Compass: SAIL's performance improves, but more needed

The improved operating profit is still not enough to cover interest costs; rising coal costs will add to woes going ahead

The performance of the Steel Authority of India (SAIL) for the quarter ending September was significantly better than estimates. Not surprisingly then, the stock has gained nearly three per cent, rising to Rs 54.95, even as the Sensex is down 0.7 per cent.

However, the uptrend may not last long.

For the September quarter, sales at Rs 12,431 crore came much better than Bloomberg consensus estimates of Rs 10,517 crore, on the back of higher volumes of 3.56 million tonnes (MT) versus 2.8 MT in the previous quarter and 2.7 MT in the same quarter the year ago. In the seasonally weak quarter, the company was anticipated to post steel volumes of up to 3 MT.

Not only volumes were better, SAIL also surprised with lower costs. Even though realisation at Rs 31,497 a tonne fell eight per cent  year-on-year and five per cent sequentially, lower costs helped SAIL report an Ebitda (earnings before interest, tax, depreciation and amortisation) of Rs 111.4 crore, higher than the consensus estimate of Rs 89 crore. This is encouraging as the company saw a decline in employee expenses as well as power and fuel costs. While operating leverage on higher volumes benefited, it also indicates that SAIL’s efforts on modernisation and cost controls are yielding results.

The trend moving forward needs to be watched as the effect of higher coal prices is yet to fully play out. Also, the Ebitda reported is still not sufficient to take care of interest costs (Rs 602.8 crore) and with lower other income and higher depreciation, SAIL ended up with a net loss of Rs 732 crore for the quarter. The losses are marginally lower than consensus estimates of Rs 756 crore, but SAIL needs significant improvement at operating level to report a net profit.

The company’s cost structure and product mix is such its operating profit is significantly lower than peers. SAIL reported Ebitda per tonne of Rs 313 in September quarter, while Tata Steel’s India operations and JSW Steel, which are also facing cost pressures and remained impacted by lower realisation, reported Ebitda per tonne of Rs 7,297 and Rs 7,085, respectively.

Analysts remain cautious. Elara Capital said, “Despite improvement in operating cost and higher volume, we cut our FY17 Ebitda by 33 per cent and FY18 Ebitda by 38 per cent to factor in higher coking coal prices.” 

Motilal Oswal Securities said the sharp increase in coking coal prices (from $80 per tonne to $300 per tonne) would more than offset the recent price hikes announced by domestic steel mills.