Indian steel sector: Divergence grows - Views on News from Equitymaster

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Indian steel sector: Divergence grows

Sep 13, 2000

Restructuring in the public sector, it seems, is triggered only when options are very limited. Like in the case of the Steel Authority of India Limited (SAIL), where bankruptcy seemed inevitable. Had the restructuring exercise been taken earlier on, the company, which figures in the largest producers of steel globally, could have been in a much better position to face the global slowdown in demand. Take the case of another steel company, albeit a private sector one, Tata Iron and Steel (Tata Steel). Earlier in this decade the company lagged SAIL in productivity terms (sales per employee). Today it claims to be one of the lowest cost producers of hot rolled coils globally. The change over the last decade has been profound. And it is likely that the next few years will be equally interesting for the company.

FY94   Tata Steel SAIL
No. of Employees 000 76,400 190,282
Saleable steel sales MMT 2.1 8.5
Sales per employee MT 27.7 44.8
FY00      
No. of employees# 000 52,167 172,500
Saleable steel sales MMT 3.2 8.9
Sales per employee MT 61.5 51.6
Gross Profit Margin % 17.9 4.1
# estimate for SAIL      
FY94 - FY00      
Growth in Sales (volumes) % 51.6 4.5
Change in employee base % (32.0) (8.2)
Valuations      
Price Rs 108 6
EPS Rs 12.1 (4.2)
P/e x 8.9 NM
Market Capitalisation Rs bn 39.8 24.8
Here are two companies in the same environment, which have shaped up very differently over the last six years. In FY94, SAIL was more efficient that Tata Steel (in terms of sales per employee). In terms of volume sales, Tata Steel was just 25% the size of SAIL. Cut to FY00 and Tata Steel seems to have pulled off a coup. It is not only more efficient but has grown to account for steel sales that are 36% of the SAIL’s. During this period, Tata Steel was able to reduce its workforce by over 32% even as sales jumped 51%. SAIL on the other hand could log in only a 4.5% rise in sales even as the employee base reduced by a marginal 8.2%. The differential in gross margins is clearly apparent.

The steel sector is just one of many examples of how the government has led the public sector to the brink of bankruptcy. SAIL, which commands volumes, is not efficient. This is largely due to political constraints in rationalising the employee base and a lack of freedom in investing in new technologies and opportunities in the sector. The government would probably add more value to by exiting the company rather than by passing through new proposals every now and then to revive the company’s dwindling fortunes.

The stock markets have also taken note of this change. The market value of Tata Steel far exceeds that of SAIL. This despite the fact that the government has sanctioned a restructuring package for the beleaguered public sector company. Investors probably do not expect the government to change its method of operations i.e. bureaucratic and non-business like. Until then, the market perception too is unlikely to change significantly.

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