Demand, product mix to aid SAIL’s realisations

With much-delayed expansions getting onstream, SAIL has been posting a consistent improvement in performance over the last few quarters and the June quarter was no different. Its operating profit per tonne at ~7,877 is a significant improvement over ~86 in the year-ago quarter and reflects a 13 per cent rise on a sequential basis. These levels are the highest since FY10.

While volume growth remains strong led by expansions and robust demand, it is the improved realisations and cost controls that have driven profitabilty. The June quarter saw sales volumes at 3.3 million tonnes, up 8 per cent year-onyear, while realisations at about ~48,630 a tonne were up 27.2 per cent year-on-year.

Further, given lower raw material and employee costs, overall expenses too remained under control. Analysts say that operating parameters continue to improve and SAIL’s headcount has declined by 13 per cent led by natural attrition and the voluntary retirement scheme. The expensive retirees have been replaced by cheaper younger employees driving the reduction in cost and significant savings.

Most of SAIL’s plants are no longer posting losses at the operating level as was the case a year ago. Its Rourkela plant has shown a significant improvement in operating performance helping improve segment profit by 21 per cent sequentially to ~5.2 billion. Meanwhile, most eyes are on the Bhilai plant with a new steel melting shop likely to be fully ramped up in six months. It is the benefits of expansions and stabilisation like these that will improve product mix providing fresh triggers to the stock.

Meanwhile, looking at the strong demand and realisation as well as outlook for steel, analysts remain positive on the stock. Motilal Oswal Securities says that strong tailwind of demand and absence of additional capacity for peers augur well for SAIL’s earnings growth. Nevertheless, in the near-term, the seasonally weak monsoon season may keep the street sentiment subdued on steel stocks.