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SAIL: A brief overview
Jan 3, 2007

India is the 8th largest steel producer in the world with an installed capacity of 36.1 million tonnes (MT) in FY06. During the year, domestic steel production and consumption has increased by 5.1% and 7.1% respectively over the previous year. Steel consumption in India is expected to grow by 7% to 8% CAGR in the medium to long term and production is expected to touch 66 MT. In terms of future demand growth propellants, India represents an opportunity for the steel industry on the basis of its large population and current low per capita consumption. Moreover, India is rich in iron ore reserves, a key raw material. Let us take a look at how SAIL, one of the oldest and the largest integrated steel producer in the country, has performed over the last few years. Overview: Steel Authority of India Ltd. (SAIL) is India’s largest and world’s 11th largest steel producer. The company holds sway over almost 1/3rd of the domestic market with its 13 MTPA capacity. It operates 4 integrated steel plants and 2 specialty steel plants. After bleeding at the net profit level between FY99 and FY03 owing to an unfavorable steel cycle, the company turned around in FY04 and reported an astounding performance in FY05. Further, the company has embarked on a massive expansion plan (split into two phases), which will take its steel production capacity to 20 MTPA by FY12. The company accounts for nearly 26% of domestic finished steel production. It is the largest player in the flat products and second largest player in the long products segment and uses the BOF process to manufacture steel.

Performance FY06: With the steel cycle showing no signs of slowing down, SAIL’s performance also continued to look upwards. The company that reported operating loss during FY02 has consistently improved its performance. During FY01 to FY06, there was a sizeable 15% CAGR improvement in the topline of the company. However during FY06, the net sales of the company declined by around 2% YoY on account of reduction in prices of saleable steel and increase in excise duty (from 8% to 12%). In terms of volumes, the company achieved an all time high finished steel production of 9.8 MT, a growth of 2% YoY. The overall physical performance of the company improved during the year as it achieved highest ever production of hot metal (14.6 MT), crude steel (13.5 MT) and saleable steel (12.1 MT).

Though there was improvement in production and growth in sales volumes (9% YoY), the operating profit declined by almost 38% YoY on account of lower realisations and increase in prices of coking coal and freight on iron ore and fluxes. The reduction in net realisation during the year was about 9% compared to the previous year, which also impacted the bottomline. Profit after tax of the company declined by almost 41% YoY due to above mentioned reasons. The impact of rising input costs and lower realisations was partially offset by improved physical performance and growth in exports. The export volumes grew by almost 24%, accounting for almost 5% of total sales volumes.

Improved product mix: The company manufactures and sells a broad range of steel products, including hot and cold rolled sheets and coils, galvanised sheets, electrical sheets, structurals, railway products, plates, bars and rods, stainless steel and other alloy steels. During FY06, flat products contribution to the total sales turnover was 51%, followed by long products at 35% and alloy steel and secondary products accounted for 6% each. The company caters to the entire gamut of mild steel business. However, the value added products form a lower share that enjoys better margins. The company has a monopoly in value added product segments like rails but has a lower presence in value added products that are used by the fast growing automobile industry.

5 Year performance: Between FY01 to FY06, the company’s performance has improved drastically on account of buoyancy in the steel sector. Earlier, between mid 90s and FY02, the company had suffered on account of downturn and slower growth. The slack performance by the company was also on account of low productivity and inefficient operational efficiencies. However, that seems to be a thing of the past as currently measure like reduction in manpower, impetus on cost reduction and productivity improvement through systematic application of new technology has also helped improve the operational performance beyond the rise in product prices. Further cost reduction was achieved on account of reduction in coke consumption by using alternative fuels like tar and coal dust injection in BOF and increasing usage of sponge iron and scrap further helped to reduce costs. The sweet fruits of these measures are being reflected in the much-improved operating performance. After reporting a loss during FY02, SAIL turned profitable and since FY04, has achieved double-digit OPM. With improved cash flows, the company’s gearing has also lowered. The debt to equity ratio of the company has come down to mere 0.3 in FY06 from 3.4 in FY01. The effects of improved cash flows and productivity is also being reflected through considerably higher return ratios.

  FY01 FY02 FY03 FY04 FY05 FY06
Operating profit margin 10.9% -0.7% 9.2% 18.6% 35.2% 22.1%
Net Profit Margin -5.1% -12.5% -1.8% 11.7% 23.7% 14.2%
RONW -17.5% -75.8% -15.3% 53.9% 68.1% 32.4%
Production/employee 61.9 65.7 75.3 83.6 87.0 87.2

The company’s performance during 1HFY07 has also been impressive as bottomline grew 26% YoY on the back of a 29% growth in topline. Operating margins though came under pressure and fell by 250 basis points, signifying inflationary pressure.

In FY06, the merger with IISCO provided still higher opportunities for better synergy and growth, especially in mild steel business. To retain and increase market share, the company has outlined expansion plans through acquisitions and mergers. The company also expects to achieve volume growth through de-bottlenecking, technology up-gradation etc. While the current valuations of the stock may look attractive, we believe that steel prices are likely to remain weak in the medium-term. This is because steel production in China is expected to outpace consumption for the second year is succession in CY06. While domestic demand for steel has risen sharply in the recent past, over the next three years, we expect steel demand to grow at around 4% to 5% per annum. Given this backdrop and the fact that SAIL is not a globally cost competitive steel manufacturer in the world, we believe that risks outweigh returns at current levels.

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