SAIL – improved outlook and a reasonable valuation

Jitendra Kumar GuptaMoneycontrol Research

Better pricing environment and a strong demand growth are helping the steel major Steel Authority of India (SAIL) to continuously improve its financial performance and return back to profits. As against a loss of Rs 685 crore in June quarter last year the company posted a profit of Rs 540 crore in Q1FY19.

The June quarter performance was quite impressive with company registering 8 percent growth in volumes followed by strong 28 percent year-on-year (YoY) growth in realisation to Rs 4,8631 per tonne. Both better realisations and higher volumes led to strong a 22 percent increase in sales.

This also pushed the company into profits at the operating level. As against an EBITDA loss of Rs 83.9 crore last year the company earned an EBITDA of Rs 2,576 crore in the June quarter this year. It made an EBITDA per tonne of close to Rs 7,811 compared to a negative EBITDA of Rs 277 per tonne in the corresponding quarter last year.

During the quarter it reported a net profit of Rs 723 crore as against a loss of Rs 791 crore last year in the June quarter.

Outlook

Overall the growth trajectory remains good on the back of good volume guidance provided by the company as a result of higher capacity and production.

For the current year, the company has guided to a sales volume of almost 16.6-16.7 million tonne as against 14.1 million tonne in FY18. That apart, firm steel prices and further reduction in cost, as the availability of fuel improves and other expenditures reduce, would drive earnings growth in the current year.

As against a loss of Rs 566 crore in FY18, this year the company should report a profit of about Rs 3,000 crore. Based on FY19 estimates, its stock is trading at about 10 times price to earnings (P/E), which is reasonable considering the growth and improvement in return ratios.

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