Nearly about 10 years ago, Steel Authority of India Ltd. (SAIL) embarked on a massive plan of expansion of capacity as well as restructuring. Over the last 10 years, SAIL has paid a price in terms of stock market performance due to the huge investment overhang of $10 bn. The current year may actually see SAIL getting the benefits of substantially higher steel capacity, favorable policy framework and cost management. For SAIL, it is about being in the right place at the right time.
Creating more capacity…
The capacity expansion that started 10 years back is finally coming to an end this year. Once the expansion is completed, SAIL will become the largest steel manufacturer in India with total installed capacity of 21 million tons. That will be more than JSW at 18 million tons and Tata Steel at around 15 million tons. This will coincide with the estimate that Indian steel demand will triple by 2030 and the capacity expansion could not have come at a better time. The steel cycle has finally turned in favor of the steel producers and government policy of resisting global steel dumping from China has also benefited Indian steel manufacturers. With an enhanced capacity, SAIL is likely to benefit largely from the expansion in steel demand which will be driven by infrastructure investments. After all, Indian steel demand is currently at the cusp of a massive demand explosion!
Managing costs better…
The other big takeaway for SAIL has been the substantial improvement in the cost management. If you compare the number of employees at SAIL to a JSW, then the number of persons employed by JSW is just a fraction of SAIL. With its latest restructuring plan, SAIL will let go nearly 50% of its workforce. This will of course entail a one-time cost but then the recurring costs will come down substantially and help SAIL to move more resolutely towards sustained profits in the coming quarters. With a 50% fall in the manpower levels and a 50% increase in capacity, SAIL is likely to see its earnings per ton go up nearly four-fold. That is going to be the big takeaway for SAIL from the combination of capacity expansion and its cost rationalization.
Some challenges too…
The favorable government policy for steel industry is already coming in for criticism from global trade partners. This is not going to be sustainable. SAIL has to make its steel competitive by global standards and that will be the big challenge for SAIL. Secondly, to let SAIL operate as a competitive steel player in the global market, they will need a lot more market driven decision making. That means the government will have to gradually let go control and move towards privatizing SAIL. That may be a much bigger challenge!
