Hit by Big Quar­terly Loss, SAIL Likely to Face Higher Em­ployee, Min­ing Costs


Resource Digest - - CONTENT -

The Steel Au­thor­ity of In­dia is ex­pected to grap­ple with higher em­ployee and min­ing costs in the com­ing quar­ters in con­trast to peers like Tata Steel and JSW Steel, even as the state-run com­pany is strug­gling to come to terms with its big­gest quar­terly loss in re­cent years.

“Steel com­pa­nies have seen a sharp fall in prof­itabil­ity . How­ever, com­pared to its coun­ter­parts like Tata Steel and JSW Steel, SAIL be­ing a pub­lic sec­tor com­pany has a much higher em­ployee cost, which is al­most 20% of its sales (Rs 2,420 crore in Q3FY16). In ad­di­tion to this, SAIL'S inherent ad­van­tage of cap­tive mines has been neu­tral­ized due to a crash in com­mod­ity prices,“In­dia Rat­ings & Re­search an­a­lyst Bi­joy Thomas said.

JSW Steel, for in­stance, has sig­nif­i­cantly lower em­ployee costs. Since it pro­cures raw ma­te­ri­als like iron ore and cok­ing coal from the mar­ket, the crash in com­mod­ity prices, par­tic­u­larly that of iron ore to $40 per tonne from $160 has worked to JSW Steel's ad­van­tage.

For SAIL, while the cost of ex­tract­ing the ore re­mains low, the over­all ex­pense on cap­tive min­ing is set to rise with en­hanced roy­alty charges and the con­tri­bu­tion that min­ers need to make to the District Min­eral Foun­da­tion.

Driven by a 24% plunge in net sales re­al­i­sa­tion, SAIL suf­fered a quar­terly net loss of Rs 1,528.73 crore for the third quar­ter ended De­cem­ber 31, as against a net profit of Rs 579 crore a year ear­lier. Its net in­come from op­er­a­tions went down to Rs 8,839.12 crore from Rs 11,107.32 crore. The com­pany said sales were hurt by a surge in im­ports of low priced steel, even though it reg­is­tered 6% growth in sales vol­ume over the pre­vi­ous quar­ter at 2.9 mil­lion tonnes.

A steep 40% fall in prices to $280 per tonne has led to an over­sup­ply of cheap steel in the mar­ket. Im­ports into In­dia were up 20% at an an­nu­al­ized rate of 12 mil­lion tonnes com­pared with fis­cal 2015, when they had surged by 75% over the pre­vi­ous year. While most other do­mes­tic steel com­pa­nies too are fac­ing the on­slaught of im­ports, in SAIL'S case the sit­u­a­tion is worse since the com­pany has to bear high in­ter­est and de­pre­ci­a­tion costs from re­cent Rs 70,000 crore mod­ern­iza­tion­cum-brown­field ex­pan­sion. In­ter­est bur­den rose to Rs 524.24 crore in the past quar­ter from Rs 366.57 crore a year ear­lier.

An­a­lysts, how­ever, do not feel SAIL'S ex­pan­sion will weigh on per­for­mance. “Mod­erni­sa­tion-cum-ex­pan­sion pro­gramme was planned when steel de­mand was grow­ing at 10%. It was es­sen­tially aimed at up­grad­ing out­dated tech­nol­ogy at its var­i­ous units and to im­prove pro­duc­tiv­ity. Steel is a cap­i­tal­in­ten­sive in­dus­try. It is un­for­tu­nate that the new ca­pac­ity is com­ing on stream at a time when the steel in­dus­try is fac­ing tough times,” the In­dia Rat­ings' an­a­lyst added.

“We are fo­cused on ramp­ing up pro­duc­tion from our new units and are adopt­ing cost ef­fi­cient strate­gies to im­prove our net sales re­al­iza­tion,“SAIL Chair­man PK Singh said, com­ment­ing on the quar­terly re­sults. On a se­quen­tial ba­sis, SAIL'S pro­duc­tion of hot metal, crude steel and saleable steel went up by 2%, 4% and 14%, re­spec­tively, in the third quar­ter.

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