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 tonne—the 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.