The company’s margins have been hit on account of high fixed costs, increase in consumption of externally purchased coke and degrading product mix.
SAIL managed to report above estimate results in Q3 FY14 on account of a write back of provisions made earlier. Excluding the write back of Rs2.1bn in employee expenses, results were inline with our estimate.
Topline of Rs114.6bn was lower than our estimate due to lower than expected sales volume. Sales volume of 2.94mn tons was higher by 6.5% yoy, but lower by 2.6% qoq and below our estimate of 2.98mn tons. Realisations improved by 2% qoq and 0.8% yoy, was inline with our estimate. Exports continued to increase as domestic demand remained subdued. Saleable steel production was lower by 2.8% qoq.
Operating profit of 11.3bn was lower by 0.6% yoy, but was higher by 30.6% qoq and was above our estimate of Rs9.3bn. Excluding the write back of Rs2.1bn in employee costs, operating performance was inline with our estimate. The impact of improvement in EBIDTA/ton on a qoq basis was offset by lower sales volume. EBIDTA/ton of Rs3,850 was higher by 34.1% qoq due to an increase in realisations and lower raw material costs. We are quite surprised by the 6.1% qoq drop in raw material costs. This impact was also somewhat offset by a jump in other expenditure. All other costs except other expenditure, declined on a qoq basis in per ton terms.
|| Q3 FY13
|Steel production ('000 tons)
|Steel sales ('000 tons)
|Sales as a % of production
|Cost per ton (Rs/ton)
|Power and fuel costs
Reported PAT for the quarter was lower by 0.5% qoq due to higher interest costs. Interest costs increased by 11.1% yoy and 14% qoq to Rs2.5bn.
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 quarter 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 7.1x FY15 EV/EBIDTA, higher than its domestic as well as international peers. We maintain our SELL rating with a price target of Rs50.
|Power & fuel costs
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