)
Adjusting for exceptional and non-operational items, Steel Authority of India (SAIL) reported disappointing set of numbers for the quarter ended September 2013. Excluding the one-time gain of Rs 1,056.2 crore received from foreign suppliers due to non-supply of full quantity of contracted hard coking coal, net profit at Rs 235 crore was far lower than the Street estimates of Rs 642 crore.
Analysts were surprised about lower realisations and higher operating cost, which is also a reason that they now believe that there is a scope for earnings downgrades. The Street’s view was also reflected in SAIL's share prices, which closed with a loss of 1.82 per cent at Rs 64.85 on Monday.
“Operationally results were below expectations. It looks volumes are pushed at the cost of realisations. We have a ‘Sell’ rating and most likely to maintain the same in the wake of disappointing results,” says Abhisar Jain, who tracks the company at Centrum Broking.
That apart, analysts also believe that at current valuations of 11-12 times its FY15 estimated earnings, there is less room for rewards.
During the September quarter, the company reported about 14 per cent year-on-year growth in saleable steel at 3.1 million tonnes. However, higher volumes did not translate into higher profits because of the lower realisations. The company’s sales realisations have fallen drastically from Rs 37,210 a tonne in last year quarter Rs 34,213 a tonne in the quarter ended September 2013.
Further, during the quarter because of provisioning required for the wage hike, the company’s employee cost was up by Rs 405 crore. Also, use of prior period high cost inventory, the company’s overall cost was up. This led to huge 275 basis points erosion in operating profit margins to 7.5 per cent.
SAIL, however, got some respite from lower coal prices. The company manufactured steel using imported coal costing an average $135 a tonne during the quarter as against $220 a tonne in the corresponding quarter last year. Meanwhile, the cumulative impact of higher costs and lower realisations led to lower profits. Adjusted for exceptional items, net profit came at Rs 235 core as against Rs 642.3 crore in the year-ago quarter.
Hopefully, some of these pressures should ease marginally in the coming quarters considering that SAIL has recently hiked steel prices. Currently, the domestic steel prices are trading higher as compared to September 2013 quarter.
Further, on the back of on-going capex, the company is expected to churn higher volumes. It intends to commission projects of worth Rs 15,000 crore by the end of FY14 as against Rs 5,500 crore in FY13. Lastly, even if domestic demand is lower, the company should be able to monetise on the exports demand. In September quarter, it reported 47 per cent year-on-year growth in exports sales.
