Sail Loses Its Sheen
Between April 1996 and March 1997 the Indian steel industry faced its worst challenges ever in the form of a substantial hike in raw material prices, mainly coal, by 20 per cent, a 12 per cent increase in freight charges and higher power costs.
This led to the countrys largest steel maker, the Steel Authority of India, suffering one of its worst financial results in 1996-97, with a staggering 60 per cent fall in its net profit from Rs 1,318.61 crore in 1995-96 to Rs 527.27 crore.
For this government-owned blue chip, one of the designated nava ratnas of the public sector, the cumulative impact of input cost hikes during 1996-97 was an estimated Rs 1,100 crore. Worse, this premium on production costs happened at a time when domestic offtake for its products dropped sharply as reduction in import duties saw cheap imports from CIS countries flooding the market.
Against Rs 21,500 per tonne of CR coils in the first half, prices fell to Rs 20,300 per tonne in the second half. Hot rolled coil prices also fell to Rs 15,500 per tonne from Rs 17,500 per tonne. Prices of semis did not fall so much; the company was hit primarily by a fall in flat products, says Sanjay Jain, investment analyst at HSBC B&K in Mumbai.
As stocks, now estimated at over one million tonnes, began piling up, and sales realisation dropped, SAIL had to take recourse to high cost borrowing. This, in turn, led to spiralling interest costs and, as a result, the companys interest burden rose 31 per cent to reach Rs 1,179.39 crore from Rs 808.37 crore in 1995-96.
Not surprisingly, SAILs performance was dismal. Total sales, which includes other income, dropped by 2.5 per cent from Rs 15,127.16 crore in 1995-96 to Rs 14,739.65 crore in the previous year. During 1996-97, SAILs profit before tax fell by 54 per cent reaching Rs 601.85 crore compared to Rs 1,318.61 crore the previous year.
SAILs financial results shocked even the analysts who had predicted a net profit of around Rs 650-750 crore for the company. In fact, the final figure is even worse than the ministry of steel estimates, which had pegged net profits at Rs 653 crore. Even after the ministrys estimates were published, some analysts had upped their estimates to over Rs 700 crore.
Also accounting for SAILs dismal performance has been the fact that it had to pay the minimum alternate tax for the first time this year. A zero-tax company till 1995-96, SAIL had to pay MAT of Rs 71.64 crore. The provision for tax included a write back of excess provision of earlier years to the extent of Rs 3 crore. Depreciation charges were also higher at Rs 689.74 crore, against Rs 584.81 crore last year.
But SAIL has not been alone in this downturn. In a year that has been marked by poor performance by all the major steel companies, Tata Steel (Tisco), SAILs main private sector competitor, declared a 17 per cent drop in its net profit under the combined impact of a sluggish market, a Rs 73-crore first ever tax outgo and Rs 78.7 crore on account of voluntary retirement scheme (VRS) payments.
The relatively lower drop for Tisco has mostly been because the company has taken some steps to adjust to adversity. A senior Tisco official points out, It was better marketing efforts and co-ordination between marketing and production strategies that helped Tisco contain the adverse effect of the market on its financial results.
To be sure, SAIL has chalked out an agenda for revival. To cope with its inventory problem, SAIL is looking for an increased presence abroad. Special emphasis is being given to the quality of products to gain a competitive edge. Exports for 1997-98 have been targeted at 10 lakh tonnes-plus, in view of the improvement of the international market from April this year. Last year, SAIL exported more than 5 lakh tonnes.
But costs remain the big issue. SAIL achieved a three per cent reduction in cost of production on constant price during 1996-97. For the current year, 1997-98, the target is to bring down cost of production by 10 per cent.
To achieve this, coal consumption, which accounts for nearly 60 per cent of raw material costs, is being brought down. And to ensure optimum utilisation of resources two blast furnaces at Bhilai and Bokaro were shut down in January this year.
SAIL also plans to spend about Rs 15,000 crore on expanding capacity. This includes raising Bokaro steel plants steel-making capacity from the present 4 million to 6 million tonnes in the Ninth Plan (which starts this year). Bokaro and Bhilai have been expanded to 4 million tonne per annum capacity. Plans for diversification, modernisation and technological improvement are in progress at the Durgapur, Rourkela and Bokaro steel plants.
These expansions will help SAIL leverage its already wide product range that will help it withstand the vagaries of market demand better than most private sector steel makers. For instance, SAIL has the widest range of products. The company is a leader in all the three grades of steel, namely mild steel, alloy steel and stainless steel.
This and several inherent advantages are expected to help SAIL keep ahead of domestic competition. For one, SAIL has easier access to raw material sources like iron ore, coal and dolomite. Most of its plants are located near the source of primary raw materials like iron ore and coal.
SAIL also has massive idle infrastructure in various plants. This will help the company raise its steel making capacity in stages in the near future. Expansion costs at the existing sites will be considerably cheaper than setting up large greenfield capacities.
According to the steel industrys annual performance budget, SAILs turnover in 1997-98 is estimated to reach Rs 17,440 crore with profit before tax reaching Rs 850 crore and net profit after interest, depreciation and taxes at Rs 740 crore.
The question is whether all this will be enough to keep SAIL truly competitive in the long run as more and more capacities go on stream. New units like those of Essar Steel and Ispat Industries are expected to cater to the market in the western region and emerging ones like Jindal Vijaynagar Steel will cater to the markets in the south.
Industry experts point out that the steel major needs to start benchmarking production processes against the best in the world.
Unless that is done, SAIL will not be in a position to translate the advantage of cheap and abundant raw material like iron ore into significant price advantages and be competitive in the world market.
To quote Paine Webber in World Steel Dynamics Steels technological revolution will continue to create winning opportunities for the aggressive. When combined with the competitive pricing structure, this means steel companies can only succeed if production costs are trimmed and product quality upgraded at a rapid rate. Otherwise, no matter how good the macro environment, they will be leapfrogged by others. This now rings true for SAIL like never before.
SAILs financial results shocked even the analysts who had predicted a net profit of around Rs 650-750 crore. In fact, the final figure is even worse than the ministry of steel estimates, which had pegged the net profits at Rs 653 crore.