SAIL March Quarter 2012 Earnings’ Review

SAIL, the country’s largest steel producer, declared its March quarter result on Tuesday, May 29, 2012. The performance of the company during the quarter and for the fiscal year 2012 remained subdued. The consolidated net sale of the company during the quarter grew by 12.2 per cent on a YoY basis to Rs 13,397 crore while the net profit was up by a mere 3 per cent on a YoY basis to Rs 1,576 crore. This was mainly on account of the jump in the sales volume and realisation during the quarter.

The sales volume of the company during the quarter grew by 3.2 per cent on a YoY basis to 3.2 million tonnes and the realisation increased by 8.7 per cent on a YoY basis to Rs 41,866 per tonne. The demand scenario saw some revival in the March quarter due to increase in the infrastructure and construction activity. Further, the steel companies increased the prices by Rs 1,000-1,500 per tonne. Although the overall demand situation got revived in the March quarter 2012, it remained lower as compared to the same period last year.

On the operating side, the EBITDA margin declined by 700 bps to 15.6 per cent on a YoY basis due to higher raw material and power/fuel prices, up by 15 per cent and 26 per cent on a YoY basis respectively. Moreover, due to increase in the operating cost the EBITDA per tonne during the quarter stood at Rs 6,521, down by 26.6 per cent as compared to that in the previous year’s corresponding quarter, which was at Rs 8,890.

Also, the performance of the company in the fiscal year remained weak largely on account of the lower demand, higher input cost, increased finance cost and higher rupee depreciation. The net sales of the company for FY12 has grown by just 6.9 per cent to Rs 45,654 crore while the net profit has declined by 28 per cent to Rs 3,545 crore. The decline in net profit was due to a jump in the interest cost by 43 per cent to Rs 677 crore and higher foreign exchange loss of Rs 262 crore against profit of Rs 125 crore in the same period last year

On the expansion front, the company has planned to add saleable steel capacity from 12.9million tonnes with crude steel capacity from 13.76 million tonnes to 21.4 million tonnes. The company for the ongoing project and further expansion plan will raise fund at a 1:1 debt / equity ratio.

Till March 2012 the company has already spent Rs 40,322 crore and has further placed orders of over Rs 55,826 crore for its modernisation and expansion projects. And out of a total spend of Rs 40,322 crore the debt of the company for the ongoing capex plan is Rs 11,021 crore by March 2012, which constitutes around 30 per cent of the total capex incurred. For FY13 the capex plan of the company is of Rs 12,000 crore and for this company has firmed up to raise USD 300 million through the ECB route, which is likely to be at competitive rates.

However, the overall increase in the debt will lead to an increase in the interest cost of the company which will impact its profitability as the company is aggressively increasing its debt level to finance its capex and the high cash reserves will partly be used for capex. Moreover, the delay in the project expansion plan by the end of the next fiscal year will lead to higher cost over-run.  

At present the company is trading at a PE of 10x and with its EPS of Rs 8.58 the valuation looks decent. Also, the coking coal prices have come down and it will provide relief to the company on the cost front. However, on the back of concerns such as slow pick-up in demand and delay in the commissioning of the projects, we believe that the counter doesn’t provide much value in the short to medium-term and therefore, while remaining on the side of caution, our recommendation to investors is to avoid the scrip.