Higher costs, lower other income and a possible supply of equity could keep earnings growth muted.
The fall in steel prices was always going to impact SAIL’s top line in the September 2009 quarter, but increase in volumes helped cushion the impact. As such, net sales fell just 19 per cent to Rs 9,900 crore, although realisations were down 30 per cent.
What also helped was lower coking coal costs restricting the fall in the operating profit to just 24 per cent. Besides, analysts point out that the steel maker made adjustments to its expenses on employees, which are down 24 per cent.
With other income up 49 per cent, the net profit fell just 17 per cent to Rs 1,660 crore. In fact, about a fifth of the bottom line came from other income.
What perplexes analysts is the drop in the employee costs to just Rs 1,130 crore for the September 2009 quarter when the management had earlier indicated that expenses under this head could add up to Rs 8,000 crore for the year. They fear the employee costs could increase again in subsequent quarters thereby depressing profits.
Also, the company is taking up its capacity by 60 per cent in the next couple of years, and would need to spend around Rs 10,000 crore this year on capital expenditure. While SAIL does have some amount of cash on the balance sheet, it may want to sell some equity in order to raise more money to be able to fund the projects.
This would mean a fall in the other income and, therefore, lower earnings. Moreover, the supply of equity could create an overhang in the market, limiting the upside for the stock. SAIL is doing all the right things to become a more efficient player over the medium term.
It is adding capacity so that saleable steel volumes hit 20 million tonnes by the end of 2012, changing the product mix with the objective of bringing down the share of semis to zero and attempting to bring down costs by reducing the number of employees.
However, at the current price of Rs 174, the stock trades at 11 times 2010-11 estimated earnings and captures near-term upsides.
