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Steel Authority of India Limited (SAIL)'s performance in the quarter ended June failed to cheer the Street, despite the company recording a better-than-expected net profit. While gains from currency movement aided profit, operating performance took a hit due to higher expenses and soft realisations.
On Wednesday, the SAIL stock, which has underperformed the broader market for long, slipped 1.7 per cent to close at Rs 43.6 on the BSE.
Though gains from new capacity would boost volumes, the pricing environment remains weak. Also, higher financial costs (adjusted for other income) would impact profit growth. Therefore, even as valuations look attractive, most analysts aren't bullish on the stock.
While steel realisations were subdued, sales volumes were flat, amid low demand. Though SAIL's saleable steel output rose seven per cent year-on-year to 3.2 million tonnes during the quarter ended June (a rise of three per cent sequentially), at 2.62 mt, sales were only marginally higher than 2.5 mt in the year-ago period. Thus, at Rs 10,107 crore, net sales fell 5.3 per cent year-on-year and realisation per tonne stood at Rs 39,190 compared with Rs 43,100 in the year-ago period.
The outlook for realisations remains weak and, therefore, the operating performance is unlikely to see a boost, as costs continue to rise. Employee costs are likely to increase due to wage revisions since January 1 2012. Pending finalisation of a fresh agreement on wage revision for non-executive employees, the company provided for Rs 740 crore till the June quarter (Rs 128 crore for the June quarter).
Declining coal costs were unable to provide much respite (power and fuel cost fell 5.83 per cent). Consequently, at Rs 967 crore, SAIL's earnings before interest, tax, depreciation and amortisation (Ebitda) in the June quarter declined 36.2 per cent year-on-year and margins, at 9.6 per cent, were much lower than 14.2 per cent in the year-ago period. Ebitda per tonne fell from about Rs 6,000 to Rs 3,600.
SAIL's delayed capacity expansion has led to concern. However, there is some positive news on this front. Recently, the company commissioned its largest blast furnace at the Rourkela Steel plant. This would raise the company's hot metal capacity at the facility from two mt a year to 4.5 mt, as the commissioned unit stabilises. In June, SAIL also commissioned an air separation unit at the Bhilai Steel Plant, a raw materials handling plant, a coke oven, a sinter plant and a wire rod mill and a rotary hearth furnace at the IISCO Steel Plant. The benefits of these on volumes should start accruing in the coming months, though larger gains are expected from FY15. HSBC analysts estimate steel sales would increase to 13 mt and 15 mt in FY14 and FY15, respectively, compared with 12 mt each in FY13 and FY12.
While volumes from ongoing expansions would rise gradually, the initial period could see gains being offset due to rising finance costs. Since a large portion of the cash on books is being used to fund expansions, the interest income is also decreasing. During the June quarter, finance cost increased 53.6 per cent to Rs 192 crore, while interest earned decreased by Rs 79 crore, or 38 per cent year-on-year, to Rs 129 crore. Therefore, despite lower foreign exchange losses (Rs 88 crore, compared with Rs 257 crore in the June 2012 quarter) and a tax credit of Rs 108 crore, net profits fell 35 per cent to Rs 451 crore.
The outlook remains weak in the near term. Of the 17 analyst recommendations in July, only two have 'buy' ratings, while six have 'hold' ratings. Nine have a 'sell' rating on the stock.
