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SAIL 3QFY2013 performance highlights and results update

Contributed by Angel Broking

SAIL reported disappointing 3QFY2013 results, as both net sales and net profit were below our estimates, due to lower-than-expected sales volumes. We recommend a Reduce rating on the stock.

Lower realizations drag down top-line: During 3QFY2013, SAIL’s net sales declined by 0.9% yoy to Rs.10,495cr (below our estimate of Rs.11,730cr), mainly due to lower realizations, although they were partially offset by higher volumes. The company’s realizations stood at Rs.35,168/tonne, compared to Rs.37,326/tonne in 3QFY2012.

Higher staff costs and other expenses dent company’s EBITDA: Staff costs and other expenditure increased 11.6% and 23.5% yoy to Rs.2,081 and Rs.1,753cr, respectively. The EBITDA therefore decreased by 28.0% yoy to Rs.1,138cr; the EBITDA margin contracted by 408bp yoy to 10.8%.

Lower operating profit drags bottom-line: The company reported an exceptional item related to forex loss of Rs.31cr in 3QFY2013, compared to exceptional loss of Rs.466cr in 3QFY2012. Hence, the adjusted net profit declined by 53.1% yoy to Rs.515cr (significantly below our estimate of Rs.716cr) in 3QFY2013.

Outlook and valuation: We expect SAIL’s operational and financial performance to be impacted by 1) inability to maintain/raise sales volumes amidst slower demand growth; 2) higher employee costs, and 3) delays/cost overruns in its brownfield expansion projects. SAIL is on the verge of expanding its saleable steel production capacity from 12.5mn tonne to 24.0mn tonne by FY2015. However, the current rich valuation of 6.5x FY2014E EV/EBITDA discounts its anticipated volume growth over FY2012-FY2016. Hence, we recommend a Reduce rating on the stock.