RECOGNITION as one of the government's Navaratna companies could not have come at a worse time for the Rs 16,000 crore high-profile Steel Authority of India Limited (SAIL).
Despite a five-point strategy aimed at reviving SAIL, the steel major seems headed for its first loss in many years
RECOGNITION as one of the government's Navaratna companies could not have come at a worse time for the Rs 16,000 crore high-profile Steel Authority of India Limited (SAIL).
For the first time in years, the always-well-performing steel major has taken a beating in almost all aspects of corporate functioning. Turnover has declined, revenues are down drastically and net profits have less than halved.
Things don't look too good in the current year too and if the company's performance in the first quarter of 1997-98 is any indication, it's nearly certain that SAIL will incur a heavy loss at the end of the current financial year. With the exception of Bhilai Steel Plant, all of SAIL's plants have under-performed in the first quarter of 1997-98. Against a production target of 2.3 million tonnes during the period, output was just a shade over 2 million tonnes. Production in the first quarter of last year was five per cent higher at 2.1 million tonnes.
Clearly, it's not the best of times for the new chairman Arvind Pande. In 1996-97, turnover dropped three per cent from Rs 15,127 crore to Rs 14,740 crore. But net profit dropped by over 60 per cent from Rs 1,319 crore to about Rs 527 crore and that too, after including interest on loans given to the Indian Iron and Steel Company (IISCO) and Visvesvaraiya Iron and Steel Company (VISL)—a practice not followed before.
Strangely enough, while the SAIL management attributes this fall in turnover to escalation in input cost by about Rs 1,000 crore, the company's audited financial results for 1996-97 put the total expenditure lower at Rs 12,268.67 crore as compared to Rs 12,415.37 crore in the previous year.
SAIL is also pointing to sluggish markets and cheaper imports, especially from the CIS countries. But at least two private sector steel majors registered higher turnover and profits in similar circumstances last year. Essar Steel grew by a whopping 209 per cent while Tata Steel's turnover increased by about 8.5 per cent.
Pande's job has become doubly difficult with a consensus eluding the board of directors on the company's future course of action. Pande reshuffled the SAIL board after taking over as chairman. This, say insiders, has left some directors unhappy and has resulted in a virtual vertical split in the board over the company's functioning. And for the first time in SAIL's corporate history, the company's first quarter losses were reportedly not even discussed in the July 17 board meeting.
There could be a technocrat-bureaucrat schism here. Some SAIL long-timers on the board apparently feel Pande, who is an IAS officer with only a few years in SAIL, isn't fit for the job because he has no experience of running a steel plant. As a result, most plants have reportedly resorted to individual strategies, paying hardly any heed to the directives coming from the headquarters.
SAIL's plants are all underperforming, except for Bhilai. Even after spending a cool Rs 9,000 crore on modernisation (Rs 4,000 crore on Durgapur Steel Plant, Rs 2,000 crore on Bokaro and Rs 3,000 crore on Rourkela), the plants are yet to reach proper capacity utilisation. In June this year, they could achieve only 81 per cent of the combined production target of 6.07 lakh tonnes. Above all, quality, despite the modernisation, continues to be a problem. Added to this is the standing inventory of about 1.3 million tonnes or about two months' sales, the cost of maintenance of which is also high.
PANDE, however, remains confident (
see interview ). "We're targeting a sales growth of 19 per cent and production growth of 4 per cent this year," says Pande. Union Steel Minister Birendra Baishya too is upbeat. "It is true that profit has declined. But this is only a temporary phenomenon and was caused due to low sales on account of lack of infrastructure projects coupled with higher taxes on account of MAT (minimum alternate tax). This year the profits will be much higher," he insists.
According to Baishya, much has already been done to improve the situation both by the government and by SAIL. Pande has introduced a new five-point strategy to turn SAIL around, and Baishya affirms that the government too is doing its bit by working with SAIL to fine-tune the new life-giving strategies.
The going will still be very tough. According to SAIL's finance department, the company needs to grow at least 20 per cent in sales and 3 per cent in price to arrest its current woes. But, say SAIL insiders: "As things stand, the growth in sales cannot go beyond 8 per cent. There is also no possibility of a price increase as the market had rejected SAIL's earlier price hike." At best, they feel, SAIL could reduce the rebates given on its products which amount to around Rs 1,400 per tonne of steel. Says a senior SAIL executive: "Even if SAIL achieves all productivity norms laid down in the Annual Performance Plan—the MoU equivalent within SAIL—the company will not be able to escape a loss of around Rs 700-800 crore this year."
This is not all. SAIL has been borrowing heavily from the markets at an average rate of Rs 200 crore a month. Company officials warn that if this trend is not arrested pronto, SAIL could sink deeper in the very near future.
Total borrowings up to March 1997 stood at Rs 2,240 crore as against Rs 1,164 crore in March 1994-95 and Rs 1,376 crore in March 1995-96. On top of that, the company is sitting on loans of about Rs 4,000 crore from outside sources which have to be paid back in the next two years itself. As a result, SAIL's debt-equity ratio has increased from 1.85:1 in March 1996 to 2.05:1 in April 1997.
The last financial year was clearly SAIL's
annus horribilis . And the first quarter results have not given it any respite. Could SAIL be actually heading for a loss in 1997-98, the first time in years? If Pande's detractors are to be believed, he will need no less than a minor miracle to avert that. Pande says he has his strategies worked out and is confident of attaining his targets. But more than cost-cutting and marketing strategies, SAIL's 1997-98 fortunes may well be decided by how adroitly the new chairman manages the dissidence within his core team.