India’s two large loss-making steel companies namely Steel Authority of India (SAIL) and Jindal Steel & Power (JSPL), both during the September quarter have reported lower losses as a steel up-cycle helped them earn better realisation, higher volumes and benefits of operating leverage as their capacity utilisation improved.
SAIL: Realisation boost
SAIL reported a loss of Rs 539 crore as against Rs 731 crore in the corresponding quarter last year. Thanks to higher steel prices, SAIL’s realisations grew by strong 23 percent to Rs 38467 per tonne, which despite a flat growth in volumes led to an almost 9x jump in EBIDTA to Rs 914 crore. The company reported an EBIDTA per tonne of USD 40 per tonne as against USD 5 per tonne a year ago. However, this partially helped in reducing the losses because of the large fixed costs and burden of the ongoing expansion.
Its competitor JSW Steel in Q2FY18 had made almost 4 times more EBIDTA per tonne (USD 117 per tonne), which reflects that there is more room for efficiency gains. If steel prices remain strong, SAIL could possibly turn profitable in the next fiscal. However, the recent spike in share price leaves very little on the table. The stock is trading at 11.4 times its estimated enterprise to operating profits of FY19.
JSPL: Steel steals the show
In case of JSPL, the biggest contribution came from the Oman facility which accounts for about 50 percent of the steel sales volume of the company. The Oman facility was operating at very low capacity utilisation. During Q2FY18, it sold 4.3 lakh tonnes of steel as against 2.7 lakh tonnes in the corresponding quarter last year which is a growth of about 60 percent. Higher realisations and better volume growth, particularly in Oman, led to a spurt in consolidated operating profit to Rs 1373 crore in Q2FY18.
Domestic steel sales volumes grew merely by about 2.5 percent to 8.3 lakh tonnes as Angul expansion is yet to contribute and would start in Q3FY18. However, due to 11 percent growth in realisations to Rs 45,586 crore, the domestic business reported good growth in operating profit. The domestic steel business recorded 42 percent year-on-year increase in operating profits per tonne of close to Rs 9442 per tonne.
The other important segment, power, which accounts for about 25 percent of the revenues reported 5 percent growth in generation on a year-on-year basis. However, there was a sequential decline of 24 percent compared to June 2017 quarter as a result of shortage of coal. This is also visible from the fact that during the quarter the company reported 32 percent PLF (plant load factor) as against 37 percent in Q2FY17.
However, we do not expect PLF to fall further from this levels although the company faces uncertainty on other fronts like coal, PPAs (power purchase agreements)and debt.
Other businesses, which largely comprise international mining operations in Australia and Africa, too recorded Rs 174 crore loss before interest and tax as against Rs 99.6 crore in the corresponding quarter last year.
Steel will continue to drive growth particularly with the Angul facility (3.5-4 million tonnes) contributing in the coming months. Considering the earnings growth, the stock at current market price of Rs 165 a share is reasonably valued at 7x its FY19 estimated enterprise value to operating profits.For more research articles, visit our Moneycontrol Research Page.