SAIL hits rough weather

Despite a light balance sheet, it reported its weakest operating profit in the year ended March

Riding on expectation of high economic growth and believing in India’s long-term story, many steel companies took up expansion plans and made acquisitions. However, not many anticipated a sharp slowdown in demand, local and global, leading to lower alloy prices. Currently, steel prices are at multi-year lows of around Rs 30,000 a tonne.

Quite a few firms face the threat of falling in the red at not only the net but the operating level, too. State-owned Steel Authority of India (SAIL), the largest alloy producer in the country in terms of capacity, is one.

Despite a light balance sheet and 100 per cent raw material security in iron ore, the Delhi-based company had, when compared to larger peers Tata Steel and JSW Steel, which also gave annual capacity above 10 million tonnes, reported the weakest operating profit in the year ended March 2015.

 

 

Continuously rising employee cost is the main factor that has led to shrinking of the once strong operating profit. After dropping sharply from Rs 8,663 crore in FY09 to Rs 5,527 crore in FY10, employee costs surged 80 per cent to Rs 9,747 crore in FY15.

In the year ended March, SAIL reported operating profit of only Rs 2,858 crore. Tata Steel’s India operations and JSW Steel clocked Rs 10,888 crore and Rs 5,967 crore, respectively. Also, when compared to its own past performance, SAIL reported the lowest operating profit in 12 years (see chart) for the year ended March 2012. In FY10, SAIL had reported an operating profit of Rs 12,203 crore.

Though SAIL said its personnel had dropped 20 per cent to 93,352 as on April 1 from 117,664 in April 2010, employee cost in absolute terms has gone up.

 

A company's expenditure behaviour typically brings out flaws when the business climate turns adverse. For SAIL, since its revenues have failed to keep up in the same time span and costs have risen, operating profits have taken a hit. “Rise in employee cost year after year is not new for SAIL. But, what has happened now is that the top line, moving in tandem until recently, has not grown as much and due to this, rising employee cost is surfacing as a problem,” said an analyst with a local brokerage.

Increased steel imports, mainly from China, coupled with sluggish demand in the domestic market, has led to primary producers witnessing weak realisations through FY15 and thereafter. SAIL was not spared.

 

With annual capacity of 19.5 million tonnes (mt) and employee cost close to Rs 10,000 crore, revenue was Rs 45,800 crore in the year ended March 2015, nearly the same as the Rs 46,300 crore in FY11, when the employee cost was Rs 7,600 crore and capacity stood at a much lower level of 13.8 mt, clearly indicating better efficiency. Some of this, however, might get corrected in the next couple of years, as output from new capacities rises.

“Though the capacity at SAIL after modernisation is 19.5 mt and is ready, utilisations will happen only this year. For FY15, the capacity utilisation was 100 per cent for the 13.9 mt which produced steel,” a spokesperson at SAIL said.

Over recent years, SAIL spent Rs 55,000 crore (including on the Bhilai plant) to take its capacity to 23.5 mt. “The capacity is built but ramp-up happens gradually and so this year, production will go to 16.5-17 mt,” said a source from SAIL.

 

While increased contribution from new capacities should help prop revenue, the per-tonne cost of raw materials and power & fuel at Rs 18,000-20,000 would leave little at the operating level, assuming some increase in employee costs as well. That’s because a weak outlook for the steel industry for the next few quarters is expected to keep realisations for companies muted. Consequently, lowering the employee cost should be top priority for SAIL, said analysts.

Comparatively, Tata Steel and JSW, which have seen employee costs rise 95 per cent and 220 per cent, respectively, since FY10, spend a lesser portion of their revenue toward these, compared to SAIL, which is the highest at 21 per cent. Tata Steel’s revenue to cost of employee is half of SAIL, while JSW Steel is in the most comfortable position at about three per cent. SAIL, however, does have an edge over peers in terms of debt levels and raw material security. But, with the high employee cost, the company is losing on these positives.

Alongside, in an industry where raw material cost forms the largest chunk of total expenditure for a company, SAIL has access to captive iron ore and is also partially secured on coking coal supply. Though, any other company with similar access would have managed that.

 

In debt, though, SAIL's balance sheet carries the least burden, as against Tata Steel (consolidated), the most heavily indebted company not only among domestic peers but also globally, followed by the Sajjan Jindal-led JSW.

Despite these advantages, the company’s cost per tonne is very close to that of JSW, which has no access to captive raw material supply at all. JSW’s raw material bill is nearly 80 per cent of its total costs. Despite being handicapped on raw material security, the firm was the largest steel producer in FY15, with operating profits double that of SAIL.

Clearly, given the current dull industry scenario amid the advantage of relatively lower debt and raw material security, SAIL has not been able to reap benefits to the extent it could have. It’s time the firm pulls up its socks, helping put up a better picture and improved shareholder returns.