Analysis: SAIL: Operating in a challenging environment

Increasing inventory, low realisation, risk rising employee costs may keep tab on stock prices in near-term

Steel Authority of India limited (SAIL) has lost nearly six per cent since its results on November 8 when it reported a net profit growth of 9.8 per cent year-on-year to Rs 543.11 crore for the September 2012 quarter. This performance comes in the backdrop of a tough operating environment, which poses a challenge for SAIL on realisation as well as the volume front.

Though saleable steel production came in 4 per cent higher year-on-year and 6per cent sequentially at 3.18 million tonnes (MT), sales at 2.6 MT declined 9 per cent sequentially though it was 4 per cent higher than in the September 2011 quarter. Realisations, too, at Rs 41,616 a tonne declined 3.5 per cent sequentially although they were up 8 per cent year-on-year. Same is the trend in the bottom-line, which saw some improvement on a year-on-year basis. Buy was down 22 per cent sequentially.

Analysts say that soft steel prices remain a challenge. While on one hand the company stands to gain with a decline in coal prices, this is not being reflected in the bottom-line due to soft realisations. A cause for concern is the possible rise in employee cost on back of pending wage revision due since January 2012.


Higher inventory

Lower volumes are leading to higher inventory, which is in turn adding to woes. Giriraj Daga at Nirmal Bang said, SAIL usually witnesses inventory build-up in the first half of a year. This year, however, the quantum was substantially higher at 0.98 MT, as compared to past five years’ average of 0.66 MT. He does not expect the company to make up its lost volume in the second-half of the current fiscal and believes there will be further pressure in the second-half due to capacity addition by peers.

A similar concern has been raised by analysts at Emkay Reserach. They observed that higher inventory would be a concern going forward. As SAIL is also on the verge of commissioning new capacities, especially in a bleak demand scenario, higher inventory build-up might compel the company to either compromise on volumes from new capacities or cut down on net sales realisations in the immediate future.

Hence, this would be a major concern for the company in a competitive market scenario.


Expansion plans

The improving visibility on commissioning of projects is a positive development and will accrue benefits in the long term, analysts say. The delay in commissioning of projects has been one of the key factors for underperformance of the stock.

However, Daga adds that the company has indicated that modernisation and expansion is progressing steadily and it would add two blast furnaces at IISCO and Rourkela Steel Plant, thereby adding 5 MT of hot metal capacity in the coming months. On the raw material front, SAIL has signed a Memorandum of Understanding (MoU) with the Chhattisgarh government for development of iron ore mines at Eklama iron ore deposit, which would bring some respite as developing green-field mines at Rowghat were becoming a tardy process due to Maoist activities.

Though expansions and mine development can accrue positives in the long run, the challenges in near-term such as lower realisation, lower volumes can be further impacted by increasing steel imports and an expected rise in employee costs. All this may keep gains under check.

As per Bloomberg data, 22 of the 50 analysts have a 'Sell' rating on the stock, 11 have a 'hold/neutral' and remaining have a 'buy'. The consensus target price of Rs 85 (as per Bloomberg) also indicates towards a limited upside in the near-term for the stock that is trading at Rs 79 levels.