Scores negative marks on high conversion, employee cost, profitability

The SAIL stock, which has been drifting downwards in FY-13, is also witnessing several downgrades after its Q2 results. Market analysts appeared wary of the country’s largest steel maker’s high fixed conversion cost and risk of its falling margins.

Religare found that State-owned SAIL’s high fixed conversion cost was a key risk to its margins in a weak steel price environment. Espirito Santo expressed concern over higher employee cost provisioning (pending wage negotiations) and apprehended increase in fixed costs with gradual commissioning of new facilities. It, however, felt that SAIL would realise gains on declining coking coal prices and inventory de-stocking in the second of current fiscal.It valued SAIL at 5.6x FY14 expected EV/EBITDA or a 15 per cent discount to the historical 5-year average.

Asian Market Securities pruned SAIL’s FY13 and FY14 volume estimates by 3 per cent to 11.2 million tonnes (mt) and 13.2 mt, respectively. It also cut realisations by 1 per cent.

The SAIL stock closed at Rs 81.70 on the BSE on Monday. In February this year, the stock had seen its 52-week high at Rs 115.90.

Another research report from MSFL said the benefits of SAIL’s capex plans would only start arising in later part of FY14. “SAIL’s realisation and profitability will continue to lag compared to peers due to inferior product mix till the new capex comes in. We believe that SAIL will continue to deliver dismal numbers in next few quarters,” it observed.

Mining profitability

Stock research firm Espirito Santo seemed to have taken note also of a possible dent in profitability of SAIL in view of uncertainty over iron ore security. In a recent note, it said its profitability of its flagship plant at Bhillai might be dented in the forthcoming years.

“Mining profitability (100 per cent in ore, 30 per cent in coking coal integration) remains the only profitability driver for SAIL as it continues to record negative smelting profits, thanks to higher conversion costs and an inefficient cost base,” Esprito Santo analysts Ritesh Shah and Angsuman Atri said. “We think SAIL’s Bhilai Steel Plant (BSP) will face shortage of high grade ore and will have to resort to lumpy ore/ pellets from its far off captive mines.

“Assuming SAIL secures ore from any of its Raw Material Division’s (RMD) mines — either of Meghatuburu (531 km), Kiriburu (536 km), Gua (577km), Bolani (538km), Kalta (517km), which are each at least 500 km away from BSP — we expect to see a direct dent in BSP’s operational profitability,” they said.

“Even conservatively assuming logistics costs at Rs 3/km/tonne, it translates to an EBITDA hit of 15 per cent,” the report observed.

The shares of SAIL closed at Rs 81.70 on the BSE on Monday. In February this year, the stock had seen its 52-week high at Rs 115.90.

(This article was published on December 3, 2012)
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