Financial Daily from THE HINDU group of publications
Tuesday, Aug 06, 2002
Columns - Focus
SAIL: Cost control measures do the trick
Rabindra Nath Sinha
KOLKATA, Aug. 5
THE first quarter of this fiscal year has seen Steel Authority of India Ltd trim its loss, after four successive quarters of 2001-02 when its loss was substantially higher on the respective quarters of 2000-01.
An analysis shows that the quantum jump in loss in the last financial year was despite a quantum jump in other income, mainly from divestments and long-term lease of houses in steel plant townships.
It is evident from the first quarter 2002-03 results that other income has not been a significant influencing factor.
The increase of almost of Rs 1,000 crore in the sales turnover in the April-June 2002 quarter, compared to the same period of 2001-02, is certainly due to three instalments of mark-up - one each in April, May and June - in prices and higher volume of sales.
On the expenditure side, SAIL, it appears, has had to spend more for raw materials (Rs 118 crore) and power and fuel (Rs 63 crore), although a part of the higher costs can be attributed to higher production.
However, the significant points on the expenditure side are that while its staff cost showed virtually no variation, its outgo on account of interest was lower by Rs 29 crore.
The pertinent question is: Was the decline in loss by Rs 67 crore solely due to hike in prices, particularly of flat products?
Two points deserve mention in this connection. The market for mild steel did improve, permitting producers to register appreciable increase in sales volume and step up net sales realisation.
But, the market for stainless steel and other special steels made by SAIL's alloy steels units at Durgapur, Salem Steel Plant and Visvesvaraya Iron & Steel Plant, did not show any upturn.
There is reason to suggest that while price hikes in relative congenial market conditions have certainly helped the company, no less has been the effect of measures introduced during the stewardship of Mr Arvind Pande to control costs (including staff costs) and improve techno-economic indices.
Which also means that losses would have been much more than registered if those steps had not been initiated.
Heightening the need for measures to control costs and improve techno-economic indices was not only the sluggish demand for steel but also the increase in input prices, notably coking coal, power and railway freight.
More so because although after huge investments in update, plants were in a position to achieve significantly higher production and thereby economies of scale, the market situation did not permit them to derive optimum benefits of modernisation.
But, at the same time, significantly higher provision for interest and depreciation was badly denting the results.
Yet another factor that had weighed heavily was the delay of over a year in the Union Government's approval of the financial-cum-business restructuring package for the company.
Getting the Centre's okay was a challenge for Mr Pande. He finally succeeded in mid-February 2000.
In five years from 1997-98, a cost saving of over Rs 3,000 crore was achieved - Rs 731 crore in 1997-98, Rs 812 crore in 1998-99, Rs 533 crore in 1999-2000, Rs 525 crore in 2000-01 and Rs 450 crore in 2001-02.
Aiding the efforts were improvement in blast furnace productivity and reduction in coke rate as also energy consumption, stepping up the share of continuous cast output, and of course, better cash management.
During this period, there was an increase in prices of inputs - - 40 per cent in domestic coal, 10 per cent in imported coking coal and 30 per cent in power tariff.
While financial restructuring was to impact on the balance sheet positively, in any case, the real challenge was the implementation of the business restructuring part of it; more so because of the stiff resistance of trade unions to divestment of units not core to SAIL's activity.
It naturally had to start with captive power plants. By the end of 2001-02, the task was accomplished. With the Centre deciding to hand out a lifeline to Indian Iron & Steel Co, its ailing wholly-owned subsidiary, the business restructuring process has progressed further.
While the units remaining to be divested are oxygen unit of Bhilai Steel Plant, fertiliser unit of Rourkela Steel Plant and the three special steel plants, a new source of extraordinary income that was identified and that yielded good results in the first year itself (2001-02) was leasing of houses in plant townships to employees and ex-employees. The upfront realisation was Rs 172 crore. SAIL will be able to tap this source of other income for a few more years.
A saving of Rs 165 crore in the wage bill has been possible with the separation of nearly 30,000 employees under VRS.
All these enabled SAIL to retire about Rs 1,800 crore of debts and bring down the interest incidence by over Rs 450 crore. Interest and finance charges, which were at an all-time high of Rs 2,017 crore in 1998-99, declined to 1,562 crore in 2001-02. The trend has continued in the first quarter of this fiscal year.
Prices were raised for the fourth time in July too. The beginning of August has again seen SAIL resort to a selective upward revision (for the fifth time since April). With the market continuing to be generally favourable, the results for the July-September quarter will certainly reflect a further uptrend in net sales realisation.
But, a greater contribution to the results will be the lower interest outgo and cost control as also technical indices improvement mechanisms already put in place firmly. Of course, it will be Mr Pande's successor who will have the pleasure of declaring the results.
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