The Steel Authority of India Ltd (SAIL) stock spurted 6.5% on Thursday, after the announcement of its March quarter results. Net sales declined by 11.8% compared with the year-ago period, continuing the trend of lower volumes and sales seen during the previous quarter. The difference was that while SAIL’s net sales fell by 6% year-on-year (y-o-y) in the December quarter, they fell 11% y-o-y in the March quarter. Net profits too were lower compared with the year-ago period, but while they fell 37% y-o-y in the March quarter, they had fallen by even more (56% y-o-y) in the December quarter.
Earnings before interest, taxes, depreciation and amortization (Ebitda) margins in the March quarter were at 16%, were well below those of the year-ago period, because of high cost coking coal inventory and lower realizations. Rupee depreciation also added to import costs. Nevertheless, Ebitda margins were much higher than in the December quarter. The company management pointed out that cost efficiencies, together with higher production of value-added items, were responsible for the improved margins. They added that there has been a revival of steel demand and, with a new government firmly in the saddle, a boost to infrastructure is in the offing. Note, however, that employee costs were much lower in the March 2009 quarter, at Rs1,336 crore, compared with Rs3,270 crore in the year-ago quarter, probably because of high provisions made for wage revision during the quarter. Interestingly, if employee costs during the March 2008 quarter were the same as that during the March 2009 quarter, then the drop in profits before exceptional items and interest would have been 64% year-on-year, even worse than the y-o-y drop in the December quarter. The only reason for the improvement in margins in the March quarter, compared with the December quarter, is the fall in employee costs. The lower employee costs are probably the reason why SAIL has beaten most analyst estimates.
Analysts have for long been drawing attention to SAIL as a safe play because of its strong balance sheet and its overwhelming domestic exposure, which improves its growth prospects in the current environment. But Pawan Burde, an analyst with Angel Broking Ltd, says the recent rise in the prices of steel stocks is based more on liquidity than on fundamentals and the 5-6% fall in steel volumes will, at best, lead to a 7-8% volume growth this fiscal. Indian steel prices are quoting at a premium to global prices. Besides, Burde says SAIL’s balance sheet strength is already priced in, as it trades at a huge valuation premium to its peers.
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