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SAIL badly needs a lift from steel prices

The company’s future is quite dependent on the macro situation
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First Published: Tue, Feb 12 2013. 07 59 PM IST
Global cues will have a bigger impact on the company. China’s recovering appetite for steel and its eventual impact on global prices is one key factor. Photo: Priyanka Parashar/Mint
Global cues will have a bigger impact on the company. China’s recovering appetite for steel and its eventual impact on global prices is one key factor. Photo: Priyanka Parashar/Mint
Updated: Tue, Feb 12 2013. 10 00 PM IST
Steel Authority of India Ltd’s (SAIL’s) December quarter earnings show the predictable outcomes of a poor environment owing to low demand and weak prices. The state-run steel company’s average steel realizations declined by 10.4% sequentially, and were down by 5.6% from a year ago. But SAIL has limited the damage, partly by focusing on improving its operating efficiencies.
During the quarter, India’s steel consumption rose by just 0.9% from a year ago. SAIL did better with a 5% year-on-year increase and a 10% sequential increase in volume.
This appears consistent with a trend of smaller steel makers losing share to the bigger ones during the current slump.
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And that’s why SAIL’s revenue declined by only 1.6% sequentially, despite a dip in realizations. An increase of 12% in other operating income also helped the performance in the December quarter. Inflation in input costs did see the company’s cost of goods sold as a percentage of sales increase by 41 basis points.
But SAIL also managed to cut power and fuel costs significantly, and keep employee costs flat and, as a result, operating profit margin actually rose by 42 basis points. But compared with a year ago, it was down by 4.1 percentage points.
A basis point is one-hundredth of a percentage point.
The company’s net profit declined by 10.8% sequentially, chiefly due to lower other income and an increase in interest costs. SAIL’s expansion and modernization projects are expected to start in 2013, which should improve operating parameters and share of value-added products, but it will also add to output, which could be a problem given a weak environment.
The steel maker’s future is quite dependent on the macro situation. The best outcome will be a recovery in the domestic economy, especially on the investments side, as that will see steel demand improve.
But a recovery is yet to be sighted, even from afar.
Therefore, in the near to medium term, global cues will have a bigger impact. China’s recovering appetite for steel and its eventual impact on global prices is one key factor.
A recovery in the European Union region economy could be another catalyst. A steady increase in steel prices is probably what SAIL needs the most in 2013-14.
The company’s share fell on Tuesday after its earnings were announced, but closed with a gain of 0.37%.
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First Published: Tue, Feb 12 2013. 07 59 PM IST
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