SAIL Q4 operating profit falls 20% on higher input costs
Moneylife Digital Team 30 May 2012

Massive input cost pressures, especially from imported coal, inflation and global uncertainty led to a consistent decline in operating profit of SAIL for the third consecutive quarter

Steel Authority of India (SAIL), a leading steel manufacturer, posted robust fourth quarter results, which helped the company achieve its highest-ever annual sales turnover of Rs50,000 crore. For the three-month period ended March 2012, the company posted 13% increase in sales turnover at to Rs14,785 crore. It recorded net profit of Rs1,577 crore, which was an improvement of 3% year-on-year, over the corresponding period last year. 

While the sales turnover for the quarter looks impressive at 13% which is over the 3% average year-on-year growth over the last three quarters, its operating profit declined by 20%. In fact, it is worrying that this trend has been continuing for the last three quarters. The average operating profit year-on-year growth for the last three quarters is actually a negative 35%. In other words, the operating profits have shown consistent decline, which doesn’t bode well for this company as it struggles to rein in costs. According to the company, massive cost push due to a variety of factors chipped away the topline gains, resulting in the effect of input price increase, amounting to over Rs4,000 crore. This was mainly on account of imported coking coal with average prices rising to $288 in FY11-12 from $213 the previous year, compounded by the volatility in dollar-rupee valuations, carrying an adverse impact of around Rs900 crore.

The market-cap-operating profit of the company is quoting at roughly 5 times, which is tad expensive, given that steel is a fragmented industry, heavily dependent on global conditions, which at the moment isn’t too positive.

According to SAIL chairman CS Verma said, “It is a matter of great pride that SAIL’s turnover crossed the Rs50,000-crore mark during a year in which the global economy faced many challenges. With 2012 having begun on a very positive note for us, and our strategic initiatives in several areas taking firm shape, our outlook is bright. The focus during the current year will be on completing the ongoing M&E plan to give SAIL the readiness to meet the projected growth in steel demand during the 12th Plan period and beyond.”

While we applaud the Rs50,000 crore milestone, its operations is what the management should be concerned about, especially tightening costs in the face of inflation and global uncertainty. Its capex requirements were met mainly through internal resources, and hence the steel major managed to reduce external borrowings by around Rs3,050 crore during the year, taking its debt-equity ratio to 0.41 as of March 2012. 

The company expects several new major production units to become operational this fiscal, at its plant at Burnpur, including raw material handling system, sinter plant, COB-11, blast furnace and casters, power blowing station and wire rod mill, paving the way for full-fledged operations to start in this greenfield plant.

 

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