SAIL’s Net Down By 23%

The state-owned Steel Authority of India has disappointed the street with its subdued December quarter numbers. SAIL has reported flat growth in its sales and a decline in its net profit. The result has come at a time when the government is looking to sell the 10.82% stake in the Maharatna PSU.

For the December quarter, the company has reported 0.5% decline in the total income to Rs 10,670 crore. Of its eight main steel plants, only three plants (Durgapur, Rourkela and Bokaro) have reported growth in the business while the rest have reported a decline. Its largest steel plant, Bhilai, which adds 35% in its total revenues, has reported 4% decline in revenues. The other four plants which combined to add 10% in the total revenues (IISCO, Salem, Alloy steel and Visvesvaraya iron and steel) have also reported a 10% decline in their combined revenues.

On the margin front, the company’s performance has been absolutely dismal as 7 plants (except IISCO) have reported a slide in the PBIT margins. Margins of the Bhilai plant have declined by 400 basis points while that of Bokaro have tanked by nearly 700 bps. Salem, Alloy steel and Visvesvaraya iron and steel have again reported negative margins. At the organisational level, while the company has kept a tight control on its major costs such as material costs and power and fuel expenses, its EBITDA margins have still declined by 400 bps. Rise in the employee costs as well as other expenses caused the margin erosion. The decline in revenues however had a major impact on the margins.

SAIL has also reported a sharp decline in its other income, which came in short by 42% to Rs 220 crore. The interest income, which is a major part of other income, declined by 44% to Rs 208 crore. Its interest cost surged by 20% to Rs 222 crore which led to a decline in the net profit.

The company has also declared an interim dividend of Rs 1.60 which gives a dividend yield of 2% at CMP.

Currently the stock is trading at the Price to Earnings multiple of 10x of its TTM EPS of Rs 8. The stock has plunged by 12.5% in this calendar year and a slide in the net profit in the December 2012 quarter may further bring down the valuation of the stock. A cheap valuation may leave no room for the government to offer a discount to the shareholders. We would advise investors not to enter the counter at the CMP. Those who have bought the shares should hold them at CMP.