SAIL fails to steel the show on low net sales realisations

Written by Promit Mukherjee | Mumbai | Updated: Jan 5 2014, 05:27am hrs
The countrys biggest steel producer, Steel Authority of India (SAIL), has not been able to increase its realisation per tonne in tandem with the value-addition it has done in its products in the last five years.

Since 2008-09, SAIL has increased the share of value-added products in its overall portfolio by 10% from 3.75 million tonnes per annum (mtpa) to 5 mtpa against a saleable steel production of 12.5 mtpa. This is against a minimal increase of 2% in its realisation per tonne (a standard metric to gauge a per tonne sales revenue of steel companies), from R38,709 per tonne to R39,605 per tonne in 2012-13.

While the company does not separately give the realisations per tonne number on value-added products, according to Bloomberg data, the average price of a standard value-added hot-rolled coil (CR grade) moved up by 56.78% to R41,257.81 in 2012-13, from R26,312.50 per tonne in 2008-09.

Surprisingly then, the company is still getting very low realisations in terms of increased topline on a per tonne basis.

SAIL, as part of its modernisation and upgradation programme, has invested over R30,000 crore in increasing the share of value-added products in its overall volumes in the last few years, which has led to a higher production of products such as pipes, TMT bars, wheels, plates, sheets and galvanised coils, etc. In fact, analysts say the company has also failed to protect its profitability against private players such as JSW Steel and Tata Steel.

When contacted, SAIL chairman CS Verma said, If you compare, in the last one year, every company has lost its margins. There has been an accumulation of inventory and tonnage and the demand has been poor in the country. This has impacted every steel company in the sector. Also, SAIL does not have the benefit of a low-employee strength like private companies. We had to make full provisions for increased wages, dearness allowances, pensions, etc, according to the directive of the government.

However, Emkay Global analyst (institutional research) Goutam Chakraborty said, While SAIL is saddled with a huge employee cost, compared with its private competitors, it does not justify the erosion of its profitability. Why do you invest in value-addition To prevent erosion of margins, but in case of SAIL it has not worked so far.

Chakraborty added that while its employee cost is high, SAIL also enjoys the benefit of having a 100% backward integration in iron ore, one of the main ingredients in producing steel. SAIL produces 23-24 mt of iron ore annually from its captive mines, making it the biggest iron ore producer in the country after NMDC, which produces over 30 mtpa.

Both SAIL and JSW Steel produced up to 40% value-added products for the quarter ended September 2013. While JSW Steel posted a margin of 20%, SAIL was lagging at 9%. In fact, instead of improving on margins, SAIL has lost on Ebitda per tonnethe per tonne profitability of steel companies (a standard metric to compare peer groups in steel sector). It has fallen from R7,433.57 per tonne in 2008-09 to R4,104.91 per tonne in 2012-13, a drop of almost 45%a number which should usually increase with a rise in value-addition, as it fetches higher margins, say analysts.

In fact, due to lower demand, SAIL had a very poor second-quarter performance in the current fiscal with its Ebitda at R870 crore, which was 30% below market expectations. While the company posted a 15% year-on-year growth in steel volumes at 3.02 million tonne, its Ebitda per tonne was at a low of R2,875 per tonne, down 32% year-on-year. Its net sales grew by only 7% to R11,535 crore for Q2 FY14.

In response to the global financial crisis of 2008, most of the steel companies in India started to innovate in order to protect margins.

One common step that all of the companies took was to increase the production and sales of value-added products. While SAIL increased the volume of value-added products, JSW Steel tried to maintain its value-addition share at 35-40% of the overall saleable steel and its capacity increased from 3.8 mt to 10 mt at its flagship plant at Vijayanagar, Karnataka.