SAIL Q4 result: Rising input costs & flat steel prices spoil show

The fourth quarter report card for SAIL showed an unsatisfactory performance by the country’s largest steel maker as higher input costs, chiefly iron ore and coking coal, compressed its operating profit margin. What’s worse is that this situation is not likely to improve in the near term as coal prices are expected to increase further whereas steel prices are likely to remain flat. During the last quarter, coking coal contracts were signed at about $225/tonne, and according to industry analysts, contract prices are likely to increase to about $270-280/tonne for the current quarter.

Moreover, domestic steel prices are not seen rising very significantly as steel supply is expected to go up with a number of manufacturers having major capacity expansion plans in place over the next two years. Prices of HR coils in India, which have historically commanded a premium to import parity, are expected to soften as a result. Unless there is a significant change in global steel prices, the domestic trend will remain unchanged.

On its part, SAIL has taken a number of expansion and modernisation initiatives like the expansion plan of its Salem steel plant and upgradation at its Bokaro, Bhilai and Burnpur plants. According to the management, the company has received clearance from the ministry of environment and forests to enhance mining capacities at Barsua-Taldih-Kalta iron ore mines from the present level of 3.8 mtpa to 8.05 mtpa and for development of Sitanala coking coal block. It also spoke of inorganic overseas expansion plans which are likely to take place over the current year to achieve backward and forward integration.

During the fourth quarter, the company’s saleable steel production grew 5% YoY while production of value-added steel products grew 6%. Still, net sales were . 12,166.43 crore, 1% lower than the year-ago period, as a result of the soft pricing scenario. Its operating profit margin fell 600 basis points on account of higher raw material costs and a 25% year-on-year increase in staff costs. Net profit declined 28% to . 1,507.12 crore YoY. The company’s net worth as on March 31, 2011 was . 37,622 crore while its debt stood at . 20,162 crore. At . 160, the stock trades at a 12-month trailing PE ratio of 13.5 times.