SAIL – India’s Largest Steel Company Suffering from Dent in Profits

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SAIL- Latest Results

(in Cr.)
Sep-11
Jun-11
FY10-11
Revenue
10,979.62
10,926.00
43,432.79
Net Profit
494.64
838.06
4,904.74
EPS
1.2
2.03
11.87
Cash EPS
2.15
2.93
15.47
OPM %
11.92
16.24
21.08
NPM %
4.51
7.67
11.29
 
 
 
 

SAIL - share price movement

 
 
 
Weekly H/L
87.85
80.2
Monthly H/L
113.4
80.2
52 Weeks H/L
197.05
80.2
 
( 21 Dec 10 )
( 30 Nov 11 )
Delivery / Var+ELM %
17.02
17.45

Steel Authority of India Ltd

A steel plant in the United Kingdom
A steel plant in the United Kingdom | Source
The steel cable of a colliery winding tower
The steel cable of a colliery winding tower | Source

SAIL


SAIL optimistic of the second half

SAIL’s Q2 performance was dented by a weak rupee in a sluggish market and high input costs. But the company is confidant about pick up in demand and better performance in the second half of the current fiscal year. SAIL’s Chairman Verma is basing his optimism on the need of the government to rush through to achieve various targets in the terminal year of the 11th Five Year Plan which invariably involve procuring steel. The company hiked the price of steel by Rs.1000 per tonne in the middle of October even while the global steel prices are softening due to a general sluggishness of the world economy. But one advantage for the company is that steel imports are almost absent in India due to weakening of Indian rupee against the dollar. There is also a small demand supply mismatch due to the difficulties experienced by the private sector steel producers because of the problems involved in procurement of raw materials including coal. This also may favour SAIL in the second half.

Terminal year of 11th Plan may produce good demand for steel

Steel consumption increased in India by only 1.8% in the first half of the current fiscal. But in the last five years, the trend has been to see demand increasing for steel in the second half. Moreover, the first year of a Five Year Plan is always a lean year and the terminal year is a brisk one. Infrastructural projects involving steel get completed fast in the terminal year. Demand from infrastructure, construction and road sectors will be on the up.

Talibans may try to strike at SAIL workers

An Indian consortium led by SAIL has won an Afghan iron ore bid. It won the mining rights for three blocks in Hajigak iron ore mines in Bamiyan province of Afghanistan. The consortium consists of besides SAIL, Monnet Ispat & Energy, NMDC, JSW Steel, RINL, JSW Ispat and Jindal Steel & Power. But SAIL will find the going tough in Afghanistan. First of all, Pakistan army and ISI are determined to root out Indian presence in Afghanistan. Secondly, the Talibans in Afghanistan are also opposed to Indians. They will indulge in assassinations and put up every obstacle for SAIL. Thirdly, the Bamiyan Province is a very sensitive area. The Talibans destroyed an age old historic Buddha sculpture carved out in the Bamiyan mountains in Afghanistan, ignoring all international protests. The Talibans may try to do to Indian workers in Bamiyan province what they did to the Buddha sculpture. Indians and the companies involved should be extra careful. It is not worth to work with fear of life for monetary gains. Afghanistan government headed by Hamid Karzai also cannot assure protection to the Indians. Assassination of Rabbani recently proved that the Talibans can penetrate any area and strike at any target at will. In addition, Hamid Karzai himself is an ardent supporter of Pakistan. Recently he openly declared that he will support Pakistan in the event of an Indo Pakistan war. There is a saying that fools rush in where angels fear to tread. SAIL should withdraw from this iron ore mining work now itself lest it will regret later.

Pakistan and Iran are undependable

SAIL consortium is planning $11 billion investment in the Afghan mines. SAIL Chairman has sought sovereign guarantee to go ahead with the steel project. C.S. Verma is the Chairman of SAIL. Verma stated that the steel plant in Afghanistan will materialise only if the Afghan government provided coking coal and limestone mines. Afghanistan currently imports 3 million tonnes per annum of steel. It wants to reduce its dependence on imported steel. Initially the consortium AFISCO will have to invest $75 million (Rs.386 crore) to carry out geologic studies and exploration of the 1.28 billion tonnes of estimated deposits over the next 3 years. There are other problems also with the Afghan project. As Afghanistan is in the negative list, no bank or financial institution will be ready to lend money to the consortium for the projects undertaken. Therefore SAIL has sought sovereign guarantee and financial assistance from the government of India. SAIL has also sought some facilities from the Afghan government. The Afghan project will create around 8000 direct and 40000 indirect jobs. Around 1500 Indian workers will be involved in the project site. The rest of the employees will be from Afghanistan. Talibans could easily penetrate into this employee force and destroy the project. The consortium is also considering the feasibility of transporting iron ore from Afghanistan to India for further processing and production of steel. But this method involves difficulties as transportation has to be done through either Iran or Pakistan. Both Pakistan and Iran are undependable nations, inimical to India’s interests.

Employee cost will increase by Rs.1500 crore

The impending wage revision to the employees may cost SAIL around Rs.1500 crore extra every year and dent its profitability further. There are more than one lakh workers in SAIL excluding officers. Wage revision to these employees is due in January 2012. The employees’ militant trade unions are up in ante and demanding huge payments. They are flexing their muscles and will not settle to any reasonable increase in the wages that the management proposes. Labour militancy is on the increase in India following strike by the Maruti car factory workers. Hyundai workers are also on the strike. Employees’ cost for the fiscal year 2012 is estimated to touch Rs.8000 crore. At present, without the increase, employees’ cost accounts for around one fifth of the company’s turnover.

Modernisation programme

But the company’s Chairman Verma is confidant that with increasing turnover, employees’ cost will come down in the coming years. SAIL is implementing a modernisation programme that will increase its production capacity from 14 million tonnes per annum to 24 million tonnes per annum by the year 2014. About 7000 employees retire every year while 10000 new employees join every year.

Joint venture with Posco

SAIL and Posco of South Korea are exploring the possibility of starting a joint venture company to manufacture cold rolled steel products. A memorandum of understanding has already been signed between the two companies. The production facility may be formed either in Bokaro or in any other place by using FINEX technology. The initial capacity may be 3 million tonnes per annum. Posco will have full operational control of the proposed steel plant as it is already using the FINEX technology in its Pohang plant in South Korea.

Capital expenditure programmes

SAIL’s follow on public issue (FPO) has been dropped because of sluggish market conditions. But this will not affect the company’s capital expenditure programme. 67% of the company’s capital expenditure will be financed through internal accrual. The rest 33% will be financed through debt. The company’s total borrowings that includes foreign currency loans stands at Rs.23158 crore. The company has in its cash kitty Rs.15142 crore. SAIL has planned for a capital expenditure of Rs.12000 crore. It has already expended Rs.4500 crore. The company will spend the remaining Rs.7500 crore in the second half of the current fiscal year. The company’s borrowing capacity is huge at Rs.79000 crore.

Master plan for R&D

SAIL intends to commence its cold roll mill in Bokaro and steel wire rod mill in the quarter ended 31.12.11. In the financial year 2012, the company’s two of the three blast furnaces in Bokaro and Rourkela will be fired. This will produce a quantum jump in productivity next year. It will increase the production capacity by 6 million tonnes next year. In the first half of 2012, the company hopes to commence its IISCO in Burnpur in West Bengal. Oman Oil has offered to partner SAIL for steel unit in Oman. It has proposed to build gas-based plant with capacity of 3 million tonnes per annum. SAIL will be studying the proposal and say yes if it is satisfied about the input availability. SAIL has also completed a master plan for R&D. The master plan aims at development of alternative iron making technologies, production of cold rolled grain oriented electrical steel, carbon dioxide reduction & sequestration, endless strip production and optimisation of land use by designing compact steel plants. The R&D is also aimed at reducing energy consumption and raw material consumption.

Employee cost high

SAIL was set up in 1973 as a holding company to manage and run five integrated steel plants. Each of these plants possesses around 30000 acres of land. The company’s steel plants are connected to its own ores. The ores are enough to last for another three decades. Asia’s biggest iron ore reserves at Chiria in Jharkhand are in the hands of SAIL. But the company’s employee costs are around 18% of its revenues. This is pretty high compared to 7% for Tata Steel and 3% for JSW Steel. After the wage hike, the percentage will still more go up for SAIL. World Steel Dynamics has ranked SAIL 9th in the world in terms of strength. Some companies that are ahead of SAIL with their ranks are Posco (1), Nucor (2), Novolipetsk (3), Arcelor Mittal (5), Nippon Steel (6) and JSW steel (7). SAIL is planning to add 1000 dealers to boost its rural sales. SAIL is planning to invest Rs.10264 crore to develop its captive mines.

Bhilai plant develops special grade plate

Bhilai Steel of SAIL has developed a special grade plate. It can be used in the manufacture of pressure vessel for a petrochemical project. SAIL is also planning three special purpose vehicles to revive Sindri unit of Fertiliser Corporation of India. It will have a debt equity ratio of 80:20 for the Rs.35000 crore project. SAIL will have a minimum of 51% stake in the special purpose vehicles. It may seek iron ore mines from the Jharkhand government. The steel plant will have a diversified mix of flat products for sectors like power and auto. The company merged Maharashtra Elektrosmelt (MEL) with itself. It will be infusing around Rs.1500 crore for expanding capacity and also set up a power plant. The swap ratio for the merger was 1 : 1.7.

Do not invest

It is better for the investors not to invest in the shares of SAIL at the current market prices because of the following reasons:

· The latest quarterly results of SAIL are not good

· The proposed wage increase will raise its employee cost by Rs.1500 crore

· SAIL is incurring higher input cost

· SAIL is importing 75% of its coal requirements from abroad

· International coal prices are ruling high, denting at SAIL’s profits

· Interest rates are ruling high, affecting borrowing cost of SAIL

· Rupee is getting weaker and weaker every day, thereby denting SAIL’s profits

However, if the share price for some reason drops to below Rs.50, investors may acquire the shares for short term gains.

SAIL, India's largest Steel Company

Steel Authority of India, largest manufacurer of steel in India

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