Speedy implementations hold the key for SAIL's performance

The stock closed almost 2.6% down today despite news of massive investments of Rs 45,000 cr for expansion during 12th Plan ending March 2017

Steel Authority of India stock closed almost 2.66% down at Rs 85.95 today despite news of massive investments of Rs 45,000 crore for expansion during 12th Plan ending March 2017. Out of this around Rs 14,500 crore will be spent in this year alone. The company currently is in midst of expanding its crude steel capacity from 13.7 million tons (MT) to 21.4 MT before going for next round of expansion to 45 MTPA.

The saleable steel capacity in the first round is also being expanded by 7.8 MT to 20.2 MT.  Nevertheless the delay in the expansion plans has been one of the major factors that have shaken investor confidence and led to underperformance of the stock feel analysts. Most of the planned expansions have been delayed by 1-2 years observes Giriraj Daga at Nirmal Bang . For instance 1.2 MT expansions at Bokaro plant that had to be completed in 2010 is now to be completed by October 2012. The IISCO West Bengal expansion of 2.2 MT is also almost one year delayed and likely to be commissioned now by Decembr'12.

Similarly Rourkela 2 MT expansion is also delayed now to be completed in 2013. Thus it will be crucial for the company to complete these expansions plans now and as per these revised guidelines without further delays to gain back the investor confidence feel analysts. 

The completion of expansion plans is also necessary for improvement in company’s operating margins. For instance SAIL’s commissioning of two coke oven batteries with total capacity of 1.6MT at its plants at IISCO (west Bengal) and Rourkela (Orissa) should allow SAIL to reduce the power and fuel bill which in turn could help margins. The Sinter plant problems that had continued to be faced at some plants even during June’12 quarter too seems to have been resolved now.

Analysts at Edelweiss Securities in their earlier reports had observed that the operating margins may increase from second half FY13. While the cost of power & fuel and stores & spares have remained high, with gradual commissioning of projects in a phased manner, SAIL expects these costs to normalise in second half of FY13 and FY14.

However another concern for the investors remains is the implementation of wage revision that has been pending since January’12. The wage revision as and when implemented will have an impact on the operating margins and the overhang of this is further likely to keep the stock under pressure for some more time feel analysts.