Set To Sail On A Turnaround Journey!

Steel Authority of India Limited (SAIL), one of the largest steel-maker globally, has reported net profit in the OctoberDecember quarter after 10 consecutive quarters of losses! The company’s share price touched a two-and-half-year high of Rs101.40 recently in January. So, is it safe to say that SAIL has started sailing on its journey to reclaim its lost glory? Or, is it too premature a conclusion? We dig deeper to find this out for our Investors. 

COMPANY PROFILE 

SAIL,established in 1954, is India’s largest state-owned iron ore producer. It also has one of the largest mines network in the country. Although the government owns about 75 per cent of the SAIL's equity, the company, by virtue of its ‘Maharatna’ status, enjoys significant operational and financial autonomy. 

SAIL offers one of the most diverse product portfolios among domestic steel companies. The company manufactures and markets steel products such as hot and cold rolled sheets and coils, galvanised sheets, electrical sheets, railway products, plates, bars and rods, stainless steel and other alloy steels. It also produces long and flat steel products, which are in demand in the domestic as well in international markets. The company’s products are offered to large and marquee institutional buyers in sectors such as defence, railways, construction, power, auto, fabrication, etc. SAIL produces these products from its five integrated plants and three special steel plants located principally in the eastern and central regions of India close to the sources of raw materials. 

The company's captive power generation during the FY17 increased 4.5 per cent to 820 MW from 785 MW in the previous year. About 68.3 per cent of the company's total power requirement of 1200 MW was met from captive power generation, 30 per cent by purchasing power from grid utilities and the balance 1.7 per cent from power exchange through open access. 

EXPANSION IN CAPACITY 

SAIL had been undertaking modernisation and expansion of its five integrated steel plants at Bhilai in Chhattisgarh, Bokaro in Jharkhand, Rourkela in Odisha, Durgapur and Burnpur in West Bengal and special steel plant at Salem, Tamil Nadu, to increase its crude steel production capacity from 12.8 million tonnes per annum (MTPA) to 21.4 MTPA, thus regaining its position as the largest steel producer in the country. The company incurred Rs62,000 crore in capex in the last 10 years for the same. All major facilities under the modernisation and expansion plan are now complete and are under stabilisation phase, except some balance facility of Bhilai Steel plant. The modernisation programme has helped improve energy efficiency. 

Minister of State for Steel, Vishnu Deo Sai, recently said that with the increase in production, SAIL is geared to increase its market share. According to domestic consumption data given by Joint Plant Committee, the market share of SAIL during April- December 2017 was 14.9 per cent. This is expected to increase further as the company’s marketing policies are focused on maximising revenue and minimising inventory. 

However, JSW Steel and Tata Steel, its biggest peers, with current annual capacities of 18 MT and 13 MT, respectively, are also expanding. Tata Steel, in the second leg of the expansion at its Kalinganagar (Odisha) plant, plans to achieve a capacity of 18 MT in two years. Also, JSW Steel is doubling its capacity at Dolvi in Maharashtra to 10 MT. 

INDUSTRY OVERVIEW 

The steel industry experts have predicted that 2018 would give more benefits to the steel industry in terms of demand, costs of production, market realisation and exports than what was experienced during the previous year. 

The global production of crude steel was at 1691 million tonnes (MT), increasing by 5.3 per cent in 2017 over the previous year, whereas the estimated steel consumption rose to 1622 MT last year. Thus, 2018 began on a positive note, which was not the case a year ago when excess capacity in global steel market was plaguing the industry. The low priced exports from China in 2015 and 2016 had caused a major heartburn and damaged the health of indigenous steel industries in India and other emerging economies. However, China has now successfully closed down its capacity to the extent of 35-40 MT and simultaneously eliminated additional steel-making capacity of 30-35 MT over the last two years as part of its plan to close down nearly 150 MT of steel capacity by 2020. 

This backdrop of a favourable market scenario of global steel industry is likely to give India a good platform to maximise exports amid much lesser threat of cheap imports in 2018. It is possible to enhance the export share of finished steel production from the current 9.6 per cent to at least 12 per cent and occupy the second position in global steel production. The NCLT resolution during the year would also enable Indian steel industry to achieve a higher capacity utilisation in crude steel production by the second half of 2018. 

Also, the infrastructure investment from public and private sector in rail and road-led development; more spending by the government in real estate, affordable housing and smart cities, would enable the demand to grow in the domestic markets. 

REDUCTION IN EXCESS LABOUR 

SAIL’s employee cost is one of the highest in the sector and also one of the biggest drags on its financial performance. The company reduced the number of employees from 1,28,804 in March 2008 to 82,964 in March 2017. This year, the company reduced employee costs by 15 per cent. Its employee strength is reducing on account of retirement of 4,000-5,000 employees per year and will decline to 65,000 in the next few years. It also offered a one-time settlement to employees opting for voluntary retirement to reduce costs on wages. The company offered a nominal 7.5 per cent wage hike versus 20-plus per cent by most public sector companies, as the company was reporting losses. But, as profits improve, it will have to pay higher wages, which will partly negate the savings.

FINANCIALS 

SAIL declared its best financial performance in over 10 quarters. The company’s topline increased by 21 per cent to Rs15,324 crore, as compared to Rs12,619 crore in Q3 FY2017. Its EBITDA saw a phenomenal jump and stood at Rs1571 crore from Rs35 crore in the same period last year. The company’s PAT, after exceptional items, stood at Rs43 crore against a loss of Rs795 crore in a year ago period. 

Also, its EBITDA/tonne for Q3 FY2018 was at Rs4162 which is significantly higher as compared to Rs107 per tonne in Q3 FY2017 and 53 per cent higher than Rs2728 in Q2 FY2018. This can be credited to reduction in manpower costs; steady ramp-up of production; improvement in productivity and more value-added products as part of its product mix. The employee costs-to-sales have also declined from 21 per cent to 16 per cent in the last two years. 

On an annual basis, the company’s net sales increased 27.3 per cent to Rs49,767.10 crore in FY17 on a year-onyear basis. The company’s PBDT improved from a negative PBDT of Rs5,098.90 crore in FY16 to a negative PBDT of Rs2,170.91 crore in FY17. The company narrowed its losses fromRs4137 crore in FY16 to a loss of Rs2833 crore in FY17.

VALUATION 

SAIL has a negative return on equity (RoE) of 6.83 per cent and a negative return on capital employed (RoCE) of 5.37 per cent. The stock is trading at par with its book value. The company has a debt-to-equity ratio of 1.15x. Its current debt is at Rs45,000 crore, out of which nearly 50 per cent is long-term and 50 per cent is short-term. The company plans to increase its long-term loans to 70 per cent and reduce short-term loans to 30 per cent of its total loan amount. The company has said that it will focus on debt reduction once it attains profitability.

CONCLUSION 

SAIL has continuously thwarted challenges in the recent past. Its capacity expansion plans have been delayed, which not only dampened investors' sentiments, but also impacted its financials. Finally, the quarter marked a turnaround for the company. Yet, SAIL will take some time to report sustainable profits. Profits will inch up in the coming quarters, but we expect full benefits of the expansion to materialise only after FY20. We recommend our readerinvestors to HOLD the stock