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This performance can be attributed to subdued steel demand leading to weak realisations, which impact its profitability, and continuing delay in SAIL’s capacity expansions. While realisations are not yet showing signs of recovery, the lower coal prices and higher liquidation of inventory may boost the company’s earnings before interest, taxes, depreciation, and amortisation (Ebitda) in the near term. However, with capacity expansions being delayed further, the gains have been postponed and hence, analysts have cut their volume and in turn earnings estimate. The hangover of divestment by the government may further keep the stock under check in the near term. Given the one-year consensus target price of Rs 79.85 according to Bloomberg data, near-term upsides are limited.
Realisations under stress
SAIL’s per tonne realisations had improved in FY12 to Rs 42,787 by the March 2012 quarter and further to Rs 43,110 in the June quarter. However, it lost momentum thereon. With demand remaining subdued, international steel prices falling and imports increasing, realisations have fallen 10 per cent by the December quarter to Rs 38,800. Profitability thereby remained impacted.
Ebitda comes at $76 per tonne in October-December, significantly lower than $111 in the year-ago quarter. Though sequentially the company has been able to maintain the profitability (Ebitda stood at $77 per tonne in the September quarter) despite realisations falling 6.7 per cent, the same is visibly lower than those of peers like JSW Steel, which reported Ebitda per tonne of around $100. For the March 2013 quarter, the realisations estimate of Rs 37,044 a tonne by analysts at Motilal Oswal Securities indicates further weakness.
Coal prices provide some cushion
Moving forward, SAIL’s employee costs are expected to increase with wage negotiations (new wages being applicable from January 1 2012). The company, though, has provided 15 per cent increase in basic pay and dearness allowance for employees and has accordingly made provisions of Rs 500 crore so far. But for FY14, analysts at Motilal Oswal Securities see the wage cost going up by Rs 600-700 crore, which, given the trend in realisations, could hurt profitability.
Overall, while realisations are expected to remain subdued, costs per tonne are seen falling by a higher margin leading to increase in Ebitda per tonne (of $101) on a sequential basis in the current quarter. Analysts see SAIL’s Ebitda rising to $110 per tonne in FY14, from $91 in FY13.
In the near-term, liquidation of inventory should also boost revenues. SAIL is sitting on finished steel inventory of 1.6-1.7 million tonnes (mt). While analysts expect it to clock sales of 3.2-3.5 mt in the March quarter, compared to 2.76 mt in the December quarter, it will be interesting to see how the company achieves the same, given the weak demand across user industries. Nevertheless, the gains on these fronts are largely reflecting in the share price.
Capacity expansions delayed
Meanwhile, the company, which is in the process of expanding capacities from 13.7 mt to 21.4 mt, has seen the same getting delayed further. SAIL now expects the coke oven battery at the Indian Iron and Steel Co (IISCO) West-Bengal and Rourkela, Orissa, to be operational in the current quarter, while volume expansions (2.5 mt at Rourkela and two mt at IISCO) will be completed only by the second half of FY14.
Thus, analysts at Motilal Oswal Securities have cut their volume estimates by 1.2 mt each in FY14 and FY15 to 12.3 mt and 13.6 mt due to lower guidance by the management and thereby their earnings per share estimates by 28 per cent and 36 per cent, respectively. Ashish Kejriwal of Elara Capital has also cut his FY14 volume estimates by five per cent to 12.4 mt and profit estimates by four per cent.
