We Are Preparing Ourselves For Another Difficult Year

SAIL has drafted a Rs 1,000-crore cost-cutting plan is looking at various ways of improving sales realisation. "This seems feasible via reduction in the consumption of coal and other raw materials, and captive power generation," said Arvind Pande, chairman of the company, in an interview with Rakhi Majumdar. Excerpts:

Business Standard: How do you see the current year after the setback suffered by SAIL last year?

Arvind Pande: At present, the current year also seems to be fairly difficult in a sense that the demand for steel is not growing as much as we had expected. The plus side is that the first three months has been better than the average for the last year in two ways.

 

First, the price realisation for our products between April and June this year has been higher than the average realisation for the whole of 1996-97. In terms of quantity of our sales, April was not good but there has been a pick up in May and June.

At the rate at which we are going, we should be able to sell most of our production. Our only problem is that in the last year we had built up some stocks.

To be able to liquidate those stocks we need a slightly higher growth.

The feedback from the finance minister and many of his advisors is that construction, project activity, new investments should pick up in the second half of the year. If this happens it should be fine.

But we are preparing ourselves for another difficult year. Therefore, we have decided to take some internal actions which will keep our profit figures reasonable.

This basically means a lot more action on cost.

We have prepared a Rs 1,000 crore cost-cutting plan and this seems feasible in terms of reducing the consumption of coal and other raw materials, including captive power generation. And we are also looking at various ways of improving the sales realisation.

So if we focus on cost, improvement in sales realisation and quality improvement we should be able to do marginally better than last year in terms of overall profits.

As of today, the predictions for the year are not much better than last year. But if in the second half of the year demand picks up as is being predicted then we should be able to do better.

BS: How will you actually manage to save the Rs 1,000 crore on cost?

AP: The main item on which we expect the most reduction is coal. Our budget for coal in 1997-98 is Rs 3,800 crore. Our target is to reduce the consumption of coal to Rs 3,000 crore. This will be achieved by reducing the coal to hot metal ratio. This means that for the same production of hot metal we will consume less coal. We are planning to buy 2 mt less coal than last year for the same level of production of hot metal. Similarly, it is possible for us to reduce the consumption of other raw material like limestone, dolomite, refractories, ferro alloys to improve our captive power generation which is cheaper than power purchase from the grid.

And these are the things which are possible. We had detailed discussions with all our plants' managing directors and this Rs 1,000 crore figure has come out after lot of discussions and detailed analysis. There is a fair level of confidence that this is something we can achieve.

BS: If you look at the performance last year, the common perception is that SAIL has suffered much more than the other steel producers. Why is that the case?

AP: We are a very large company with four steel plants of different vintage and product mix. When all of them are put together it becomes difficult to compare it with a single-plant companies like Tisco and Essar Hazira.

If you compare Jamshedpur plant with Bhilai, our best plant and which has a similar product mix, I think the plant to plant comparison can reveal that the performance of Bhilai last year will be better than Jamshedpur.

Where we are losing out is that we are clubbing Bokaro, Durgapur and Rourkela. In DSP and RSP we have made heavy investment for modernisation. In fact, we have spent around Rs 5,000 crore each on DSP and RSP over the last five to six years. There we have a heavy burden of depreciation and interest charges. Unless we can recover those charges, DSP and RSP will continue to remain under financial pressure.

Bokaro also suffered last year. This is primarily because the Bokoro product, which is the hot-rolled coil is of previous generation. We are currently going through a modernisation exercise of about Rs 2,000 crore introducing continuous casting and upgrading the hot strip mill. Once it is completed by the second half of this year, the Bokoro coil will be comparable to the Tisco and Essar coil. From 1998-99 onwards we should be on a different wicket.

BS: Can you export more to offset the domestic demand problem?

AP: Yes, I think one of the good signs is that the international market has picked up, international prices are going up and we are planning to double our exports. Last year we exported about half a million tonnes.

This year we plan to export one million tonne. In the first three months -- April, May and June -- we are exporting at the rate of one lakh tonnes per month. So the target of one million tonnes seems reasonable. Government incentives announced in the Exim policy plus increase in international prices should give us a 18- 20 per cent advantage. In fact, in many products our earnings from exports would be comparable with those in today's domestic market.

BS: When you look at your customer base what is the trend that you see ? Do you see the engineering industry recovering?

AP: As of today we see a trend that is, in many ways, similar to last year's. There has been no major improvement. But the engineering industry is also talking of improvement in the latter half of the year.

There are lot of good signs seen like the budget and the credit policy.

Thus availability of funds is not a constraint now. A lot of projects that were temporarily shelved last year due to financial constraints, should come through this fiscal. However, it will take time to formulate the schemes and get the investments going. From July/ August onwards things should improve.

BS: The SAIL scrip seems to reflect quite a lot of pessimism in the market..

AP: Our Stock is undervalued for several reasons. The main reason is the perception among many investors that a large chunk of SAIL shares will be in the market. Today we are 86 per cent government owned. The government has announced that they will reduce it to 51 per cent. This is 35 per cent out of an equity of Rs 4,200 crore and it is a large sum. But I do think it is an undervalued stock today but it should pick up few years later.

BS: Do you have a long-term gameplan?

AP: Yes, we do have one. In fact, we had prepared a investment plan last year of Rs 15,000 crore for the Ninth Plan. In view of the resource shortfall last year we have reduced it to Rs 13,500 crore. We still believe that with Rs 13,500 crore we should be able to complete the same investment which we had planned with Rs 15,000 crore. That implies a 10 per cent cut in capital cost which is reasonable. This step will involve higher judicious purchases and more negotiations with our suppliers.

This year we had planned an investment of Rs 2,700 crore which has been subsequently cut down to Rs 2,000 crore. The important thing today is to consolidate the investments in Rourkela, Durgapur and Bokaro and start getting the returns from these.

In another five years we should be the fifth largest company in the world. Today we are the eighth largest.

BS: At what capacity level would you be fifth largest?

AP: The capacity level would be at 14 million tonnes. Today, we are around 10 million tonnes on the basis of production of crude steel.

BS: What about quality and cost issues?

AP: This is the most important issue for us. The modernisation in Rourkela, Bokoro and Durgapur have not been so much on tonnage but they will enable us to produce better quality of steel. Bokoro is the plant from which we want to attain the capability to supply automobile body sheets to the auto sector. This sector is growing fast and we have been unable to manufacture the required quality of auto sheets. But we believe that once the continuous casting process in Bokaro and secondary refining investments come through that is one sector we should be able to attack. The growing sectors are automobile oil and gas pipelines all of which require steel of a higher quality. So the investments we are making are basically to improve quality and product mix. Tonnage is an incidental increment.

BS: You are one of the 'navaratnas' identified by the government. What changes does it mean for you in terms of your relationship with the government or your own internal functioning?

AP: Well, it hasn't happened yet. Murasoli Maran has been talking to us about it. I believe they are yet to get the Cabinet approval on the final package.

I don't know what the final package will be but the intention is that we should become globally competitive a global giant. In other words the government wants us to be noticed globally. And I believe we can do that in terms of our cost of production and quality. Besides, the government has indicated that they would delegate powers to the board to give us a position where we can become a fully board managed company like any other private company. If that happens we would welcome heartily.

I think that would give us the flexibility in decision making enabling us to improve our global presence and position.

BS: But Maran is not your minister. You are under the steel ministry...

AP: I believe it will be a Cabinet decision, but I don't know what the collective decision will be.

BS: Most of the new companies have much fewer people employed than the older producers like SAIL or Tisco. How do you see that as a competitive advantage ?

AP: That's true. They have less manpower than we do and that is an advantage they have.

BS: What difference will it make in terms of cost ?

AP: That will not be very much. Because labour cost is not very high. For us, the cost of labour as the percentage of the cost of production of steel is 16 per cent.

BS: That's very high. If somebody has a labour cost of 5 per cent he can have 10 per cent advantage.

AP: They have some advantage. But energy constitutes 30 per cent of the cost of producing steel, 30 per cent is raw material. So I have a lot of scope in saving energy and raw material consumption.

But we have an advantage over these new mills. For example, the Bokaro mill is a 1970 mill and we have written it off through depreciation.

This is one advantage we have, which they do not have.

BS: But that is a wasting asset. The advantage of having the ability to renew goes away. But your workforce is with you and you are struck with cross problem.

AP: I agree. But even with the labour advantage, sheer cost wise 16 per cent is not high. Internationally, labour in steel production constitutes about 33 per cent.

We on the other hand pay higher taxes and spend more on energy and raw material. Among our domestic competitors Essar has a five year sales tax advantage, and are located on the west coast. Therefore, they have a freight advantage. We have to fight in reducing our cost so that we can compete against them.

BS: When do you see the next equity offering from SAIL?

AP: Not immediately. There are two kinds of equity offering. One is government disinvestment. The government has not taken SAIL for disinvestment this year and have neither indicated any time frame for the next equity offering.

Today, since the SAIL scrip is depressed we would prefer the debt market. We have also planned to go in for a $100 crore external commercial borrowing (ECB) later this year to finance our investment.

The finance ministry has recently removed ceilings on ECB limits of 10 years and above.

We are yet to get a copy of final guidelines but if that comes through then we would like go for a larger external borrowings since that is cheaper.

We have prepared a Rs 1,000 crore cost-cutting plan and this seems feasiblevia reduction in the consumption of coal and other raw materials... We are also looking at various ways to improve sales realisation. The main item on which we expect the most reduction is coal. Our budget in 1997-98 is Rs 3,800 crore. Our target is to reduce consumption to Rs 3,000 crore.