SAIL: Steeling for a price cut

If the government forces a price cut, it could hurt the steelmaker's profits

The SAIL stock hit a five month low on Wednesday closing at Rs 167and losing four per cent in the day's session. Moreover, it is down about 42 per cent from its peak in January.

The Street is concerned that the government may compel steelmakers to bring down prices by 15-20 per cent. That can shave off about 25- 30 per cent of SAIL's profits, say analysts.

Steel prices have risen sharply over the last three months from around $550 per tonne to as much as $ 900 per tonne for some products, an increase of over 60 per cent though the average increase may have been lower at around 30 per cent.

However, manufacturers say prices of raw materials such as coking coal and iron ore have risen, the latter by about 65 per cent . Should the government agree to cut excise duties from the current level of 14 per cent to around 6 per cent, companies will not suffer.

However, if it insists on a price cut, SAIL, being a public sector firm, will have no option but to comply. The steelmaker is vertically integrated to a great extent and has sufficient reserves of iron ore.

It makes around 12 million tonnes of steel annually and the capacity will be ramped up to 24 million tonne by FY12. The firm's operating margin in the December quarter at 31.3 per cent the highest in 8 quarters and SAIL is expected to close FY08 with revenues of around Rs 38,000 crore and a net profit of around Rs 8150 crore.

Sales are expected to go up to about Rs 44,000 crore in FY09 while profits should be cross Rs 10,000 crore with the company improving its product mix. At the current price of Rs 167, the stock trades at 6.5 times estimated FY09 earnings and a fall in the price could be an opportunity to buy.

Bajaj Auto: Skidding sales

Bajaj Auto, the demerged entity which will house the automobile business of the Bajaj group, has ended FY08 on a disappointing note with sales of motorcycles falling 10 per cent to 2.12 million vehicles.

Compared with market leader Hero Honda, which had posted a 15 per cent rise in sales of two-wheelers during March, Bajaj Auto's March sales were down about 9 per cent at 1.54 lakh vehicles.

Hero Honda has been doing well in the northern market, say industry watchers, where Bajaj hasn't been able to make an impact.

Besides, they point out that the Pune-based company probably needs to launch a couple of new models to be able to grow sales and market share: in the executive segment, the 125 cc XCD hasn't done as well as expected and the company had been banking on it to the extent that it has focussed less on the 125 cc Discover and Platina.

Meanwhile the 150 cc Pulsar 150, which is a premium product, has been doing consistently well but is now a mature brand. The motorcycles market is tipped to grow at just about 5-7 per cent in FY09 compared with a degrowth of about 10 per cent in FY08. With banks reluctant to finance purchases, customers are staying away.

In a difficult environment, it could be difficult for Bajaj to grow share in a challenging environment and fend off competition from Hero Honda.

At the current price of Rs 690, Hero Honda currently trades at around 13 times estimated FY09 earnings. The company which houses Bajaj's automobile business is yet to list after the erstwhile Bajaj Auto was split threeways.