Indian Steel Giant Raises Game After Government Cracks Whip
Government has ordered belt-tightening and asset disposals at the loss-making 63-year-old mill, SAIL.
(Bloomberg) -- State-run Steel Authority of India Ltd. is heading for a turnaround this year as the government orders belt-tightening and asset disposals at the loss-making 63-year-old mill.
“This year we’re expecting some cash profit to come into SAIL,” Aruna Sharma, secretary at the steel ministry, said in an interview in New Delhi. The ministry has directed the company to better compete with private mills in the race to meet the nation’s growing demand, she said.
SAIL is forecast this fiscal year to report positive free cash flow for the first time since 2009, according to data compiled by Bloomberg. It’s not expected to see net income head back into the black until fiscal 2019.
In addition to appointing Boston Consulting Group, the ministry has set up a panel to revive the fortunes of SAIL in line with Steel Minister Birender Singh’s directive for officials to play a more active role in turning around plants. These moves come as publicly traded JSW Steel Ltd. reported seven straight quarters of profit and Tata Steel Ltd. swung to second-quarter profit.
“We see an improvement but that improvement has to be accelerated,” Sharma said on Tuesday. “They have to go a long way.”
External pressure is building on SAIL. State-run Indian Railways recently issued a global tender for purchasing rails outside its traditional supplier SAIL, opening the doors to private steel producers like Jindal Steel & Power Ltd. to compete in the local market.
“Gone are the days when SAIL was a monopoly,” Sharma said. “They have to be capable of standing up to competition.”
SAIL’s working on performance by optimizing production from efficient units, improving the product mix and cutting costs, the company said in a statement to Bloomberg. “Increased use of IT-enabled services and automation will lead to higher productivity, further cutting down operational costs.”
SAIL has about $6 billion of debt and a workforce of 82,964 people as of March 31, more than the combined 46,837 employees at Tata Steel and JSW Steel.
The company has identified employee costs as one of the key drags on profits and has been trying to trim numbers through voluntary retirement programs. It paid out about 2.2 billion rupees ($33 million) as compensation under the program in the six months of this fiscal year started April 1.
“Having more employees cannot be the excuse,” Sharma said, adding that the company wouldn’t seek to replace positions left empty by retiring employees.
SAIL, which traces its origins to Hindustan Steel Pvt. Ltd. that was set up in 1954, has five integrated steel plants, three special steel plants, and one subsidiary in the country. The steel ministry will be calling for expression of interests before the end of December for disinvestment of the plants in Salem, Durgapur and Visveswaraya as part of the central government’s sale of state-run assets, Sharma said.
Analysts though remain wary about the company’s prospects, with 20 out of 24 of them having a Sell call on the stock. “Despite SAIL’s modernization plan and expected higher volumes, going forward, we believe that it needs to continue effective cost cutting measures to be able to be back in the black,” Kunal Motishaw, an analyst at Reliance Securities Ltd., said in a report last week.
The company’s shares jumped as much as 2.3 percent to 83.50 rupees in Mumbai on Thursday. The benchmark S&P BSE Sensex Index was little changed.
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