Stock Review: Steel Authority of India (SAIL)

 

After correcting 32.55 per cent from the closing high of 256.35 on April 6, Steel Authority of India (SAIL) touched a 52-week low of 159.65 on Friday as investors dumped the stock on the back of weak December 2010 quarter results reported after trading hours on Thursday.

The company reported a33.9 per cent annual drop in its net profit for the third quarter ended December, at 1,107.47 crore. Raw material costs (per tonne) spiraled 32.7 per cent and dented Ebitda (earnings before interest, taxes, depreciation and amortisation) margins that came in at 15.87 per cent, much lower than 26.1 per cent recorded in the previous corresponding period.

Net sales at `11,312.84 crore (up 4.7 per cent sequentially and 14.5 per cent annually) were, however, helped by a sequential growth of 7.3 per cent in volumes to 3.25 million tonnes (MT) though realisations remained soft. Blended realisations at 34,809 a tonne declined 2.4 per cent sequentially. According to analysts at Edelweiss Research, the spread of SAIL's realisations over hot rolled coil (HRC) prices declined to `2,100 a tonne during the third quarter as compared to `3,820 a tonne during the second quarter and `4,980 a tonne during the first quarter of the current year.

The company has also witnessed a steady increase in coal costs in the current financial year. In Q3, coal costs stood at `1,093 crore in comparison to `368 crore in the first quarter and `939 crore in the second quarter a of the current financial year, a company release said.

The planned expansion of the 2 million-tonnes-per annum IISCO plant has also been delayed and is expected to be completed by December 2011. The company's debt levels have increased from `13,400 crore at the end of the second quarter to `16,500 crore at third quarter end, says an IIFL report.

While the stock has underperformed peers during the current financial year and is now trading at 52-week lows, the upside may remain capped looking a at proposed follow on offer (FPO) next month, analysts say. The FPO would be carried on in two tranches of five per cent divestment by the government and five per cent through the issue of fresh shares.

Also, financial year 2011-12 is likely to see improved realisation with a rise in steel prices. Further, with the reduction in semis and increasing production of value added products, the improving product mix is also likely to benefit. The stock ended 6.7 per cent lower on Friday at `161.35 and trades 13.9 times estimated yearnings for financial year 2010-11 and 8.9 times estimated yearnings for financial year 2011-12.