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Government breathes life into Sail...

May 25, 2000

The Steel Authority of India Limited (SAIL). The name conjures up an image of size, dreams and inefficiency. The company is the tenth largest producer of steel globally, employing approximately 175,000 employees, and operating 4 integrated steel plants and 2 speciality steel plants. It represents the dream of making India self sufficient in terms of steel requirement. And finally, the company, which posted a net loss of Rs 15.7 bn in FY99, is considered to be one of the most inefficient among the integrated producers of steel in the country.

Needless to say the company has been till recently been fighting off bankruptcy. Not that there has been a dramatic change in its fortunes. Nor has the company benefited significantly from the recent upturn in economic activity. Once again, in a typical behaviour, the weak and democratically elected government (which itself is grappling with a burgeoning fiscal deficit) has decided to throw its weight behind the company. By approving a restructuring package estimated at Rs 84.5 bn (including a loan waiver of Rs 54.5 bn), the government has ensured that the steel giant will live on atleast for the time being.

(Rs bn) FY1998 FY1999 Change
Sales 146.7 149.9 2.2%
Other Income 4.6 4.9 6.2%
Operating Profit (EBDIT) 24.9 15.2 -38.8%
Operating Profit Margin (%) 17% 10%
Interest 15.5 20.2 29.8%
Depreciation 7.9 11.0 38.9%
Profit before Tax 1.5 (16.2)
Tax 0.2 (0.4)
Profit after Tax/(Loss) 1.3 (15.7)
Net profit margin (%) 0.9% -10.5%

Unlike in the past, this time the government has extracted its pound of flesh while approving the package. It has laid down a number of measures that need to be initiated as a part of the package. These include:

  • SAIL to focus on the manufacture of carbon steel
  • Non core assets including power plants and a fertiliser plant to be sold off
  • Salem steel plant will be hived off into a joint venture by March 2001
  • Divestment of Durgapur Steel Plant and Visvesvaraya Iron and Steel to be completed by March 2002

By now you are probably perturbed by the question of productivity. How does the government solve the fundamental issue of productivity? The answer, once again, is the democratically elected government. The fear of retrenching thousands of employees it seems rested heavy on the vote hungry government. And this by itself may be the cause of yet another failed attempt to restore the company to profitability.

The key to sustainable profitability in a commodity business is a firm control over costs. This is because prices in case of commodities are market determined (owing to little differentiation in final output), on the basis of demand and supply. Companies therefore need to ensure that when there is a slowdown in steel demand, which results in a decline in prices, they are able to cut costs in order to protect their profit margins. Sail, with its mammoth work force is burdened with high fixed operating costs, which result in sub optimal profit margins in case of boom times and large losses when demand for steel trails off. The situation will remain more or less unchanged post the restructuring exercise.

All may not be lost as yet. The company has got some breathing space in view of the improving scenario for steel in the domestic and international markets. Even as it continues to keep its head above the water, the company is initiating measures to restructure its workforce. One proposal aims to reduce the size of the work force by over 90,000 within the next three years at a cost of Rs 5 bn. The funding should not be a problem in view of the decisions taken to exit non-core areas.

Post implementation of the restructuring plan, Sail will emerge as a more focused player in the steel market. The company would have shed its non-core businesses and also its loss making steel plants. The funds raised from this exercise could then be deployed in new technology and productivity enhancing measures as also a voluntary retirement scheme.

Sail has been given an opportunity of a lifetime. The company has the opportunity to rid itself of excess manpower and loss making assets, most of it at a cost to a third party (the taxpayer!). Whether it is able to capitalise on this opportunity is what will determine the survival of the firm in the new millennium?

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