SAIL: Profitability uptick holds key to upgrades

Current stock prices factor in higher operating profits compared to analyst estimates

The Steel Authority of India Ltd (SAIL) stock has not moved much since its results, despite the company being in the news for its joint venture (JV) with ArcelorMittal for an automobile-grade steel plant and a mega expansion plan. This is due to the worries on its profit. Operating profit, which got a boost during the first half of FY17, helped by higher realisations and lower input costs (primarily coal), slipped into the red during the second half.

Volatility in coking coal prices was the primary reason, as the company is largely dependent on external coal supplies, mostly imported. Losses at the operating level have increased over the past two quarters.

Concerns on rising wage costs remained, as the company set aside ~107.15 crore for pay revision from January. What gives comfort is the expectation of wage costs of around ~9,600 crore in FY18. This has surprised analysts at Jefferies, who have since cut their FY18 wage cost estimates by about eight per cent. Concerns on interest costs, nevertheless, remain. While the expansions are positive for growth, operating profits have not been able to cover interest costs, leading to losses at the net level.

For FY17, operating profit was in positive territory at ~38 crore, compared to a loss of ~3,355 crore in FY16. This was still not enough to cover interest cost of ~2,528 crore (~2,300 crore in FY16).

On expansion, the company is expected to improve its crude and salable steel capacity to 21.4 million tonnes (mt) and 20.2 mt, respectively, from 14.49 mt and 13.87 mt, respectively, in FY17 after completion of the ongoing expansions. The company has said it expects 16/19 mt of sales to in FY18-19 compared to 13.15 mt in FY17, aided by expansions.

The company feels that ramping up of units will lead to the cost of production coming down, as new and more efficient routes of production will bring down cost. Further with the ramping up of modernised units, various value-added products will form part of the enriched SAIL product basket, leading to product mix improvement.

Expansions are positive for SAIL which saw its FY17 revenue grow 11.5 per cent, helped by volume growth of 8.6 per cent and per tonne realisations improving four per cent. However, the 13.15 mt of FY17 sales were short of its earlier expectation (15 mt) and analysts at Motilal Oswal Securities (MOSL) say SAIL has been facing issues in ramping up capacity. While it is expecting 16 mt of sales in FY18, MOSL estimates 15 mt.

Analysts at Jefferies have raised the FY18 per-tonne Ebitda estimates by 17 per cent to ~2,655 due to lower employee costs. Factoring other positives, at the net level, the company is still expected to report losses. The analysts add that the current market price of the stock is factoring pertonne Ebitda at ~5,500. This is why their target prices are still lower than SAIL’s ~56.85.