With good steel demand, SAIL's profitability improvement continues

While steel demand and outlook bodes well, improving product mix should help sustain the gains in margins

SAIL continues to build on the gains it has seen during the past one year led by regular improvement in its performance as its much-delayed expansions started getting commissioned. The company’s reported EBITDA (operating profit) per tonne at Rs 7,877 during the June 2018 quarter (Q1) is a significant improvement over Rs 86 in the year-ago quarter and an increase of 13 per cent sequentially. It was also higher than Rs 7,400-7,600 levels anticipated by brokerages. This is also at the highest levels since March 2010 quarter. While volume growth remains strong led by expansions and strong demand, it is the improved realisations and cost controls that continue to drive up profitability. June quarter saw sales volumes at 3.3 million tonnes (MT), up 8 per cent year-on-year, while realisations at about Rs 48,630 a tonne were up 27.2 per cent year-on-year.  

On the operational front, as lower raw material costs helped, employee cost too remains under control. Analysts say, operating parameters continue to improve and SAIL’s head count has declined by a net 13 per cent, led by natural attrition and voluntary retirement scheme. The expensive retirees have been replaced by cheaper younger employees driving reduction in cost and significant savings, they add.

As most of SAIL’s plants have turned around, compared to operating losses in the year ago quarter, it’s Rourkela steel plant has shown a remarkable improvement (segment profit up 21 per cent sequentially to Rs 5.2 billion). Now, the street is keeping an eye out on SAIL's Bhilai steel plant as its new steel melting shop is likely to be fully ramped up in six months. It is the benefits of expansions and stabilisation of these capacities which will help improve product mix, providing fresh triggers to the stock.

Meanwhile, looking at the strong demand and realisation outlook for steel, analysts maintain a positive view on the stock. Those at Motilal Oswal Securities say that strong tailwinds of demand and absence of additional (new) capacity at key domestic competitors augur well for the company's earnings growth. In the near-term, however, the seasonally weak monsoon season may keep street sentiment on steel stocks in check.