The premier public sector undertaking and steel major, SAIL, on Wednesday reported a steady growth in earnings for the December quarter. The operating profit more than doubled to around Rs 2,578.44 crore with revenues at Rs 9,697 crore for the December quarter were 11% higher than the previous year. Similarly, net profit grew by an impressive 99% over the previous year to stand at Rs 1,675.55 crore. The share price however tanked by 3.13% to close at Rs 216.35, despite the fact that the company?s performance was in line with expectations, if not better.
Analysts reckon that there are certain causes for concerns in the days to come and that these have been factored in to get a more realistic valuation. The company has managed to grow its operating profit margins from around 24% in the quarter ended September 2009 to 26% for the quarter ended December 2009. This was largely on the back of lower raw material costs. The raw material cost as a percentage of sales has come down from 89% in the December quarter of 2008 to 53% levels in the quarter under review. However, sequentially the employee cost, which accounts for around 13% of sales, has jumped by 39%. The reasoning, say analysts, is that the company had a lower cost provision in the first half, which they would have to spread over the second half, which is why a sharp increase in the employee cost was seen. This trend is expected to be seen in the next quarter itself. The management mentions that in sheer volume terms, sales were higher by 25% on an annual basis but 12% lower realisations caused the value growth to be lower than expected.
The steel major has already announced price cuts and there would be a pressure on the margins in case input costs rise further, say analyst. The impact would not be as severe as it is fairly integrated with respect to iron ore and the company is in a position to control its coking coal costs. Its earnings per share volatility, reckon analysts, is amongst the lowest amongst peers. The reason why the share price was seen lower was that there was a lot of accumulation by institutions taking the share price to a high of Rs 258 in January 2010.
According to estimates at the this price the enterprise value of the company worked out to around $ 1,420 per tonne and the replacement cost is estimated to be around $1,000 per tonne. Hence, at current prices, the enterprise value works out to around $1,187 per tonne??more realistic.