The Steel Authority of India Limited (Sail) is likely to net Rs 50 bn by hiving-off various businesses as part of its restructuring plan. The company plans to utilise the funds to retire debt taken from the steel development fund.
SAIL is the world's 10th largest and India's largest steel manufacturer. It operates 4 integrated steel plants and 2 speciality steel plants. The company has been on the brink of bankruptcy for some time now. It is attempting to raise resources by getting rid of its loss making units.
We have dealt the merits of the restructuring plan in our earlier articles. However, in view of the decision to use the proceeds to repay the debt there is a need to re-look as the company’s viability as a steel making entity.
The reason for Sail’s present state is its inefficient operations that limited its ability to cut costs when the steel prices took a down turn. Therefore, the decision to repay debt from the restructuring exercise may not be a step in the right direction. This is mainly due to the fact that the company needs to spend heavily on new investments in order to improve its efficiency and viability. The company’s debt burden would remain unchanged, as it would then have to take recourse to market sources to fund the capex. Thus the repayment exercise is only cosmetic while ignoring the need for a massive technology upgradation exercise.
The company needs to focus on improving the efficiency of its operations by investing in technology and rationalising work force. These measures will ensure the company’s viability if the demand for steel were to take a down turn.
The stock is rated as a 'SELL' due the company's low employee productivity and the outdated technology. However, in view of the government initiatives to restructure the company, some analysts are taking a fresh look at the company.
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