Shares of Steel Authority of India Ltd (SAIL) rose around 5% after it announced results for the quarter ended June. Net profit of Rs1,326 crore beat the consensus estimate of a Rs1,180 crore profit, based on a poll of nine brokerages by Reuters. But the June quarter results included a write-back of Rs200 crore related to a wage provision the firm has been making in the past few quarters. Adjusted for this, the profit would be slightly lower than Street estimates.
There was no major surprise in the results. The average selling price of its steel fell by around 3% sequentially. Raw material costs fell by about 28% sequentially on a per-tonne basis, which again was on expected lines. All steel makers benefited in the quarter from the drop in commodity prices. Of course, since SAIL imports about 70% of its coal requirement, its costs remain high as it continues to buy coal at rates contracted in the previous year. The firm has stated that coal costs have increased by 49% year-on-year (y-o-y). Production has risen only around 4% on y-o-y basis.
Adjusted for the write-back of wage provision, operating margin rose only by about 0.65 percentage point quarter-on-quarter (q-o-q), much lower than the rate at which its competitors improved margins. On Wednesday, Tata Steel Ltd reported the operating margin of its domestic operations rose around 9 percentage points q-o-q. Earlier this month, JSW SteelLtd reported its margin rose by 8 percentage points.
SAIL’s shares are up 149% from its lows in March, easily outperforming the market in the past five months. The markets have been enthused that domestic steel sales haven’t fallen much as anticipated and the outlook on steel prices has improved. But competitor JSW Steel’s shares have risen by 319% in the same period. This big difference is because JSW operates on a high leverage and higher steel prices and the improvement in the steel cycle would benefit it more.
Meanwhile, SAIL is gradually raising capacity and as it has been funding its capital expenditure needs partly through debt, its debt-equity ratio has been rising. Interest costs doubled last quarter to Rs83 crore. According to news reports, the firm is looking to raise equity through a qualified institutional placement. If this materializes, it would be the only trigger for the stock in the near term, since valuations look rather stretched at about 17 times estimated earnings for the current year.
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