Financial Daily from THE HINDU group of publications
Tuesday, Jul 09, 2002
Columns - Focus
SAIL's recast plan prunes interest outgo
Rabindra Nath Sinha
KOLKATA, July 8
THE business restructuring programme of Steel Authority of India Ltd (SAIL) is now into its third year. A pertinent question is: What has been the impact of the exercise carried out so far in both financial and organisational terms?
The business recast plan, which was part of the composite financial and business restructuring programme that the Union Government approved in mid-February 2000, mainly envisaged divestment of non-core assets and special steel units whose declining fortunes ruled out continuation of operations.
Also envisaged was conversion of the Indian Iron & Steel Co (IISCO), the wholly-owned subsidiary, into a joint venture with SAIL as the minority partner.
An analysis of the exercise already carried out suggests that the results thereof have enabled the company to derive sizeable extraordinary income and book profit thereon which, in turn, facilitated retirement of a fairly large chunk of debt. Aiding the process was the indentification of a new source of extraordinary income long-term lease to employees and ex-employees of company-owned houses in steel townships which was successfully tapped for the first time in 2001-02.
Estimates show that it was able to derive between 2000-01 and 2001-02 an extraordinary income of nearly Rs 1,500 crore from divestment of captive power plants (CPPs) at Durgapur, Rourkela, Bokaro and Bhilai, sale of idle assets and long-term lease of houses. The profit booked from this exercise was nearly Rs 1,000 crore, including Rs 777 crore from CPPs and Rs 172 crore from lease of houses.
With this extraordinary income and savings resulting from cost-control efforts, it was able to retire around Rs 1,800 crore of its borrowings. When seen in totality against the backdrop of the financial-cum-business restructuring, there has been a perceptible drop in the outgo on account of interest and finance charges, which were at an all-time high of Rs 2,017 crore in 1998-99, the year preceding the year in which the Centre okayed the package.
The outgo on account of interest and finance charges declined to Rs 1,789 crore in 1999-2000, Rs 1,752 crore in 2000-01 and Rs 1,562 crore in 2001-02.
The recast plan also has within its purview downsizing through VRS for which New Delhi had agreed to offer guarantee for raising loans of Rs 1,500 crore and bear 50 per cent of the interest thereon. Taking into account the separation before the package took effect, the company's employee strength is down by around 30,000, which has resulted in a saving of Rs 165 crore annually in the Wage Bill.
The marketing operations have been reorganised on product group basis long and flat and recently further recast was effected by bifurcating stockyards from branches. A key account management (KAM) process for intensive focus on big customers and a total cost of ownership (TCO) concept for maintenance, repair and operating (MRO) supplies such as refractories, conveyor belts, ferro alloys etc for cost reduction have also been introduced.
The decision of the Cabinet Committee on Economic Affairs (CCEA) on June 11 to hand out a lifeline of sorts to the ailing IISCO, without waiting any further for the strategic partner route, takes, in a sense, the progress of the business recast programme a step further, although much will hinge on the stance that IDBI, the operating agency, will take on the lifeline scheme, which is being re-worked in the light of the committee decision.
So if the IISCO development is also taken into account, it can certainly be said that 50 per cent progress has since been achieved in the business restructuring programme.
Why 50 per cent ? That will be a logical question. This is because the units still to be divested are the fertiliser unit of Rourkela Steel Plant (RSP), oxygen plant two of Bhilai Steel Plant (BSP), Alloy Steels Plant (ASP) at Durgapur, Salem Steel Plant (SSP) in Tamil Nadu and Visvesvaraya Iron & Steel Plant (VISL) at Bhadravati.
Efforts to divest RSP's fertiliser unit and BSP's oxygen unit are still on. If the offers are attractive, SAIL will go ahead. But, indications are that it will not resort to distress sale. As for the other units, the position is like this: circumstances have not yet permitted it to hawk ASP, it has not received worthwhile offers for VISL and selling SSP is extremely difficult with both AIDMK and DMK ranged against the suggestion.
Therefore, in 2002-03, SAIL's extraordinary income and profit therefrom depends upon the sale of the fertiliser unit and oxygen units, idle assets (particularly land at Durgapur and Bokaro for possible power projects of DVC) and long-term lease of houses. In SAIL's assessment at this point in time, it can, perhaps, still look forward to other revenue of Rs 500 crore.
Why SAIL is able to decide that it will not resort to distress sale of the remaining units? Strongly supplementing the gains from the debt retirement and the resultant relatively low interest burden is the marked uptrend since April in the steel market, which steel producers have exploited to the hilt by marking up prices in April, May, June and from July 1.
This should have helped SAIL to close first quarter with better results (it had posted a loss of Rs 376 crore in the first quarter of 2001-02 as per the unaudited results dated July 31, 2001). A major producer has already hinted that another instalment of price raise is likely in August. If the going improves further, SAIL should be close to break-even in the second quarter of the fiscal year.
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