Steel Autho-rity of India Ltd (SAIL)’s fortunes appear to be changing for the better. After two years of negative growth, the company’s profits are expected to rise in the coming years, aided by margin gains and volume growth.
While the steel demand and price volatility have been one of the major dampeners for the stock (which has under-performed broader markets for long), the operational problems, too, had taken a toll. On the one hand, capacity expansions got delayed, while on the other, production and sales declined during FY12.
The coke battery problems at some plants led to coke being outsourced and margins further taking a hit due to rising coal costs in the back of rupee depreciation. Although SAIL has captive iron-ore supplies, it imports 60-70 per cent of its coal requirement.
The bad news, though, ends there. The planned capacity expansions are now expected to go on stream in phases in the next three to 12 months, leading to higher volumes. Margins are also seen rising on higher operating leverage and relatively lower costs. The benefits of these will start reflecting from the second half of the current year, with FY14 seeing larger gains.
| GAINING STRENGTH | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 45,654 | 49,256 | 58,182 |
| % change y-o-y | 6.9 | 7.9 | 18.1 |
| Ebitda | 5,414 | 7,577 | 9,953 |
| Ebitda (%) | 11.8 | 15.4 | 17.1 |
| Net profit | 3,805 | 4,389 | 5,664 |
| % change y-o-y | -22.4 | 15.3 | 29.1 |
| EPS (Rs) | 9.2 | 10.6 | 13.7 |
| PE (x) | 10.2 | 9.7 | 6.9 |
| E: Estimates Source: Edelweiss Research | |||
Though the government’s plan to divest stake in SAIL through a follow-on public offer (FPO) may keep a tab on the stock in the interim, the gains from increase in volumes, as well as margins, (domestic steel prices are also relatively stable despite weakness in global prices) are far higher, and point to an improving outlook for SAIL.
By Bloomberg data, the last six months have also seen an increase in positive calls on the stock — the one-year consensus target price for the stock (now at Rs 94) stands at Rs 103. In the backdrop, long-term investors could start accumulating the stock.
FY12: Volumes woes
Production volumes declined by four per cent and sales volumes 2.9 per cent year-on-year during FY12 as the performance at some plants continued to be impacted due to mal-functioning of the coke oven batteries and the sinter plant. While the coke oven batteries have started normal operations, the problems with the sinter plant still persist. Thus, production volumes may remain affected in the first quarter of FY13, feel analysts, who also estimate forex losses to offset some of the operational gains.
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Big expansions, finally going on stream
Positively, SAIL’s mega plans to expand its crude steel capacity from 13.7 million tons (mt) to 21.4 mt and saleable steel capacity by 7.8 mt to 20.2 mt, which had been delayed to various reasons, are now in the final stages of completion.
Giriraj Daga at Nirmal Bang observes these delays have shaken the investor confidence in the last two years. However, he does not see any significant delays now and the completion of most of the projects is just three to 12 months away.
The massive expansion-cum-modernisation programme is expected to cost SAIL over Rs 70,000 crore, of which it has spent a little over half as on March 2012. Analysts at MF Global see the Bukaro plant’s 1.2 mt expanded capacity to be commissioned in October 2012, compared with the earlier schedule of June 2012.
With regard to the expansion at IISCO in West Bengal, while individual facilities are expected to be commissioned from the current month onwards, the integrated commissioning will be completed by December 2012. Rourkela expansions are also to be completed in FY13.
Analysts at Edelweiss Securities observe SAIL projects are now on track to meet the revised timelines and are unlikely to face any further delays. They expect sales volume to increase by 500,000 tonnes year-on-year in FY13 (largely from expansion at Rourkela) and by another 2 mt in FY14 (of which, 500,000 tonnes will be from Rourkela and 1.5 mt from IISCO). They also expect SAIL’s volumes from the expansion project to increase materially in FY14.
Margins to increase, but gradually
With the coke oven batteries now functioning normal and international coking coal prices, too, softening, SAIL stands to gain. However, part of the benefits may get offset due to the rupee’s depreciation against the dollar. Analysts at JP Morgan estimate average coking coal prices of $220 a tonne in FY13, compared to $280 a tonne in FY12. However, they also see the employee costs increasing sequentially in June 2012 quarter. Thus, margin improvement may see some time to fall in.
Analysts at Edelweiss Securities observe the operating margins may increase from second half FY13. They observe while the cost of power and fuel and stores and spares have remained high, with gradual commissioning of projects in a phased manner, SAIL expects these costs to normalise in the second half of FY13 and FY14. After completion of expansion, Ebitda (earnings before interest depreciation taxes and amortisation) per tonne could be over $160 in FY15 aided by better product mix, efficiency from new units and apportioning of high fixed cost with greater volumes. For FY13 and FY14, though, Edelweiss analysts peg Ebitda per tonne at $118 and $137, respectively (the same stood at $99 in FY12).