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SAIL: Increasing shareholder value

Jun 24, 2008

In last article , we saw the balance sheet analysis of SAIL between the period 1999 and 2003. Now let us see the period between 2003 and 2007, which resulted in a turnaround of fortunes of a lot of steel companies, SAIL included and how the latter’s balance sheet was strengthened.Let us see how has the balance sheet changed between 2003 and 2007.

Considering the assets side of the balance sheet first, the net fixed asset declined at a modest CAGR of 2.9% as compared to last period (1999 to 2003) where it declined by 8.9%. This can be attributed to increased capex. The working capital grew at a CAGR of 51.6% but if we exclude cash at bank and interest receivable from the current assets, it grew at a CAGR of 23.9% during the period under consideration. The working capital as a percentage of sales increased from 13.1% in 2003 to 15.4% in 2007. This indicates that the increase in working capital was more a function of increased sales rather than reduced efficiency. This is also evident from the trend in inventory and debtor days, which were reduced to 72 and 25 respectively by FY07.

On the liabilities side, the company’s performance was even more remarkable. It continued to reduce its debt but this time, at a higher CAGR of 24.7% (11.4% CAGR in the previous four year period). There was also a significant increase in the company’s net worth. It grew 9 times from Rs 19 bn in 2003 to Rs. 171 bn in 2007. The debt to equity ratio was also reduced drastically from 6.5 in 2003 to 0.2 in 2007. All of this can be attributed to the windfall profits it generated during the period under consideration.

In total, if we look at this period, there was a tremendous shareholder value addition. An investor who would have invested in SAIL in 2003 would have seen his investment grow 9 times, handily beating the index returns. This is the sort of upside one can have by entering and exiting a commodity business at the right times. However, for this to happen, one has to have an intricate understanding of the industry and the business. In other words, it has to fall within one’s circle of competence. If it doesn’t, then investment in such businesses could lead to a lot of uncertainties.

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