SAIL: Fast forward

Focus on value added steel products has helped the company improve margins

Higher prices have helped steel stocks outperform the broad market over the past six months. SAIL has managed to improve its financial performance thanks mainly to the rise in prices and a focus on higher value steel products, despite rising input costs in the past two quarters.

Over the past six months, the SAIL stock has risen 48 per cent as against the Sensex's 18.6 per cent.

In the December 2007 quarter (Q3FY08), the company's operating profit grew 22.7 per cent year-on-year to Rs 2,983.4 crore, while its net sales rose 11.7 per cent to Rs 9,533.3 crore.

Its operating profit margin, too, improved 280 basis points y-o-y to 31.3 per cent during Q3FY08. In Q2FY08, the company's margins had improved by 140 basis points y-o-y to 28.7 per cent.

However, on Tuesday, the stock was more or less unchanged at Rs 216.2. The company's saleable steel production was 3.4 million tonnes during Q3FY08 as compared with 3.3 million tonnes in Q3FY07.

For the first time in a quarter, its production of higher margin special steels and value-added items exceeded 1 million tonnes in Q3FY08, a y-o-y growth of 30 per cent, the steelmaker highlighted.

The company's realisations were estimated at Rs 30,750 a tonne in Q3FY08, a growth of 8 per cent y-o-y.

Improved sales of higher margin products, such as plates, and wheels and axles during the quarter, helped SAIL bring down its adjusted raw material costs as a percentage of net sales by 610 basis points y-o-y to 28.3 per cent.

Going forward, SAIL's focus on higher value products would remain key to driving growth in profits. The stock trades at 12.3 times estimated FY08 and 11.2 times FY09 earnings.

Suzlon: Strong wind ahead

The Suzlon stock rose over 8 per cent on Tuesday due to better top line growth and a strong order book. For Q3FY08, the company reported consolidated revenues of Rs 3,169.7 crore, up 66 per cent y-o-y.

Despite strong top line growth, the company reported a 13 per cent decline in net profit at Rs 152 crore. This was due to a one-time expenditure of Rs 73 crore incurred by the company, and higher interest costs and depreciation.

The company reported a 145 per cent rise in the interest cost at Rs 156.4 crore. Also, as new capacities have begun operations, depreciation rose by 118 per cent.

At the operating profit level, the margin dropped to 12.26 per cent in Q3FY08 as compared with 13.30 per cent a year earlier.

The pressure on margins was due to higher raw material cost as a percentage of income. Raw materials consumed as a percentage of sales went up from 59 per cent in Q3FY07 to 69 per cent for the Q3FY08. Going forward, the company expects interest and depreciation costs to come down as a percentage of the sales on account of reduction in debt and increase in utilisation and volumes.

During the quarter, its subsidiary was listed at a market capitalisation of 1.6 billion euros on the London Stock Exchange.

The debt-equity ratio has reduced to 0.39 times.

As on January 25, 2008, the company had a order book of Rs 17,107 crore (3,357 mw) including Rs 2,404 crore (441 MW) in domestic orders and Rs 14,703 crore (2,916 mw) in international orders.

Increasing volumes coupled with the strong order book, the one time adjustment in this quarter and rising fixed costs should not be a concern, according to analysts.

The stock trades at 26 times FY09 earnings.

With contributions from Amriteshwar Mathur and Jitendra Kumar Gupta