Steel Authority of India (SAIL) reported a net profit in October-December after a gap of 10 quarters. The company and its peers continued to benefit from the rise in steel realisations over the last two years, helped by government measures; even so, these gains had not fully percolated to the net profit level.
SAIL's high cost structure had curbed operating profit, which was then insufficient to meet the interest costs pushed up by its expansion. The situation is turning better with its capacity modernisation and expansion programme coming to an end. Increasing volumes are boosting gains from the uptrending steel cycle, while cost cutting has reduced the per-tonne production cost.
SAIL, now targeting 20.2 million tonnes (mt) in annual sales, could emerge as the country's largest steel maker if stabilisation and ramp-up of its new plants are completed soon. JSW Steel and Tata Steel, with current annual capacities of 18 mt and 13 mt, respectively, are also expanding. Tata Steel, in the second leg of the expansion at its Kalinganagar (Odisha) site, plans to achieve a capacity of 18 mt in two years; JSW is doubling its capacity at Dolvi in Maharashtra to 10 mt. These two companies are also bidding for assets being auctioned for non-payment of loans.
SAIL sold 13.9 mt of steel in 2016-17. It has largely completed the expansion programme at its plants at Rourkela, Bokaro, Asansol and Durgapur. Commissioning of a melting shop with billet casters at Bhilai in Chhattisgarh will mark the end of its current capital expenditure cycle. An improvement in the product mix , leading to a higher proportion of value-added products, are also helping in securing market share gains.
Analysts at Elara Capital, based on the management's forecast, estimate SAIL's sales volume will grow at a compounded annual 11 per cent over FY17-FY20. They say the ramp-up of production at SAIL's new value-added product mills will help. The effects are starting to kick in with completion of the modernisation and expansion plan.
A new 3 mt per annum blast furnace will reverse the declining trend in SAIL's operating performance and its steel melt shop is likely to be commissioned in FY19, reducing operating cost, say analysts at Motilal Oswal Securities. There is already an improvement in coke usage and in blast furnace productivity, they add.
SAIL is also working on establishing an integrated chain that reaches consumers. This should also positively affect realisations in the medium to long run.
Meanwhile, SAIL's 14 per cent and 18.7 per cent year-on-year improvement in volumes and realisation, respectively, led to sales surging 36 per cent over a year before in the December 2017 quarter. Operating profit on a per-tonne basis was Rs 3,820 versus Rs 2,583 in the September quarter and a loss of Rs 130 per tonne in the year-ago quarter.
Despite rising fuel costs, rising volumes and realisation helped, beside better cost control. The modernisation programme has helped improve energy efficiency; employee costs to sales have declined from 21 per cent to 16 per cent in the last two years.
Yet, there is a long way to go. JSW Steel and Tata Steel's India operations are seeing much higher per-tonne profit, of about Rs 8,500 and Rs 14,000 per tonne, respectively.
Foreign brokerage Jefferies has a word of caution. It says the margins should rise sequentially, driven by the rally in long product prices (exceeding higher coking coal cost) but this should not be extrapolated, as the March quarter is a seasonally strong one.
Further, wage cost per tonne was down $20 year-on-year in the December quarter, with higher volume. SAIL also offered a 7.5 per cent wage hike versus 20-plus per cent by most public sector companies, as the company was reporting losses. But, as profits improve, it will have to agree to pay more. This will partly negate the savings, says Jefferies.
Overall, given the stock's outperformance, including the 60-plus per cent gain since October last year, investors could await more signs of improvement before considering an entry in the counter.