Steel Authority of India Ltd (SAIL) is likely to report muted growth in the near term as steel prices are not expected to move up much from current levels even as input costs continue to strain its bottomline.
The country’s largest integrated iron and steel producer reported disappointing first quarter numbers with net profit falling 11.6% year on year to Rs 1,176.65 crore due to higher input costs and lower sales volumes.
Net revenues were almost flat, rising just 0.9% year on year, at Rs 9,029 crore. Though the average realisation improved, led by better product mix, sales volume dropped 15.5% to 2.32 million tonne (mt). Steel production, however, was at higher levels, leading to the saleable steel inventory rising from 0.5mt to 1.2 mt at the end of Q1FY11.
The management expects sales volume to pick up in the coming quarters as underlying demand remains strong but the entire inventory depletion may happen only by Q3 FY11. Analysts believe steel prices would remain more or less stable at current levels, after having peaked in April, as there is inventory built up across the industry.
“Realisations are likely to drop in 2Q, as 1Q realisations captured peak prices in April, post which the company has taken price cuts amounting to ~Rs3,000/tonne in June and July,” Bijal Shah and Akash Chattopadhayay, analysts at IIFL, wrote in a result update on Monday.
On the costs side, the company, which is self-sufficient in iron ore, still faces raw material pricing pressure due to volatile coking coal prices. Raw material costs jumped 15.87% year on year to Rs 4,702 crore due to an additional Rs 368 crore on account of imported coking coal alone. The company, which has consumed high-cost coal inventory (average price of $300/tonne) expects cost of production to come down a bit in coming quarter.
The latest coking coal contracts have been signed at higher prices of $225/tonne as compared to previous $200/tonne rates, which may lead to raw material pricing pressures reflecting in coming quarters as well.
The company also saw employee costs rise 86% during the quarter to Rs 2,012 crore mainly due to additional provisions of Rs 299 crore towards employee related benefits. The management has guided for full-year employee costs at around Rs 8,000 crore, which means staff costs are likely to remain at current levels in the coming quarters.
SAIL is in the midst of a modernisation and capacity expansion programme to ensure input fuel (coal) security and to increase its revenues by almost doubling the capacity to 23 mt of saleable steel.
The SAIL stock, which has remained flat for the last two months, closed the day down marginally (0.96%) at Rs 201.35 per share on the Bombay Stock Exchange. Analysts do not see any upside trigger in the near term but continue to remain positive on the stock from a long-term perspective. It is expected to reap the benefits of these capex plans only from FY13E as major new capacities come on stream.