Stock Review: SAIL

It appears that the dismal first quarter performance of SAIL has already been factored in its price. But even after the steep 30% decline in the share price since April 2011, one has to question whether the worst is really over for the steelmaker.

Not only did SAIL disappoint its investors by posting a 30% decline in profit, the steel manufacturer also indicated tougher times ahead as a result of delays in capacity expansion and higher input costs which continue to weigh down profitability. Since the past four consecutive quarters, SAIL has been grappling with high raw material costs which have eroded its margins and profitability and resulted in a decline in earnings per share for its investors.

Currently, the largest domestic steel manufacturer with a capacity of 13.6 million tonne per annum, SAIL plans to almost double its capacity over the next two years. But given the delays in execution, it appears the benefits of these plans will begin to fructify by 2013 or 2014.

On the raw material pricing front, iron ore contract prices have declined from an average of $171/tonne in the April-June 2011 quarter to $171/tonne. Meanwhile, coking coal prices have dropped from $330/tonne to $315/ tonne. But whether steelmakers are likely to benefit from the 1-2% softening in prices is yet to be seen.

During the first quarter, SAIL's operating profit was 29% lower than the year-ago period at . 1,311.41 crore on account of higher high coking coal and iron ore prices. Net sales grew to . 10,926 crore, only 20% higher than last year as disruptions at Bhilai and Bokaro impacted the overall output. Moreover, SAIL's staffing costs, which are significantly higher than its peers, add to its woes. In the quarter under review, the company had to shell out 21% of its net sales as employee expenditure. The combination of higher raw materials and staffing costs resulted in a decline of 800 points in its operating profit margin and a 29% fall in net profit to . 838.06 crore.

At . 119, the stock trades at 10.6 times its trailing 12-month priceto-earnings ratio. Despite the correction and cheap valuation, the stock does not look very attractive as high raw material costs and staffing costs will continue to erode earnings. As a result of project delays, growth in sales volumes is likely to remain slow.