SAIL: Sailing through

A better product mix and higher prices have driven sales growth in Q4FY08 though margins have fallen due to a fatter wage bill.

Higher steel prices and a better product mix may have fetched the Rs 40, 265 crore SAIL better realisations ""up 22 per cent--in the March 2008 quarter. However, like other PSUs, SAIL too is learning to live with a higher wage bill; additional expenses on employees ---up 860 basis points as a percentage of sales--dented the steelmaker's operating margins.

Power producer NTPC, for instance, had reported an 84 per cent increase in employee costs for the first nine months of FY 08. SAIL's operating profit margin fell sharply by 430 basis points to just under 25 per cent, dragging down FY08 margins by 70 basis points. However, the street was delighted with the revenue growth of 30 per cent---way above that in the first three quarters of FY08""and pushed up the stock by over 7 per cent on Friday.

SAIL is expanding steel capacity to 24 million tonnes by FY12 from 14 million tonnes currently by taking the brownfield route and, in the process, modernising its plants. With this, the cost of production, for India's biggest steel company, will fall because the ingot-cast route and the open-hearth routes will hardly be used.

Moreover, sales of semi-finished steel products, which currently account for about a fifth of volumes, will be replaced by higher ""end products. In other words, the product mix will improve steadily thereby leading to better operating margins. SAIL's biggest advantage is that it is self-sufficient in iron ore and stands to gain if iron ore contract prices move up more than anticipated.

While steel prices are expected to remain firm globally, the government is bent on keeping prices in check. Steel makers will feel the pinch because input costs, like those for coking coal, have trebled over the last year and as such margins could remain under pressure.

SAIL is expected to close FY09 with revenues of around Rs 44,000 crore and net profits of Rs 10,200 crore. At Rs 186, SAIL trades at times 9.5 times estimated FY 09 earnings and should perform in line with the market. Rival, Tata Steel at Rs 891, trades at 6.5 times estimated FY 09 earnings, gi]ven its problems with Corus and should also be a market performer.