How SAIL Turned Around Its Fortunes

Reduce excess labour and modernise: that’s the Steel Authority of India Ltd.’s turnaround template India’s other bloated state-run companies will do well to replicate.

SAIL reported its first profit in 11 quarters and is poised to become the nation’s largest steelmaker by capacity in the year that ends in March. Its crude steel capacity is expected to rise 50 percent to 21 million tonnes for the year, according to a JP Morgan research report. If it meets targets, the company in terms of capacity will be ahead of JSW Steel Ltd.’s 18 MT and Tata Steel Ltd.’s 13 MT, the research note said.

The company has been expanding and modernising plants for quite some time, said Jayanta Roy, senior vice president at ICRA Ltd., an investment information and credit rating agency. “The earlier they can commission the projects and ramp up production, the more benefit they will be able to extract from the current cyclical upturn.”

The steelmaker offered a one-time settlement to employees opting for voluntary retirement to reduce wage costs, one of the biggest drags on its financial performance. At the same time, it scaled up output by modernising blast furnaces and other equipment — a Rs 62,000-crore capex that started almost a decade ago. The Steel Ministry in the past couple of years put pressure on the state-run company to speed up the plan as it risked missing out on a revival in demand in Asia’s third-largest economy, driven by the government’s infrastructure push.

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Headcount Reduction

The company reduced the number of employees from 128,804 in in March 2008 to 82,964 in March 2017. It targets to cut headcount further to 65,000 in two years.

While the one-time expense in offering voluntary retirement will add to current costs, Morgan Stanley estimates employee costs will fall from $107 a tonne to $71 in two years.

Lower employee costs and improved capacity are already paying off. The company reported a profit of Rs 70 crore in the quarter ended December 2017 compared with a loss of Rs 796 crore in the year ago period. Debt as of H1 FY18 still stays high at Rs 43,900 crore.

Six out of its eight plants either made a profit or materially narrowed losses compared with the year-ago quarter and the previous quarter, noted brokerage HSBC in a report.

Capex Cycle Almost Complete

Shares of SAIL returned 35 percent in the last one year. That compares with a 50 percent rise each in JSW Steel and Tata Steel and a 190 percent surge in Jindal Steel & Power Ltd. Since its third-quarter earnings, the state-run steelmaker shares rose more than 10 percent. JP Morgan, which has a neutral rating on the stock, said the stock has value and upside for patient investors.

The company has largely completed expansion at IISCO and Durgapur in West Bengal, Rourkela in Odisha and Bokaro in Jharkhand. SAIL expects to commission the new blast furnace at Bhilai, Chhattisgarh in the ongoing or next quarter, marking the end of this capex cycle.

The capacity ramp-up would increase its utilisation levels from 70 percent presently to 90 percent, according to JP Morgan. That, according to an IIFL Institutional Equities report, combined with stable employee costs should improve SAIL’s operating income per tonne to about Rs 6,000 by the year through March 2020 from about Rs 1,440 now.

Improving volume growth along with higher realisation is leading to better operating efficiency, said Goutam Chakraborty, analyst, institutional research at Emkay Global Financial Services, who incidentally has a reduce ‘Rating’ on the stock.

Yet, SAIL will take time to report sustainable profits. JP Morgan doesn’t expect that before September this year even as it considers the company a good investment bet. The brokerage recommends caution though - stemming from SAIL’s delayed timelines to ramp up capacity and its high debt.

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