STEEL AUTHORITY OF INDIA LIMITED : SAILING EVER SO SMOOTHLY
Indian companies have started boosting steel production capacities in order to become self-reliant. To make this more effective, SAIL announced doubling of five of its steel plants’ capacity in September 2020. This augurs well for the company
Steel Authority of India Limited (SAIL) has been successful in climbing to the position of being the largest steel-making company in India and also one of the Maharatnas of the country’s central public sector enterprises. SAIL is a holding company. Iron and steel are produced at its five integrated plants and three special plants, located principally in eastern and central regions of India and situated close to domestic raw materials. The company is engaged in the business of manufacturing flat products such as hot rolled (HR) coils, HR plates, cold rolled (CR) coils, pipes and electric sheets, and long products such as thermo mechanically treated (TMT) bars and wire rods.
A great point of attraction for this company is that Government of India owns about 75 per cent of SAIL’s equity and retains voting control of the company. As discussed earlier, with its Maharatna status SAIL enjoys significant operational and financial autonomy. The company’s segments include Bhilai Steel Plant (BSP), Durgapur Steel Plant (DSP), Rourkela Steel Plant (RSP), Bokaro Steel Plant (BSL), IISCO Steel Plant (ISP), Alloy Steels Plant (ASP), Salem Steel Plant (SSP), VISL, power companies, and others. Rail structurals, merchant products, electric resistance welded pipes, spiral welded pipes and silicon steel sheets are also offered by SAIL.
Ferro alloys are produced at its Chandrapur unit. It has also set up a SAIL refactory unit at Bokaro and a central marketing organisation which has turned out to be India’s largest industrial marketing setup. This CMO is mainly responsible for marketing of steel items, including carbon, alloy and special steel products as well as stainless steel produced by the steel plants of SAIL. The company has also distinguished itself by being the second-largest producer of iron ore and also has the country’s second-largest mines network.
Sector Overview
The growth rate of world economy came down to a negative 3 per cent in April 2020 and further down to negative 4.9 per cent in June 2020. The growth is now predicted to bounce back to 5.2 per cent in 2021. In 2019, India took over USA as the second-largest consumer of steel. Due to the impact of the pandemic and the consequent lockdown, consumption was critically impacted and was almost negligible during April 2020. The demand increased exponentially post easing of the lockdown. The cumulative consumption during April- September 2020 fell to 35.864 MT as against 50.989 MT during last year, posting a decline of 29.7 per cent.
The steel industry in India has entered into a development stage post deregulation, riding high on a resurgent economy and a rise in the demand for steel. In this developing India, the government’s role is that of a facilitator which lays down policy guidelines and establishes structure for creating a beneficial environment for improving the efficiency and performance of the steel sector. In relation to this, the government released National Steel Policy 2017, laying down a broad roadmap for encouraging long-term growth for the Indian steel industry, both on demand and supply sides by 2030-31. The government has also given an inclination towards the domestically manufactured iron and steel products in government procurement.
Demand for steel is largely determined by the market forces and gaps in demand-availability are met mostly through imports. Since the price regulation of iron and steel was abolished in 1992, the prices are determined by interplay of market forces. Steel was declared as an essential industry in many countries during the pandemic, yet the demand witnessed a decline. The automotive manufacturing sector and the oil and gas sectors are some of the major consumers of steel. But due to the pandemic these sectors had to curtail their production, thus leading to less demand than normal. Also, many of the non-essential construction projects have been halted and this has also negatively affected the demand for steel.
Financial Overview
Analysing the performance of SAIL in the previous quarters we can see that on a consolidated quarterly basis the net sales rose to Rs 16,925.49 crore in Q2FY21 as compared to Rs 14,128.96 crore in Q2FY20. The operating profit increased by 57.06 per cent from Rs 1,320.69 crore in Q2FY20 to Rs 2,074.31 crore in Q2FY21. The net profit was the highlight of the quarter turning positive as compared to the same quarter the previous year. It came in at Rs 362.62 crore in Q2FY21 as compared to net loss of Rs 353.87 crore in Q2FY20. On an annual basis, the net sales were seen declining by 7.93 per cent from Rs 66,973.58 crore in FY19 to Rs 61,664.16 crore in FY20.
The operating profit was seen increasing by 8.44 per cent in FY19 as compared to FY20. The net profit on an annual basis was declining by 9.38 per cent in FY20 at Rs 1,926.39 crore as compared to Rs 2,125.84 crore in FY19, burdened with higher capital-related charges which included depreciation and interest and a hefty impact on the valuation of stocks of different inventories which fell in prices on account of the pandemic. As such, SAIL posted a decline in net profit. Taking this financial status into consideration, SAIL reduced its borrowing and interest cost in the September 2020 quarter. There was also a drop in the debt equity ratio as compared to the previous quarter i.e. Q1 of FY21 and an increase in the quarterly as well as annual net worth of the company.
Conclusion
SAIL has always strived to build lasting relationships with customers based on trust and mutual benefit. It upholds the highest ethical standards in the conduct of its business. SAIL nurtures a culture which supports flexibility, learning and is proactive to change. In addition, it also charts a challenging career for employees with opportunities for advancement and rewards. Historically, March is the best month for the steel industry but this year the pandemic led to a slump in both the domestic and international markets. In response to this pandemic, SAIL proactively started to take actions and activated responses for its plants, units, mines and townships. In the fight to defeat the impact of the pandemic, SAIL contributed Rs 30 crore to PM Cares Fund.
A number of initiatives were undertaken across the plants for process improvement with special emphasis on productivity and quality improvement, product development and commercialisation, energy conservation and automation. This led to development of 17 new steel products in FY19-20. The steel industry along with the associated mining and metallurgy sectors has seen major developments and investments in the recent past. The Indian metallurgical industries attracted foreign direct investment (FDI) of around USD 14.22 billion in the period April 2000-June 2020, according to data shared by the Department for Promotion of Industry and Internal Trade (DPIIT). Indian companies have started boosting steel production capacities in order to become self-reliant. To make this more effective, SAIL announced doubling of five of its steel plants’ capacity in September 2020.
The Ministry of Steel is also planning to invest USD 70 million in the eastern region of the country through accelerated development of the sector. The National Steel Policy 2017 anticipates 300 million tons of production capacity by 2030-31. There is an increase in per capita consumption of steel from 57.6 kg to 74.1 kg during the last five years. The government has lined up a fixed objective of increasing rural consumption of steel from the current 19.6 kg per capita to 38 kg per capita by 2030-31. The Indian Steel Association forecasts that demand will grow by 7.2 per cent in 2020-21. India offers huge scope of growth for comparatively low per capita steel consumption with expected increase in infrastructure construction and the thriving automobile and railways sectors. Having the government’s major support, SAIL is predicted to have an enlightened road ahead. Hence, we recommend BUY.