Steel Authority of India Ltd (Q2 FY14)

India Infoline News Service | Mumbai |

SAIL reported a 6.6% yoy increase in its topline to Rs115bn, but lower than our estimate of 125bn. The underperformance was due to lower blended realisations.

CMP Rs64, Target Rs50, Downside 21.9%

  • SAIL continued to report below par numbers for the fourth consecutive quarter, led by lower blended realizations and an increase costs due to the startup of new capacities. The underperformance was witnessed even after registering strong volume growth during the quarter. It managed to register sales volume growth of 37.3% yoy and 15.3% qoq on the back of increase in export sales volume and some inventory liquidation. The underperformance in PAT was offset by a extraordinary item of Rs10.5bn.


  • SAIL reported a 6.6% yoy increase in its topline to Rs115bn, but lower than our estimate of 125bn. The underperformance was due to lower blended realisations. The company registered an increase of 37.3% yoy in sales volume to 3mn tons, lower than our expectation of 3.1mn tons. Production too remained strong at 3.3mn tons, 2.5% higher on a yoy basis. A decrease in share of value added products of total sales led to the company registering a 2.5% qoq decrease in realizations against our estimate of 1% yoy increase. Blended realizations for the quarter stood at Rs38,197/ton against Rs39,190/ton in Q1 FY14. We were quite surprised by the decline as the company also managed to export 0.13mn tons of steel.


  • Operating profit for the quarter declined 21.8% yoy to Rs8.6bn, quite lower than our estimate of Rs17bn. The underperformance in operating profit was largely due to lower realisations and an increase in costs due to startup of new capacities. Raw material costs per ton of saleable steel increased on a qoq basis due to higher landed cost of coking coal. Though coking coal prices were lower on a qoq basis in dollar terms, the sharp depreciation of the rupee led to an increase in costs for SAIL. Except raw material all other costs per ton declined on a qoq basis, reducing the impact of higher raw material costs on EBIDTA/ton. EBIDTA/ton for the quarter stood at Rs2,871/ton, lower than our expectation of Rs5,569/ton and Rs3,692/ton in Q1 FY14.

Per ton analysis
(Rs mn)
Q2 FY14
Q2 FY13
% yoy
Q1 FY14
% qoq
Steel production ('000 tons)
3.3
3.2
2.5
3.2
1.9
Steel sales ('000 tons)
3.0
2.2
37.3
2.6
15.3
Sales as a % of production
92.6
69.2

81.9

Net realisations
38,197
49,183
(22.3)
39,190
(2.5)
Cost per ton (Rs/ton)





Raw material
17,047
20,970
(18.7)
15,483
10.1
Personnel cost
8,263
9,499
(13.0)
8,759
(5.7)
Power and fuel costs
4,297
5,791
(25.8)
4,399
(2.3)
Other overheads
5,719
7,881
(27.4)
6,858
(16.6)
Total cost
35,326
44,140
(20.0)
35,499
(0.5)
EBIDTA/ton
2,871
5,042
(43.1)
3,692
(22.2)
Source: Company, India Infoline Research
  • Reported PAT for the quarter jumped 118% yoy to Rs11.8bn, quite higher than our estimate of Rs8.7bn. The outperformance in PAT was aided by a one-off of Rs10.5bn, which the company received from coking coal major Vale for non-supply of coking coal during FY08. Interest costs increased 12.9% qoq and 16.3% yoy to Rs2.2bn due to increase in capitalization of new capacities.

  • The company’s margins have been hit on account of high fixed costs, increase in consumption of externally purchased coke and degrading product mix. Margins have been further impacted by the high costs involved in the stabilization of the new capacities. Though we expect margins to improve going ahead, we believe it would remain below its 5-year historical average. Earnings growth would further decline on account of rising interest costs and depreciation. We expect earnings to decline in FY14 and then increase by 20% in FY15. SAIL has bounced back sharply over the last one month after registering strong volume growth in Q2 FY13 and a revival in domestic steel prices. We believe the company would be an underperformer in the near term on account of delays in the commissioning of new plants, muted margins and subdued demand environment in the domestic market. At the CMP, the stock is trading at 7.2x FY15 EV/EBIDTA, higher than its domestic as well as international peers. We downgrade the stock from Market Performer to SELL with a revised price target of Rs50.

Results table
(Rs mn)
Q2 FY14
Q2 FY13
% yoy
Q1 FY14
% qoq
Net sales
115,355
108,202
6.6
102,679
12.3
Material costs
(51,482)
(46,133)
BSE 80.15 [1.05] ([1.29]%)
NSE 80.25 [1.05] ([1.29]%)

***Note: This is a NSE Chart

 

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