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.

IPO Review: TD POWER SYSTEMS

 

TD Power Systems, which manufactures AC generators (used in power plants) ranging from 1 Mw to 52 Mw, has come out with an initial public offering (IPO) to raise `227 crore.

Since its incorporation in 1999, the company, till June, has supplied 1,538 generators aggregating to a generation capacity of 12,657 Mw to the industrial segment. Apart from the product business, it also undertakes projects and EPC (engineering, procurement and construction) projects, which accounts for over 60 per cent of its revenues.

There is not much competition in the AC generator segment, except from BHEL, with TD Power leading this category. The company is well diversified in terms of its product profile, clients and geographies, including a presence in overseas markets. It also has tie-ups with global majors like GE and Siemens that help it to grow its international business and support the company's positioning in the domestic market.

India's industrial captive power segment has grown at about 8-10 per cent and is expected to witness similar growth. However, in the near term, there could be some challenges given the slowdown in the domestic industrial capex cycle.

The company is currently operating at about 80 per cent utilisation and plans to almost double its manufacturing capacity from the current levels (equivalent to product worth of 400 crore), which will be completed over the next 9-10 months. This, along with the expected increase in exports, should help it to grow its revenues. It has witnessed 19 per cent growth in revenues in the last four years. However, the benefits of the new capacity will be reflected gradually over the next two years as demand and utilisation picks up. The company is currently having an order book of `1,094 crore.

The IPO at the upper band is priced at about 12 times its FY12 estimated earnings (assuming revenue growth of 35 per cent). The pricing is marginally expensive considering the growth in the near term and on a relative basis. BHEL, however, has superior capabilities and has better visibility. The company stock is trading at about 12-13 times its FY12 estimated earnings.

Additionally, there are risks over a rise in competition from global and domestic players for TD Power. The company also caters to a single segment (industrial clients), which is more volatile and has relatively less growth compared to utilities and private power companies.

Overall, while fundamentals and growth prospects look reasonable, the risk (due to client and revenue concentration) remains and valuations are not cheap.

Stock Review: TAPARIA GROUP

This TAPARIA GROUP company manufactures polystyrene and was suffering till FY09 due to an industry-wide oversupply situation that squeezed margins. However, its fortunes improved substantially in FY10, and yet the company's profits for FY11 were 45% higher than FY10. In these two years, the company shifted from commodity polymer to more value added products and expanded its capacities. A global rationalisation in polystyrene capacities is benefiting the company as domestic demand picks up. The scrip has gained 41% in last one year and is still trading at around 8 times its earnings for the trailing 12 months