STEEL AUTHORITY OF INDIA LIMITED

WORKING CAPITAL MANAGEMENT

ABOUT SAIL

Steel Authority of India Limited (SAIL), one of the world’s largest government-owned steel
making companies and India’s largest, was incorporated on January 24, 1973. The Government
of India held 75% of the stake in SAIL. The working capital management at SAIL was vital to
ensure the firm’s liquidity and profitability as a large part of the assets was attached to its
current assets. This case is designed to analyse the working capital management at SAIL in
order to understand the current assets and current liabilities of a manufacturing firm vis-a-vis
a non-manufacturing firm. The computation of the operating cycle and analysis of liquidity
ratios provide an important basis for decision making.

INTRODUCTION

Rayansh graduated from Indian Institute of Management Bangalore, a premier management

institution in India in March 2015 and bagged a job at Steel Authority of India Limited (SAIL).
Before his placement interview, he gathered information about SAIL right from financials to
details of its various plants located all over the country. He was on his way to join the company
on June 1, 2015 and while sitting in the flight he pondered over the thought that the slogan of
SAIL, “There’s a little bit of SAIL in everybody’s life”, was so true. From spoons to satellites
and from pins to planes, steel was so integrated with people’s lives. During his induction
briefing, he was made aware of the salient facts about SAIL. SAIL was accorded the status of
“Maharatna” by the Government of India (GOI) in May 2010. It had had the “Navaratna” status
since 1997. It was a public sector enterprise – one of the seven Maharatnas of the country and
was India’s largest steel producing company. SAIL comprised 5 integrated steel plants, 3
special plants, and one subsidiary. The company produced iron and steel products of high
quality and also boasted of a state-of-the-art Research and Development Centre for Iron and
Steel (RDCIS). The company was also India’s second largest producer of iron ore and had the
second largest network of mines.

SAILING IN ROUGH WINDS

Rayansh figured out that SAIL had a sales turnover of INR 511.29 billion during 2014-15,
which was 2% lower than the previous year. A lower sales volume was the prime cause for the
decline. Steel prices, which were soaring at the beginning of 2014-15, had started to gradually
decline in September 2014. They hit a rock-bottom at the end of the financial year 2014-15.The
profit after tax during 2014-15 was INR 20.93 billion as compared to INR 26.16 billion in the
previous financial year.

HISTORY OF SAIL

The foundation of SAIL was laid in the early years after India became independent. The leaders
of emerging and newly independent nation envisioned that in order to lay a strong foundation
for the growth and strength of the country, they needed to focus on infrastructure and rapid
industrialization in the country.

THE EMERGENCE OF SAIL

The Rourkela steel plant was the only steel company under the management of Hindustan Steel.
The Iron and Steel Ministry of India took charge of the Bhilai and Durgapur Steel Plants. Later,
in April 1957, the supervision and control of these two steel plants were also transferred to
Hindustan Steel. In December 1961, the 1 MT phase of the Bhilai and Rourkela Steel Plants
was completed and in January 1962, the 1 MT phase of Durgapur Steel Plant was also
completed. Bokaro Steel Limited, another unit at Bokaro, was incorporated in January 1964.

THE STEEL MANUFACTURING PROCESS

Rayansh had a look at the steel manufacturing process of SAIL. The Raw Materials and
Material Handling Plant received, blended, stored, and supplied different raw materials to the
Blast Furnace, Sinter Plant, and Refractory Materials Plant as per their requirements. It also
maintained a buffer stock to take care of any supply interruptions. The Coke Oven Complex
converted prime coking coal and medium coking coal from various mines (Jharia, Dugda,
Moonidih, Kargali, Kathara, Mahuda, etc.) blended with imported coal into high quality coke
for the Blast Furnaces, and also recovered valuable by-products like Anthracene Oil, Benzene,
Toluene, Xylene, Light Solvent Naphtha, Ammonium Sulphate, and Extra-hard Pitch in the
process. Blast Furnaces that produced molten iron – Hot Metal – for steelmaking used Bell-
less Top Charging, modernized double cast houses, coal dust injection and cast house slag
granulation technologies. The process of iron-making was automated, using the PLC Charging
System and the Computer Controlled Supervision System. Waste products like the Blast
Furnace slag and gas were either used directly within the plant or processed for recycling / re-
use.
Financial Analysis
SAIL achieved a turnover of 50,627 crore during 2014-15, which is lower by 2% over previous
year, mainly on account of lower sales volume. The steel prices which were at a high in the
beginning of Financial Year 2014-15, started falling gradually every month from
September’2014 onwards. Towards the end of the Financial Year 2014-15, the steel prices
reached at the lowest for the Financial Year. The Profit after Tax of your Company for the
Financial Year was 2,093 crore as compared to 2,616 crore in the previous Financial Year,
which included the one time receipt of 1,056 crore from M/s. Vale Australia Pty Ltd.

The net profit of SAIL for the year 2014-15 has been negatively impacted on account of
stagnant saleable steel production and lower sales volume of saleable steel, higher salaries &
wages, higher stores & spares expenditure, higher repairs & maintenance expenditure, increase
in royalty on iron ore, increase in purchased power rate, higher usage of imported coal in the
blend due to lower availability of indigenous coal, higher interest charges, higher depreciation
due to capitalization of new facilities and reduction in interest earning on term deposits.

The Management has taken various cost reduction measures like reduction in usage of external
BF Coke, lower coke rate & energy consumption, higher CDI usage, etc. to offset the impact
of adverse factors. Your Company continued its thrust on optimum utilisation of funds by better
fund management. This included replacement of high cost short term loans with low cost debts,
timely repayment of loans including interest, strategic parking of surplus funds with scheduled
banks, actions for future fund raising etc. to meet the growth objectives.

Further, the Company hedged the foreign currency risk on Buyer’s Credit and repayment of
External Commercial Borrowings depending on market conditions. The Company had liquid
assets of 2,000 crore as on 31st March, 2015 invested in short term deposits with scheduled
banks against borrowings of 29,898 crore as on 31st March 2015. The debt equity ratio of
the company increased to 0.69:1 as on 31st March 2015 from 0.59:1 as on 31st March 2014
mainly on account of increase in borrowings during the year. The net worth of company
improved from 42,666 crore as on 31st March 2014 to 43,505 crore as on 31st March 2015
and this helped in generation of internal resources for funding expansion plans of SAIL. During
the Financial Year 2014-15, the capital expenditure incurred was 6,840 crore. The Company
paid interim dividend @ 17.5% of the paid-up equity share capital during the year. The Board
of Directors has further recommended a final dividend @ 2.5% subject to approval of
shareholders, thus making the total dividend @ 20% of the paid up equity share capital for
the Financial Year 2014-15.