Covid-19 and high operating costs mar Sail’s Q1 results, stock subdued

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Steel Authority of India Ltd’s (Sail) first-quarter results show the scars of covid-19. The company’s steel production fell due to the lockdown. This dragged its stock down by about 1.5% in trade on Tuesday.

Sail’s revenues plunged nearly 39% year on year (y-o-y) on lower offtake of steel. With domestic consumption curtailed due to covid-19, Sail sold just about 2.2 million tons of steel in Q1FY21 as against 3.2 million tons in Q1FY20.

But what has hit the company even harder is that its realisation per ton declined by about 10% y-o-y. As both realisations and volume took a knock, Sail’s operating leverage was hit hard. Analysts were optimistic that Sail’s realisations would be better due to the improvement in steel prices later in Q1, but Sail could not cash on the better market conditions.

Sail has a higher fixed cost than other steel units, and that’s another drag on its profitability. As a result, Ebitda per ton fell into negative territory to 1814 per ton as compared to 4869 per ton in Q1 the last year. Ebitda is earnings before interest, tax, depreciation and amortization.

For now, the operating environment for the steel sector has improved considerably in the past few months, thanks to rising international demand. Steel prices increased in the last month, while offtake is also improving. Sail should be able to notch better numbers in the coming quarter.

Even so, while export volumes are improving, domestic volumes have yet to pick up. The slowdown in the economy, particularly in construction is a deterrent. So, it could be a while before the company could scale back its volumes to pre-covid levels.

The Sail stock has not fully priced the covid-19 disruptions going by the current performance as the company could take a sizeable knock in FY21. While the market is expecting to drive back to profitability in FY22 with a jump in sales, the valuation multiple for the PSU stock is still quite rich. The stock quotes at a PE of nearly 11 times its FY22 earnings. That might not be comforting enough for many investors.

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