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SAIL struggles to stay solvent - Views on News from Equitymaster
 
 
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  • Aug 30, 1999

    SAIL struggles to stay solvent

    According to newspaper reports, Steel Authority of India Ltd. (SAIL), which has put its Special Steel group on the block, has evoked the interest of the LNM Group, Avesta Sheffield and Gama Synergy. Moreover, with a jump in steel production in July 1999, the company may as yet pull itself away from the clutches of the BIFR.

    SAIL is the world's 10th largest and India's largest steel manufacturer. It operates 4 integrated steel plants and 2 speciality steel plants.

    SAIL recorded large cash losses over the past fifteen months, and has recently held back on ex-gratia payments to employees. 1QFY2000 results too have belied expectations of a recovery as the company posted a loss of Rs 6 bn on a turnover of Rs 34 bn.

    Once the leading light of the public sector, the company is likely to be referred to the Board for Financial and Industrial Reconstruction (BIFR) if things do not improve soon. Recently, Credit Rating and Information Services of India Ltd. (CRISIL), a leading credit rating company, downgraded the company's rating to below investment grade.

    SAIL has initiated measures to keep its head above water. The company has stepped up the target for the Voluntary Retirement Scheme (VRS) to 15,000 employees from the present 8,000-10,000 employees. More importantly, it has sought to sell off its special steel group, which has been a large contributor to the losses.

    A sell off could greatly improve the cash flows of the company, which in turn could be utilised to improve technology and rationalise work force. This would help in improving overall efficiency and making SAIL more competitive. However, SAIL is likely to face stiff resistance from its employees if it were to plan retrenchment to make is units look more lucrative to the buyers. Moreover, given the inherent drawbacks in public sector units, a buy out seems difficult unless accompanied by other sops.

    The talk of a sell off comes at a time when there has been an improvement in both the export and domestic steel markets. According to a government release, steel production increased by 25% in July 1999 over the corresponding period last year. Although, a definite improvement in steel demand could help lift the fortunes of the company, there is a need to look more closely at its operations and ensure that steps are taken to make the company more efficient and competitive.

    Market View:

    The stock is rated as a 'SELL' due the company's low employee productivity and the outdated technology. Moreover, with the steel demand yet to show a definite uptrend, analysts are skeptical of a turnaround in the near future.

     

     

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