Better FY19 for SAIL after strong Q4: Rising volumes to drive earnings

Helped by strong realisations in the domestic steel market and completion of major capacity expansions, Steel Authority of India (SAIL) posted an improvement in profit for the March quarter (Q4). After returning to profit in October-December 2017 after a gap of about 10 quarters, the net profit in Q4 improved significantly. 

Operating profit at Rs 26.24 billion in Q4 was the highest in 27 quarters. SAIL had an operating profit of Rs 14.4 billion in the December quarter and an operating loss of Rs 2.64 billion in the year-ago period, according to a Motilal Oswal Securities report. 

With such a turnaround, the stage is set for SAIL to return to profit in 2018-19, the first time in four years, said analysts.

Rising volumes, led by new capacities and improving realisations supported by strong demand in India, better product mix, and rebounding prices in China will help SAIL.  During Q4, while sales volume grew 8.5 per cent year-on-year (y-o-y), net realisations improved 23.8 per cent. The improving prices of long products, helped by rising demand from housing and infrastructure sectors, bodes well; the segment still dominates SAIL's product portfolio. Nevertheless, the company is increasing its share of flat and value-added products. Further gains at the profitability level will come from soft input prices. 

With majority of its expansions complete, SAIL is aiming for growth of 27 per cent in production for 2018-19 to 18 million tonnes (mt), rising to 20 mt by 2019-20. As analysts peg the sales volume at about 16 mt in FY19, it would still translate to more than 10 per cent volume growth for SAIL.  

Analysts at Emkay Global Research said higher volumes would be a positive trigger. With better prices and profitability, cash flow is expected to surge and help in deleveraging. Based on the improved fundamentals, at the macro and company levels, Emkay's analysts have upgraded their ratings. Elara Capital expects operating profit to clock a compound annual growth rate of 60 per cent over 2018-20, driven by higher volume and realisation, aided by improving macros.

The one year target price for the share of Rs 94-111 by IIFL, Emkay and Elara is 30-54 per cent higher from the current Rs 72. However, in the near term, due to the seasonally soft monsoon season, the Street sentiment on steel and cement stocks might remain subdued, analysts add. Steel prices, on the rise since November, are expected to pause or even correct marginally. For long-term investors, it could then be a good time to enter the counter.