SAIL: No signs of recovery

No major increase in production and sales volumes seen despite capacity expansions now progressing satisfactorily

Prevalent weak demand and realisation scenario have taken their toll on already fragile steel industry. SAIL's performance for the quarter ending December’15 has been unimpressive compared to its peers.

With the loss at EBIDTA level widening for the third consecutive quarter, SAIL’s efforts of aggressive cost reduction, inventory liquidation and other operational measures failed to re-instigate confidence.

Most analysts, thus, have a ‘sell’ on the stock even as it was down over 50% in a year scaling to a 11-year intra-day low of Rs 37.25 on Wednesday before closing at Rs 37.85 post company’s results a day before. On Thursday it fell to Rs 36 levels.

SAIL’s operating losses widened further to Rs 1,381 crore in December quarter compared to Rs 768.5 crore loss in previous quarter and a profit of Rs 1,208 crore in the year ago period. Consequently, EBITDA loss per tonne was Rs 4,764.

Though steel prices and demand both are under pressure and cheap imports have been a cause of concern, in the same environment, other domestic-oriented players as JSW Steel reported EBIDTA per tonne of Rs 3,497. Tata Steel, which been under pressure because of its European operations, also reported Ebidta per tonne of Rs 6,375 at standalone level. 

Another concern for SAIL is sales.

While the already delayed capacity expansions are now progressing satisfactory, there is no major increase in production and sales volumes. SAIL had also taken an inventory write-down of Rs 370 crore and Rs 700 crore for the quarter and first nine months of FY16, which analysts attribute to finished goods inventory. 

Secondly, there is no major change in power and fuel costs despite the sharp decline in imported coal prices, while finance costs are rising, thereby impacting the bottom-line. 

Hence, with costs not declining, the only hope is an increase in steel prices and demand. To protect the domestic producers from cheap imports, the government has imposed a minimum import price (MIP). Though half of SAIL’s product portfolio is covered by MIP, Goutam Chakraborty at Emkay says that the company expects significant price rise but it won’t be easy given the weak demand scenario, already available imports for at least two months, possible government intervention, etc.

Analysts at Motilal Oswal Securities say flat product pricing is likely to improve by 10% over couple of months; however, this will not be enough to pull SAIL out of operational losses.

Analysts at IIFL, too, say recovery will take time and hence maintain reduce ratings on the stock.  Overall, for December quarter, SAIL reported sales of Rs 8,806 crore down 19.5% year-on-year and a net loss of Rs 1,529 crore.