SAIL: A peep into the past II

SAIL: A peep into the past II
Source:EquityMaster


In the last article , we saw the lows of 1999-2003. Now let us have a look
at the period of 2003-2007, where backed by growing economies of emerging
markets, notably the BRIC nations and the declining trade barriers among the
countries of the world, the steel cycle witnessed one of its best phases
ever in recent times. On the domestic front, increased spending on
development of infrastructure, and robust demand from fast growing sectors
like construction, automobile and capital goods brought back smiles on the
faces of steel producers and SAIL was no different.


*Revenues: Winds in its SAIL*
The company registered robust revenue growth during this period. Its topline
grew at a CAGR of 19.1%. Revenue showed growth in all years except FY06,
where it marginally declined by 1.8%. This growth was mainly due to rising
steel prices, which in turn increased realizations. The volumes grew at a
CAGR of 4.3% while the realizations from saleable steel grew at a CAGR of
14.9% in the period under consideration. As we can see from the graph, the
growth in realisations was significant in FY05 where it grew by 34% on a YoY
basis. There has been a rising trend in realisations except for FY06 where
it declined by 6.0%. This was caused due to a steep fall in steel prices by
around 9.0%. As far as volumes are concerned, had it not been for the
capacity constraints faced by the company, growth in topline could have been
even higher.


*The operating leverage kicker*
On the operating performance front, operating profits grew at a whopping
CAGR of 60.2% in the period under consideration. Operating profits have been
growing at a rising rate continuously except in FY06, where it had fallen by
41%. This was caused due to rising prices of coking coal, which put pressure
on margins and also, lower prices of steel on a YoY basis. In FY05, the
company recorded the highest operating profit of the four-year period. This
significant rise can be attributed to the increased realizations (34.5%) and
lower than usual growth rate in expenditure (5.5%).


It is interesting to note that unlike other industries where volumes play an
important role in profit growth, SAIL was able to increase its operating
profits at a CAGR of nearly 60% despite growing its volumes by just 4.3%
annually. Furthermore, the growth in operating profits came about despite a
13% CAGR in its operating expenses. This phenomenon could be attributed to
the enormous power of operating leverage, where the lower the operating
margins, the higher the profits during an upturn. Since SAIL's operating
margins stood at rather lower 8% in FY03, increase in steel prices helped it
grow its operating profits at an exponential rate. However, it should also
be borne in mind that the reverse also works true for such companies i.e.
the lower the operating margins, the further your profits fall when
realisations are on a decline.


*It flows to the bottomline*
As far as net profits are concerned, they grew at a CAGR of 35.2% between
the periods 2004 to 2007 (we have considered FY04 because FY03 was a loss
making year for the company). The company registered profits for the first
time in FY04 after a long gap of five years! The interest coverage ratio of
the company significantly improved from 0.2 in FY03 to 23.3 in FY07, as
strong cash flows helped the company reduce its debt and save on the
interest charges. Moreover, a marginal growth in depreciation i.e. CAGR of
1.4% also boosted the bottom line in the period under consideration.


After having looked at both the phases of the steel cycle through the
performance of SAIL, it can be inferred that while a windfall awaits the
investor who is able to time the cycle properly and enter at the right time,
the possibility of suffering huge losses if the downturn prolongs cannot be
denied as well. Hence, one needs to exercise utmost caution when planning
one's investments in a highly 'sensitive to cycle' company like SAIL.


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Disclaimer:
Some forward looking statements on projections, estimates, expectations &
outlook are included to enable a better comprehension of the Company
prospects. Actual results may, however, differ materially from those stated
on account of factors such as changes in government regulations, tax
regimes, economic developments within India and the countries within which
the Company conducts its business, exchange rate and interest rate
movements, impact of competing products and their pricing, product demand
and supply constraints. Nothing in this article is, or should be construed
as, investment advice.


This mail is intended purely for the purpose of information sharing and
general reading and is shared with the recipient without the intention to
gain any commercial benefits. This communication is not intended as a buying
or selling recommendation, the reader is requested to use his/her own
judgement while taking any such decision.


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