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SAIL: Restructuring for real? - Views on News from Equitymaster
 
 
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  • Nov 10, 2001

    SAIL: Restructuring for real?

    When the Indian government planned to enter the field of iron and steel, it formed a private limited company, Hindustan Steel. The company was set up in January 1954 and was then converted into public sector unit in January 1973. It was rechristened Steel Authority of India (SAIL). It is one of India’s largest public sector units, with the government ownership of 86%.

    With its rich experience of over four decades in steel making, today SAIL is a leading steel manufacturer in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defence industries and for sale in export markets. The company has four plants at Rourkela, Bhilai, Durgapur and Bokaro.

    By virtue of its ‘Navratna’ status the company theoretically enjoys significant operational and financial autonomy. However, over the past few years the company, which is considered as the world’s 13th largest steel producer has been suffering from deteriorating financial health. Its revenues have grown at a CAGR of just 1.3% to Rs 143 bn in the last five years. The company, which made profits of Rs 5 bn in FY97, has incurred huge losses for the consecutive last three years. A sharp drop in realizations and increase in operational cost took toll on its financials. The situation worsened further during the first half of the current year. Its losses in 1HFY02 almost equaled its full year FY01 loss of Rs 7.3 bn. Its operating margins slipped to just 4.2% in 1HFY02 from 10.9% in FY01. The company failed to control raw material and staff cost. Stiff pressure on realizations only contributed in inflating losses.

    Deteriorating financials
    (Rs m) FY97 FY01 5 yrs CAGR
    Net sales 135,574 142,769 1.3%
    Operating profits 18,380 15,530 -4.1%
    Net profits 4,828 (7,287) -
    Key ratios      
    OPM 13.6% 10.9%  
    RONW 6.0% -17.5%  
    Book value per share (Rs) 19.4 10.1  

    For half yearly performance Click here.

    The company, which controls 36% of India’s domestic crude steel production, has been on the brink of bankruptcy for quite some time now. Deteriorating financial performance has finally forced the management to take the matter seriously. It has been attempting to draw business plans, which would yield profits to the company in the next 4-5 years.

    Starting from cost control exercises to change in revenue mix, the company also aims to get rid of its loss making units. These measures are expected to turn its financials back in black over the long term.

    The public sector management has finally become active. Their first action was to transfer captive power plants at Durgapur and Rourkela to SAIL Power Supply Company, its subsidiary for Rs 3.9 bn. This subsidiary was then converted into a 50:50 joint venture with NTPC (National Thermal Power Corporation). SAIL captured profits of Rs 2.9 bn on this transfer, which was accounted for in FY01 accounts. The asset disinvestment activity intensified further in the first half of the current fiscal year. Accordingly, in September 2001, the captive power plant at Bokaro was divested for a profit of Rs 3.6 bn to its subsidiary company, Bokaro Power Supply Company. The company is also close to finalizing a deal with NTPC for transferring its Bhilai power plant. It aims to mop up around Rs 7.5 bn from divesting its assets by the end of current fiscal.

    Apart from transferring power plants, SAIL also aims to hive off its loss making subsidiaries into separate joint ventures. Both the wholly owned subsidiaries of the company Indian Iron and Steel Company (IISCO) and Maharashtra Elektrosmelt. (MEL) have been declared sick by the BIFR. Both the companies had accumulated losses of Rs 6.2 bn and Rs 500 m respectively as on FY01. Although, SAIL aims to convert these companies into joint ventures, BIFR has refrained the management from developing any third party bailout. SAIL’s investment of Rs 4 bn in these two subsidiaries (92% of its total investments) to that extent is likely to be fully eroded. However, the company has not made any provision for diminution in the value of its investments. As a result its current losses are understated.

    Leasing out the company owned houses and flats to employees was another attempt by the management to increase other income and control the losses. SAIL has over 100,000 houses and expects to lease out 20% of this in FY02. The scheme however, received poor response and the company could allot just 4,000 houses. SAIL gained Rs 400 m in the first half of the current year from the leasing of its real estate. Considering this fact, it would be a challenging task for the company to lease out the targeted 20,000 houses by the year-end and generate an expected income of Rs 3 bn.

    Increasing the other income base was not the only plan. The company also aims to control cost aggressively and improve profit margins. Right sizing the organisation was a move in that direction. The company’s total number of employees has been reduced to 150,000 in 1HFY02 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 staff cost until the number of employees is significantly reduced. The company’s salary cost still accounts for about 22% of total revenues as against 15% for Tisco.

    Snapshot of capacity utilization
    Particulars Saleable steel Steel ingots Pig iron
    FY98 95.4% 89.1% 42.9%
    FY99 86.0% 83.7% 38.8%
    FY00 89.7% 80.7% 30.3%
    FY01 85.0% 85.8% 19.2%

    The company is also taking steps to curtail the leverage. Its debt to equity ratio stood at 3.4x as on March ’01. In order 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. The result is already reflected from its first half figures where interest cost has come down by 9%. Going forward this exercise is likely to help the company in improving its financial performance.

    Change in the revenue mix was also a step in the right direction. 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 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.

    SAIL seems to be making the right noises. However, 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. Further, an absence of technology upgradation is making the company uncompetitive in the markets. In the current grim economic scenario, it remains to be seen whether the company is able to achieve its ambitious plans successfully.

     

     

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