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SAIL's envy Tata Steelís prideÖ - Views on News from Equitymaster

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SAIL's envy Tata Steelís prideÖ
Sep 18, 2008

Öwe are referring to the operating margins. Despite dealing in a highly commoditized product and also using the same national resources, Tata Steel (standalone operations), the private sector behemoth is heads and shoulders above its public sector counterpart in the operating margin department. And the out performance is not restricted to one or two years alone. We have analysed the data for a five-year period between FY04 and FY08, and barring FY05 when SAIL came close to matching Tata Steel, the latter has significantly outperformed SAIL in the remaining four years.

The out performance could be a factor of two things, either Tata Steel enjoys better realisations than SAIL or it has a lower cost structure. As far as realisations per tonne of their main product, saleable steel is concerned, while Tata Steel has enjoyed better realisations in the past, the gap has come down considerable in FY07 and FY08, with Tata Steelís realisations higher by 3% and 2% respectively than SAILís. Hence atleast on the realisations front, SAIL has managed to blunt Tata Steelís edge in the past couple of years.

However, it is the cost structure where SAIL will have to really pull up its socks if it has to come to par with Tata Steelís operating margins. The biggest difference lies in the raw materials space. Between FY04 and FY08, raw material expenses as a percentage of sales for SAIL have on an average been a huge 2,170 (21.7%) basis points higher than Tata Steelís. In other words, if Tata Steelís raw material costs stood at 20% of sales, that of SAILís have come at 41.7% of sales. This alone explains the significant out performance of Tata Steel and could be attributed to the latterís ruthless focus on costs and a very efficient raw material procurement system. Another area where SAIL needs catching up to do is the staff costs, which by virtue of its public sector legacy, is putting substantial strain on its cost structure on a relative basis.

Benefits of the out performance of such a magnitude is for everyone to see. Courtesy its higher margins, the cash flows for Tata Steel have been way better than SAIL, enabling the former to remain in good health even during the worst of times. SAIL, on the other hand had to endure a very difficult period, especially when the steel cycle was in doldrums, thus leading to long periods of sub par or negative returns to its shareholders. Little wonder, it always pays to be with the most cost efficient player while investing in a commodity stock.

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