Cost challenges persist for SAIL

10 October 2016

Higher capacities, extension of the minimum import price, or MIP, and consequently firm domestic prices are positives for Steel Authority of India (SAIL). However, rising costs and interest expenses will weigh on the government-owned company’s profitability.

First, the good news. SAIL is targeting an increase in production and sales by 20 per cent to 17.16 million tonnes and 14.52 mt during FY17. At the annual general meeting last month, Chairman P K Singh said ramp-up of production from the new units was not only leading to better quality but had helped reduce the cost of production. And, that the worst was behind and the company would turn around this year.

This is a positive, given that 2015-16 was challenging for all steel makers. Demand remained soft and cheaper imports impacted realisations and profits for all. The turnaround came with the government imposing MIPs in February. International prices also started recovering and the full benefits, along with MIP, was seen in the June quarter. Coal prices also remained soft, leading to profits for all steel entities rebounding in the June quarter.

For SAIL, its 2.8 mt was a 4.2 per cent rise over a year before in the June quarter. This was complemented by a decline in cost of production, primarily in raw material. The latter’s cost per tonne declined 16 per cent over a year (26 per cent sequentially) to Rs 11,438; Ebitda (earnings before interest, taxes, depreciation and amortisation) per tonne expanded to Rs 835 as compared to Rs 330 in the June ’15 quarter and a loss of Rs 2,964 in the March ’16 quarter.

As Ebitda in the June quarter was not adequate to service finance costs, and with coal costs likely to move up, the company will have to seek other operating efficiencies. Worse, debt is also increasing (required for expansion). Hence, finance costs will be on the increase. Debt has already increased to Rs 36,250 crore after considering the Rs 1,740 crore impact on account of the switch to IND-AS accounting rules, say analysts. Even without this impact, it was high at Rs 34,410 crore at the end of FY16 (debt-equity ratio of about 0.9).

On higher coal prices, the company said, “Volatility in prices of coking coal is a serious concern, with spot prices increasing substantially. While SAIL is taking necessary operational steps to minimise the impact, it will also depend on the extent to which market prices provide room to neutralise the imminent cost escalation.”

It is ramping up production from the new units, rationalising output from inefficient process routes and using more efficient inventory management. And, reducing administrative expenses and personnel through voluntary retirement schemes (to a little more than 1,000 employees during May-June). Further cost reduction includes those on inputs.

Source – BS