SAIL Operating Performance Improves For June 2012 Quarter

SAIL, the country’s largest integrated steel producer, recently declared its results for the June 2012 quarter 2012 and as expected - and mentioned in our previous updates - the company has reported a subdued performance. The consolidated net sales of the company during the quarter declined by 1.36 per cent on a YoY basis to Rs 10,777.50 crore while the net profit was down by 17 per cent on a YoY basis to Rs 696 crore. This was mainly on account of the rising power & fuel cost (up by 20.33 per cent YoY) and higher forex loss of Rs 256 crore.

However, despite a fall in the total revenue, the operating profit of the company remained quite firm and was up by 16 per cent on a YoY basis to Rs 1,515 crore. Moreover, the operating margin improved by 200 bps to 14.05 per cent as against that of 12.01 per cent in the same period last year. This was largely on account of the higher realisation which improved by 10.5 per cent to Rs 43,110 per tonne. Moreover, the EBITDA per tonne of the company improved by 11.8 per cent to Rs 7,176.

The sales volume of the company during the quarter declined by 10.7 per cent on a YoY basis to 2.5 million tonnes and the demand scenario remained subdued and saw some decline in the quarter due to a slowdown in infrastructure and construction activities.

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

For FY13 the capex plan of the company is of Rs 12,000 crore and for this it has firmed up to raise USD 300 million through the ECB route, which is likely to be at competitive rates. 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.