Hit by Big Quarterly Loss, SAIL Likely to Face Higher Employee, Mining Costs
CO SUFFERS THIRD QUARTER NET LOSS OF RS 1,528.73 CRORE, DRIVEN BY A 24% DIP IN NET SALES REALISATION
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.