Steel Authority of India: Operating in a challenging environment

Last Updated: Tue, Nov 20, 2012 05:42 hrs

Increasing inventory level, low realisation and risk of rise in employee costs may keep a tab on the stock prices in the near term, analysts say

Steel Authority of India Ltd (SAIL) has lost nearly six per cent since it announced its September quarter results on November 8. The state-run steel maker reported a net profit growth of 9.8 per cent year-on-year (y-o-y) at Rs 543.11 crore for the quarter. This performance comes in the backdrop of a tough operating environment, which poses a challenge for SAIL on the realisation as well as the volume front.

Though the saleable steel production came in four per cent higher y-o-y and six per cent sequentially at 3.18 million tonnes (mt), sales at 2.6 mt declined nine per cent sequentially, though it was four per cent higher than the September 2011 quarter. Realisations, too, at Rs 41,616 a tonne, declined 3.5 per cent sequentially, though were up eight per cent y-o-y. Same is the trend in the bottom line, which saw some improvement on y-o-y basis, buy was down 22 per cent sequentially.

Analysts say the soft steel prices remain a challenge. While on the one hand the company stands to gain with a decline in coal prices, this is not being reflected in the bottom line due to soft realisations. A cause for concern is the possible rise in employee cost on the back of pending wage revision due since January 2012.

Higher inventory
The lower volumes are leading to higher inventory, which is adding to woes. Giriraj Daga at Nirmal Bang suggests that SAIL usually witnesses inventory build-up in the first half of a year. This year, however, the quantum was substantially higher at 980,000 tonnes, compared to past five years' average of 660,000 tonnes. He does not expect the company to make up its lost volume in the second-half of the current financial year and believes there will be further pressure in the second-half due to capacity addition by peers.

A similar concern has been raised by analysts at Emkay Reserach. They observe that higher inventory would be a concern, going forward. As SAIL is also on the verge of commissioning new capacities, especially in a bleak demand scenario, higher inventory build-up might compel the company to either compromise on volumes from new capacities or on the net sales realisations in the immediate future. Hence, this would be a major concern for the company in a competitive market scenario.

Expansion plans
The improving visibility on commissioning of projects is a positive development and will accrue benefits in the long term, analysts say. The delay in commissioning projects has been one of the key factors for underperformance of the stock. However, Daga adds the company has indicated that modernisation and expansion are progressing steadily and it would add two blast furnaces at IISCO and Rourkela steel plants, thereby adding five mt of hot metal capacity in the coming months. On the raw material front, SAIL has signed a memorandum of understanding with the Chhattisgarh government for developing iron ore mines at the Eklama iron ore deposit, which would bring some respite as developing greenfield mines at Rowghat were becoming a tardy process due to Maoist activities.

Though the expansions and mine development can accrue positives in the long run, the challenges in the near term such as lower realisation and lower volumes can be further impacted by increasing steel imports and expected rise in employee costs. All these may keep gains under check. As per Bloomberg data, 22 of the 50 analysts have a 'sell' rating on the stock, while 11 have a 'hold/neutral' and remaining have a 'buy'. The consensus target price of Rs 85 (as per Bloomberg) also indicates towards a limited upside in the near term for the stock that is trading at Rs 79 levels.

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