Today managers in the steel industry are talking of an across-the-board rise in price by Rs 800 per tonne- tentatively from July onwards. Unlike other ailing steel plants, a modest price hike of 5 per cent is enough to turn around the company.

The calcuations are pretty simple. An average higher price of Rs 800 per month multipied by 3/4 th of last year's sales volume of 8.7 million tonnes yields an additional Rs 522 crore of earnings. In addition the company intends to save approximately Rs 1000 crore on cost. Taken togther, one would find that the entire loss of SAIL would be wiped out in the current year itself.

Obviously fund managers have taken a fancy to the stock and in the last few days the srip has been moving up, In the last one week thestock gained 27 per cent from Rs 5.80 to Rs 7.40.

The optimism stems from the fact that in fiscal 1998-99, the management of SAIL did every thing right, but results showed otherwise. The inventory levels were pushed down by half a million tonnes. But, since accretion to stocks is added to sales to give the total sales figure, depletion of stocks resulted in sales getting reduced to show lower sales turnover. Obviously the realisations were lower, but sometimes following the accounting norms results in far lower performance than actually done by the company.

Inspite of stagnant volumes of the total steel industry, sales volumes of the company( approximately 40 per cent of total Indian steel sales) were higher by 7.6 per cent. Depreciation charges were higher by three crore, but interest charges were lower by Rs 121 crore. Simultaneously, there was saving of Rs 902 crore in 1998-99 compared to Rs 732 crore in 1997-98.

If in this background, prices are to rise, the first effect could be higher volumesales. This is because the expecations of higher prices causes bigger orders both from consumers and traders. Purchase managers tend to buy higher volumes to avoid costly purchases in the future. Traders start stockpiling and the entire chain starts absorbing higher volumes, even though the output of final product made out of steel is only showing small signs of revival. Moreover, going by CMIE data on auto production, we would find that there is definite sign of higher HCV & LCV production.

Hence volume sales would be higher contributing to both the topline and bottomline.

The only negative factor in this whole exercise is the cost cutting of Rs 1000 crore stated by the company. Going by last year's record we find that the bulk of it was due to lower cost of raw material rather than actual physical cost cutting. For example with coke prices down by 15 per cent savings of Rs 216 crore on purchase of imported coke of Rs 1800 crore is more to do with lower price of coke. The rise in price of coke couldtotally offset this cost cutting. Again lower consumption of stores, spares and saving through optimising purchases having a cumulative total of Rs 315 may be due to lower production of steel- rather than any actual cost cutting drive done by the company.

Hence at the end of year we may find that another round of cost saving yields less than Rs 1000 crore, while additional earnings through higher realisations give the company at least Rs 800 crore. Whether they are able to come out of the red would depend on their ability to achieve their cost reduction, irrespective of whether the government approves the financial restructuring package.