SAIL is a fully integrated iron and steel manufacturer with captive iron ore mines. SAIL is one of the largest producers of Iron ore in India. The captive mines assure the supply of Iron ore to the company at a lower cost. SAIL makes both, basic and special types of steel. SAIL's products find their application in domestic construction, engineering, power, railway, automotive and defense industries. SAIL also caters to the requirements of the exports market. SAIL operates through 8 manufacturing plants in India. Amongst all the plants the Bhilai steel plant accounts for a major chunk of revenues and is engaged in the manufacturing of semifinished products, Flat products and Long Products. Some of the key raw materials required for manufacturing steel are iron ore, carbon, coking coal and other metal alloys.
Q4 FY12 Results Review:
- The net sales for the quarter were up 12.9% on a YoY basis to Rs133.9 bn primarily on the back of a 10.1% (YoY) rise in realizations. The saleable steel sales for the quarter were up 1.9% to 3.2 mn tons. Sequentially the revenues were up 26.5%, primarily on the back of 23.1% rise in the saleable steel sales coupled with a 2.8% rise in the realizations. For FY12 the net sales were up 6.9% aided by a 9.7% rise in the realizations, which fully offset the drop in the volumes by 2.6% for saleable steel sales. Favorable product mix for the quarter added to the top line performance while sluggish demand dented the saleable steel sales for FY12.
- The EBITDA per ton for the quarter dropped 21.8% on a YoY basis to Rs5847 per ton from a level of Rs7457 per ton as of Q4FY11. The drop in the operating profit (excluding other income) by 20.3% has resulted in a fall in the EBITDA per ton. For FY12 the EBITDA per ton has come down to Rs5352 per ton as against Rs6486 per ton as of FY11, which is a fall of 17.5%. The 19.6% drop in the EBITDA (excluding other income) for FY12 has resulted in a drop in the EBITDA per ton.
- The operating margins for the quarter at 13.7% are down 570 bps on a YoY basis. The raw material cost (as a % of sales) increased 560 bps coupled with a 270 bps and 90 bps rise in the other expense and power cost (as a % of sales) respectively. The higher cost of domestic coking coal resulted in higher input cost. The employee cost (as a % of sales) fell 360 bps YoY. Sequentially the operating margins were down 110 bps due to 600 bps rise in the raw material cost (as a % of sales) coupled with a 120 bps rise in the other expenses (as a % of sales). The employee cost and power cost (as a % of sales) were down 410 bps and 210 bps QoQ. The operating margins for FY12 at 13.2% are down 440 bps primarily on the back of a rise in the raw material cost (as a % of sales) by 310 bps coupled with a 140 bps and 30 bps rise in the power cost and other expense (as a % of sales). The employee cost was down 50 bps (as a % of sales).
- Exceptional item for Q4 & FY12 include Rs5112 mn being the write back of liability towards disputed entry tax demand on Bhilai Steel Plant of the Company, based on legal opinion, as the dispute regarding levy of entry tax, pending before the Honorable Supreme Court, is sub-judice.
- The profit after tax for the quarter at Rs15.76 bn is up by Rs463.7 mn on a YoY. The interest cost is down by Rs558 mn to Rs1.2bn on a YoY basis. The depreciation cost has increased by Rs19.9 bn on a YoY basis for the quarter. Therefore the net margins for the quarter at 11.8% are down by 100 bps on a YoY basis. The net profit for FY12 at Rs35.4 bn is down from a level of Rs49.04 bn primarily due to the rise in the interest cost by Rs2 bn and Rs812 mn rise in the depreciation cost. The tax rate for FY12 is down to 29.1% as against 32.9% for FY11.
SAIL is one of the major PSU steel manufacturers in India. SAIL operates eight plants in India, of which 5 plants are fully integrated manufacturing steel while the balance three plants are engaged in the manufacturing of special steel products. The demand for steel is driven by the industrial sector as well as the infrastructure and the construction sector.
However with the ongoing uncertainties in the economy, the demand scenario apparently is muted at-least for the near future. SAIL is in the midst of a long drawn expansion plan, wherein it plans to double the capacity of steel from the current levels. SAIL has under achieved its capex for FY12 primarily due to the slow project execution cycles. The cumulative capex incurred by the company till March 2012 is at Rs403.2 bn. Of this Rs110.2 bn was spent in FY12. Simultaneously it has also delayed commissioning of its new capacities. Going ahead SAIL has planned a capex of Rs 120 bn for FY13 towards expansion of various facilities. Since SAIL is a PSU the management needs to obtain certain approvals from the Government of India, which causes a delay in implementation of the plan. The delay could lead to higher operating costs and also loss of market share as SAIL would not be able to meet the incremental demand for steel, in time. The on-going expansion plans are likely to be completed by FY14-15 and the benefits from the same could accrue then.
The net sales for the quarter were up 12.9% on a YoY basis to Rs133.9 bn primarily on the back of a 10.1% (YoY) rise in realizations coupled with a 1.9% rise in the saleable steel sales. The saleable steel sales for the quarter were at 3.2 mn tons. For FY12 the net sales were up 6.9% aided by a 9.7% rise in the realizations, which fully offset the drop in the volumes by 2.6% for saleable steel sales. Favorable product mix for the quarter added to the top line performance while sluggish demand dented the saleable steel sales for FY12. The operating margins for the quarter at 13.7% were down 570 bps on a YoY basis. The increase of 560 bps, 270 bps and 90 bps in the raw material cost, other expenses and power cost (as a % of sales) lowered the operating margins. The employee cost (as a % of sales) dipped by 360 bps YoY. The operating margins for FY12 at 13.2% are down 440 bps primarily on the back of a rise in the raw material cost (as a % of sales) by 310 bps. The profit after tax for the quarter at Rs15.6 bn is up by Rs388.5 mn on a YoY. Therefore the net margins for the quarter at 11.7% are down by 110 bps on a YoY basis. The net profit for FY12 at Rs35.4 bn is down from a level of Rs49.04 bn primarily due to the rise in the interest cost by Rs2 bn and Rs812 mn rise in the depreciation cost.
In HDFC Securities' result update dated 22nd February 2012 they had stated that SAIL could trade in Rs94 to Rs124 band for the next quarter. Post the issue of the report the stock touched a high of Rs106.2 on 22nd February 2012 and a low of Rs84.6 on 16th May 2012. Volatile steel prices, muted volume growth, buoyant input cost, financing concerns, consistent delaying of capex plans due to slower execution of projects could weigh on the stock price in the near future. SAIL is facing multiple headwinds to complete its ambitious capex program and hence the expansion has been delayed across most of the facilities. Although its rich iron ore reserves are attractive, the company's operating inefficiencies, weak outlook on volume expansion and project execution are disappointing.
SAIL reported worse results for FY12 than in 2008-09 downturn. Its ROE keeps falling and is now at 8.9%. Its liquidity position is showing initial signs of strain with Investments at a 5+ year low and net debt rising.
Pay hike of non-executive employees is an event to be watched out for - the pay revision was due in Q4FY12. The negotiations between the company and employees could continue for a long period of time of about 12 – 18 months. SAIL will be providing for higher wages (was due on 01 Jan 2012) for non executive employees (60% of total manpower of 111,000) from Q1FY13, which will adversely impact margins.
HDFC Securities is maintaining their FY13 operating and net profit estimates though they require a downward revision due to the higher input costs and operating costs.
Based on the above HDFC Securities feels that the stock could trade in a band of Rs79 (8x its FY13E EPS) and Rs113 (11.5x its FY13E revised EPS) for the next quarter.
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