SAIL: Operationally weak quarter hints more pain in store

Adjusting for one-time gain of Rs 1,056 cr, net profit was Rs 235 cr, was far lower than Street estimates of Rs 642 cr

Adjusting for exceptional items, SAIL reported a disappointing set of numbers for the quarter ended September 2013. After factoring in a one-time gain of Rs 1,056.2 crore due to non-supply of full quantity of contracted hard coking coal by foreign suppliers, the net profit stood at Rs 235 crore was far lower than the Street estimates of Rs 642 crore. Analysts were surprised to see lower realisations and a higher operating cost, which is also a reason they now believe there is scope for an earnings downgrades. The Street’s view was also reflected in the movement of the company's share price, which closed with a loss of 1.82 per cent at Rs 64.85 per share.     

“Operationally results were below expectations, It looks volumes are pushed at the cost realisations. We have a sell rating and most likely to maintain the same in the wake of disappointing results” Abhisar Jain, who tracks the company at Centrum Broking. That apart analysts also believes that at current valuations of 11-12 times its FY15 estimated earnings there is less room for rewards.   

During the quarter the company reported about 14 per cent growth in saleable steel at 3.1 million tonne. However higher volumes did not translate into gains because of the lower realisations during the quarter. The company’s sales realisations have fallen drastically from Rs 37,210 per tonne last year Rs 34,213 per tonne in the quarter ended September.

Further during the quarter because of provisioning required for the wage hike the company’s employee cost during the quarter was up by Rs 405 crore. Also, use of prior period high cost inventory, the company’s overall cost was up. This led to huge 275 basis point erosion in operating margins to 7.5 per cent.

Thankfully the coal prices helped in cushioning the downfall. The company manufactured steel with the imported coal costing $135 per tonne during the quarter as against $220 per tonne in the corresponding quarter last year. Meanwhile, the cumulative impact of higher cost and lower realisations led to lower profits. The company’s adjusted net profit comes to around Rs 235 core as against Rs 642.3 crore in the corresponding quarter last year.  

Hopefully pressure on these fronts should ease marginally in the coming quarter considering that the company has in the recent past taken a hike in steel prices. Also, the domestic steel prices are currently trading higher compared to September quarter. Further on the back of on-going capex the company expected to better volumes. It intends to commission projects of worth Rs 15000 crore by the end of FY14 as against Rs 5500 crore in FY13. Importantly the higher volumes will help in deal with the pressure on profitability. Thankfully even if domestic demand is lower, the company is able to monetise on the exports demand. In September quarter it reported 47 per cent year on year growth in exports sales.