The stock of Steel Authority of India (SAIL) has lost 43 per cent since January this year. The weakness in global steel prices along with a surge in steel imports has hurt domestic steel manufacturers. Following the 70 per cent jump last fiscal, India’s steel imports surged 53 per cent in the June 2015 quarter.

The impact of this is reflected in the poor financial performance of SAIL in the recent June quarter.

In the past too, the steel major has put up a poor show. The operating profit has successively shrunk over the years, reaching ₹4,023 crore by 2013-14, a third of that in 2009-10. The last fiscal was however an exception when, helped by lower raw material cost, the company reported 15 per cent growth in operating profit.

After the fall in price, the stock at ₹47 discounts its consolidated book value as on March 2015 by 0.4 times. This is much lower than its five-year average valuation of 1.2 times. Still, investors can consider exiting the stock, as it does not offer potential for much upside. This is particularly so given the challenges facing the global steel industry.

While Indian steel consumption should improve, driven by sectors such as infrastructure, the global outlook is weak. World steel demand is forecast to grow only 0.5 per cent in 2015.

Moreover, given the excess capacity in several regions, particularly the world’s leading producer China, prices should remain weak. The world crude steel capacity utilisation ratio declined to 72 per cent in May 2015, down from 75.5 per cent a year ago.

With a continued contraction in domestic demand in China, the onslaught of exports from the country looks set to continue. This could keep domestic steel prices under pressure, unless significant protection in the form of higher import duties is provided. Recent hikes in import duty on certain steel products are unlikely to act as a deterrent, given that domestic steel prices still exceed imported steel prices.

Less money for every tonne While SAIL has a strong balance sheet, its operational performance has been far from satisfactory despite having access to captive mines for its entire iron ore requirement. High employee costs and a subdued revenue growth have impacted the company’s operational profitability.

SAIL, with an annual steel production capacity of close to 13 million tonnes, manufactures both semis (semi-finished steel products) and finished steel products (both flat and long). The low-margin semis today account for 12 per cent of the company’s steel sales, up from 9 per cent share in 2011-12.

On EBITDA (operating profit) per tonne of steel sold, a key performance metric, its peers, such as JSW Steel and Tata Steel have done better, partly by improving the proportion of high-margin value-added steel products that provide end-users, such as automakers, an alternative to expensive imports. Though lower than in the year-ago period, JSW Steel (India operations) reported an operating profit per tonne of ₹4,839 and Tata Steel ₹5,523 in the June 2015 quarter.

In contrast, SAIL reported a loss of ₹313 per tonne in June 2015, down from a profit per tonne of ₹4,031 in the June 2014 quarter, at the operating level.

Weak financial performance SAIL reported a 16 per cent year-on-year decline in revenue to ₹9,503 crore in the June 2015 quarter, much sharper than that in previous quarters.

This was largely the result of lower sales realisations. It also reported loss of ₹84 crore at the operating level and ₹322 crore at the net level during this period. For the full 2014-15 fiscal, SAIL reported 2 per cent fall in revenue to ₹45,844 crore.

But thanks to lower coking coal cost, operating profit grew 15 per cent to ₹4,635 crore. Higher interest expense however dented net profit, which declined 19.5 per cent to ₹2,118 crore during the year.

Expanding capacity SAIL’s capacity expansion can also be limited by the subdued outlook for the global steel industry.

A large part of the increase in capacity this fiscal has been in the form of an additional 3.8 million tonnes per annum of crude steel production at the company’s steel plants at Burnpur in West Bengal and at Rourkela in Odisha, rather than higher production of value-added steel.

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