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Covid pain, high operating costs may test SAIL’s near-term recovery

Sail’s revenues plunged nearly 39% y-o-y on lower offtake of steel. With domestic consumption curtailed due to covid-19, Sail sold just about 2.2 million tons of steel in Q1 as against 3.2 million tons in Q1 a year ago.

SAIL Ltd’s first-quarter results were severely struck by covid-19, with high operating costs cutting into profitability. Besides, the company saw the highest volume decline among larger steel producers in Q1, say analysts.

After an initial dip on Tuesday, the stock recovered to end the day flat. That could quite continue to be its course in the coming months.

SAIL has not got a grip on costs as much as some of its peers during the quarter, say analysts. The revenue plunge of about 39% year-on-year (y-o-y) on lower steel offtake is more pronounced than what the Street factored.

SAIL did well to increase exports during the quarter as international demand and prices have increased. But overall steel volumes were still severely hit. SAIL’s saleable steel volumes were 2.2 million tonnes in Q1 FY21 against 3.2 million tonnes a year ago.

Pandemic woes
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Pandemic woes

Realization per tonne declined by about 10% y-o-y. With both realizations and volumes plunging, SAIL’s operating leverage took a hard knock.

The company had higher fixed costs than other steel companies. As a result, its Ebitda per tonne fell into negative territory, with a loss of 1,814 a tonne, compared to a profit of 4,869 per tonne registered a year prior. Ebitda is earnings before interest, taxes, depreciation and amortization.

In fact, SAIL saw one of the biggest declines in operating profitability compared to Tata Steel Ltd or JSW Steel Ltd.

“SAIL recorded the highest decline in volumes, and it is the only company that recorded an increase in costs over last year, while other steel companies reduced costs. So, when you look at the operating parameters against its peer set, the numbers are not very exciting," said Ritesh Shah, analyst, Investec Capital Services.

For now, the operating environment for the steel sector has improved in recent months, thanks to rising international demand. Steel prices have been inching up domestically, too.

SAIL should be able to notch up better figures in the coming quarter. Besides, iron ore prices are soft, which would aid margins.

Even so, while exports are improving, domestic volumes have yet to pick up pace in a big way. The slowdown in the economy, particularly in construction, is a deterrent. So, it could be a while before SAIL could scale up volumes to pre-covid levels. Besides, it has quite a huge debt, which is another drawback.

The stock has not fully priced in the covid-19 disruptions judging by its performance as the company could take a sizeable knock in FY21. While the market is expecting it to return to profitability in FY22 with a jump in sales, the valuation multiple for the PSU stock still appears on the pricier side.

The stock quotes at a PE of nearly 11 times its FY22 earnings. That might not be comforting enough for many investors.

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