stood at Rs 6,081, up by 12 per cent as compared to that in the previous year’s corresponding quarter, which was at Rs 5,441.

During the quarter, steel industries had to take a beating due to high input costs and lower demand, which impacted the topline and the bottomline of SAIL as well. A major hit was on the bottomline of the company, which declined by 42 per cent on a YoY basis. The decline in the net profit on a yearly basis was on account of the sharp rupee depreciation which resulted into forex translation (unrealised) losses of Rs 466 crore. In the previous quarter (September 2011) too the company reported forex translation (unrealised) loss of Rs 508 crore. This has eaten away most of its bottomline profit of the last six months.

Also, the performance of the company in the last nine months remained weak largely on account of the lower demand, higher input costs and higher rupee depreciation. The net sales of the company in the last nine months grew by 4.7 per cent to Rs 32,649 crore while the net profit has declined by 41 per cent to Rs 1,965 crore.

On the expansion side the company has planned for enhancing its saleable steel capacity from 12.9 million tonnes to 20.1 million tonnes with crude steel capacity from 13.76 million tonnes to 21.4 million tonnes. The company for the ongoing project and further expansion plan will raise funds on a ratio of 1:1 debt/equity. We believe that the expansion will put pressure on the company’s balance-sheet in the short to medium term.

Till December 2011 the company has already spent Rs 36,616 crore and has further placed orders of over Rs 55,826 crore for modernisation and expansion projects. And out of the total Rs 36,616 crore spent, the debt of the company for the ongoing capex plan is Rs 10,957 crore by December 2011, which constitutes around 30 per cent of the total capex incurred. Further, the company has resolved to raise USD 300 million through the ECB route, which is likely to be at competitive rates.

The overall increase in debt will lead to an increase in the interest cost of the company which will impact its profitability as the company is aggressively increasing its debt level to finance its capex programme. Moreover, any delay in the project expansion plan by the end of the next fiscal year will lead to higher cost overruns.

However, in India the interest rate cycle seems to have peaked out after the RBI’s move to cut down the CRR rate by 50 bps to 5.5 per cent. This can provide some relief to the liquidity situation in the country and therefore we believe that the demand may see some pick-up in the ongoing quarter.  

At present the company is trading at a PE of 12.95x and with its EPS of Rs 8.47 the valuation looks reasonable. Also, the coking coal prices have come down and this will provide relief to the company on the cost front. But with concerns such as the slow pick-up in demand and delay in the commissioning of the projects, we feel that the counter doesn’t provide much value in the short to medium term. Therefore, investors would do well to remain cautious and avoid the scrip.