Headwinds to continue for SAIL

Even as capacity is added, lower demand and realisations are putting pressure on profitability

The weak macro environment continues to impact Steel Authority of India Ltd (SAIL), as has been the case with other domestic steel companies. While the Street at one time was enthused with long-delayed capacity expansions now getting commissioned, the numbers so far have not been encouraging.

Despite expectations of better sales volume in the December 2014 quarter due to increase in production from new capacities, the volume growth continued to disappoint. The company’s sales at 2.86 million tonnes (mt) came lower than analysts' expectations of 3-3.2 mt. The news of SAIL’s management lowering its production expectation (guidance) for FY15 to 13.2 mt (from 14 mt) and for sales to 12.2 mt is again not encouraging.

Though the company maintains its FY16 production guidance of 16 mt, analysts do not see the company meeting the same. As a result, they have cut sales estimates, too. For example, Abhisar Jain at Centrum Broking has reduced sales estimates for FY15 and FY16 to 12 mt and 13.8 mt, respectively (from 12.8/14.6 mt earlier).

On the operating front, lower realisations and higher costs remain a concern. While realisations continue to be under pressure on softer international steel prices and cheap imports from China and CIS, higher inventories leading to stock liquation at discounts are adding to the woes for SAIL. Even though SAIL reduced prices for long products by Rs 1,200 a tonne and for flat products by Rs 1,400 a tonne in the quarter (Q3), volume pickup remained weak.

For Q3, steel realisations at Rs 38,383 a tonne came much lower than Rs 39,500 a tonne estimated by analysts at ICICI Securities. Although SAIL is benefiting from lower raw material prices, employee costs and increase in depreciation (which will be fuelled as new capacities go on stream) need to be watched. High employee costs coupled with declining steel sales has reduced SAIL's Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne from Rs 6,560 in FY11 to Rs 3,407 in FY14.

"Ebitda per tonne for the December'14 quarter at Rs 4,224 came lower than our estimates of Rs 5,000," say ICICI Securities' analysts who expect it to come at Rs 4,250 in FY15 and Rs 5,250 in FY16. These estimates are from analysts who remain more optimistic and have target price of Rs 75 for the stock trading at Rs 72.75, down almost 5 per cent in last two trading sessions post results on February 13.

The consensus target price for the stock from analysts polled on Bloomberg post results stands at Rs 67.