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SAIL: Efficiency to the rescue

Jun 23, 2008

In the last two articles on SAIL, we saw the performance of profit and loss a/c of SAIL in two periods viz. 1999 to 2003 (down turn of cycle) and 2003 to 2007 (upturn of cycle). Now let us have a look at the balance sheet of the company and how has it changed between the period 1999 and 2003.Let us first consider the asset side of the balance sheet, the net fixed assets of the company declined at a CAGR of 8.9%. This was mainly on account of no major capex that took place and continuous depreciation of the assets. The investments grew at a CAGR of 8.9%, attributed probably to rise in their value as the company hardly generated cash out of its operations to pour into investments. The company improved its working capital management. It reduced working capital requirement from Rs 66 bn to Rs 28 bn, CAGR of 19.1%. This is despite the fact that topline was growing at a CAGR of 6.1% during the period under consideration, which would have otherwise meant higher working capital needs. The days in inventory were reduced from 187 in 1999 to 53 in 2003 and similarly, debtor days were reduced from 53 in 1999 to 27 in 2003. What an improvement it was indeed!

On the liabilities side, the company managed to reduce debt at a CAGR of 11.4%. Even though there weren’t any profits realized from the operations during the period, great improvement on the working capital side helped it reduce excess flab. Thus, a reduction in debt would mean a reducing debt to equity ratio. However, nothing could be further from the truth. The debt to equity ratio increased from 3.1 in 1999 to 6.5 in 2003! This occurred due to the continuous erosion of net worth that declined at a CAGR of 26.7%. The company registered huge losses between 1999 and 2003. It had written off losses of around Rs 60 bn out of which Rs 57 bn came from the period 1999-2002. The company reduced its losses from Rs 17 bn in 2002 to only Rs 3 bn in 2003. This was mainly on account of upturn in steel cycle, which started taking place at end of 2002.

In total, if we have the look at the balance sheet of SAIL between 1999 and 2003, the only thing that had shielded the company from significant erosion in its balance sheet was the continuous improvement in working capital. Courtesy its strong bargaining power, it was able to tap funds from its customers as well as suppliers, thus giving it a little more headroom for survival. Thankfully for SAIL, just as it was inching closer to further value erosion, there was a turnaround in the steel cycle. Let us see in the next article how did it continued to improve its balance sheet when there was windfall of profits.

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