SAIL: Difficult times ahead

The Rs 45,242 crore SAIL maintained the momentum in its top line, posting a growth of 37 per cent y-o-y in the June 2008-09 quarter.

However, the steel-maker's operating margins were down 450 basis points at 25 per cent since it had to set aside a higher sum for wages, freight and ferro-alloys. Thus, net profit rose just a shade above 20 per cent to Rs 1,835 crore, disappointing the Street.

With SAIL renewing the annual contracts for the purchase of coking coal "" a key input "" at prices that are about 200 per cent higher than last year, margins could be impacted in the coming quarters.

The company imports about 70 per cent of its requirement of coking coal. A double whammy for the steel maker is that it is unlikely to be able to raise prices in the near term given that inflation is now in double digits.

The June quarter saw SAIL's products fetching better realisations, up 29 per cent on an average compared with Q1FY08. Apart from the price increase taken in the March quarter, the company also sold a higher proportion of value-added products.

Prices were last increased in March this year but due to government intervention, the steel maker has not benefited from booming international steel prices. Currently, prices in the domestic market are at least Rs 4,500 per tonne lower than the international price .

The stock has yielded significant ground since the start of the year and at the current price of Rs 146, it trades at 7.4 times estimated FY09 earnings.