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SAIL: Restructuring plans

Sep 12, 2001

World’s 13th largest steel producer and India’s largest steel manufacturer, SAIL has been suffering from appalling financial health in the past few years. The company, which controls 36% of India’s domestic crude steel production, has been on the brink of bankruptcy for quite some time now. However, SAIL seems to be taking the matter seriously and is attempting to make business plans, which would yield profits to the company in the next 4-5 years.

For starters, SAIL’s management has drawn up comprehensive cost control plans. In FY01, the company’s cost of sales as a percentage of net sales realizations have declined to 105% from 112%. However, the company is yet to break even.

It is also aiming to get rid of the loss making subsidiaries either by selling them or by hiving them off to a joint venture. The company has already transferred its Unit – II of captive power plants at Durgapur and Rourkela steel plant to SAIL Power Supply Company, its subsidiary for Rs 3.9 bn. This subsidiary is also converted into a 50:50 joint venture with NTPC. SAIL has made profits of Rs 2.9 bn on this transfer, which was accounted for in FY01 accounts.

The company has also initiated steps for divestment of Captive Power Plants at Bokaro and Bhilai steel plant. Apart from this, SAIL aims to convert its wholly owned subsidiary, Indian Iron and Steel Company Ltd. (IISCO) into a joint venture. IISCO has been declared sick by BIFR in August 94 and the proposal for its revival is in process. It had accumulated losses of Rs 6.2 bn as on March ’01. Maharashtra Elektrosmelt Ltd. (MEL) another wholly owned subsidiary is also a BIFR case with accumulated losses of Rs 500 m. Although, SAIL is making the right noises, the government’s control over the enterprise is likely to prevent the management for taking proactive measures. Infact, one of the main reasons for SAIL's present condition is government interference in its operations. This has resulted in SAIL pursuing social rather than profitable policies.

As part of this restructuring exercise, SAIL has decided to produce and market several high-grade special steel products, which will constitute 25% of its saleable steel basket. These value added products are expected to bring additional remunerative earnings compared to low realizations from the base grade. Segmentation of the business into strategic business units and focus on marketing are among the other business strategies.

Notwithstanding the above efforts, SAIL needs to concentrate on updating its technology to improve operating efficiencies. This would assist the company in becoming competitive in the markets. If these plans are implemented successfully SAIL could turn into black and sustain profitability in future.

It is also taking steps to curtail the leverage. Its debt to equity ratio stood at 3.4x as on March ’01. To bring down the average cost of debt, SAIL has repaid debts amounting to Rs 5.4 bn in 1QFY02 and would replace the same by raising fresh funds from the markets at lower cost. This exercise is likely to reduce the company’s overall interest figure going forward.

Right sizing the organisation is also a commendable effort. The company’s total number of employees has reduced to 157,000 in FY01 from 183,000 in FY97. SAIL has targeted to bring down the number to 100,000 by 2005. Although, its VRS plans are under implementation, the overall improvement in productivity is marginal. Also, it will continue to have high cost on account of salaries and wages until the number of employees are reduced. Salary cost accounts for about 22% of total revenues as against 15% for Tisco.

The stock price of SAIL currently is below Rs 5 and near to its 3 years low. The company has already set a target to curtail its losses to Rs 1.5 bn in FY02, from the very high loss of Rs 7 bn in FY01. It also aims to earn profits in FY03. Nevertheless, the company is likely to be adversely affected by structural problems and the current grim scenario in the world economy. Also, over capacity in the Indian steel markets is likely dent its growth plans. More importantly, unless the management is made proactive SAIL may revive only to go back into the red yet again.

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