If he isn't to outdo last year's Rs 1,574-crore loss, CEO Arvind Pande needs ministerial clearances-yesterday.

By Ranju Sarkar

It isn't a four-letter word any longer at the Steel Authority of India Ltd (SAIL); it's a fact of life. At a meeting of the board of directors last month, the CEOs of SAIL's 4 plants-V. Gujral (Bhilai), S.B. Singh (Durgapur), B.K. Singh (Bokaro), and A.K. Singh (Rourkela)-made their usual presentations on their performance projections. One after the other, they got up to describe, in deadpan fashion, how some of these units were going to post huge losses, yet again, in the first quarter of 1999-2000. No one seemed unduly perturbed.

Except for one man. In the last 2 years, for Chairman and Managing Director Arvind Pande, 57, SAIL, has come to mean a 4-letter word that spells loss-and fear. After its mammoth loss of Rs 1,574 crore in 1998-99-the first in the last 12 years-the morale in the company is so low that the joke going up in the lifts at SAIL's headquarters in Delhi is that the company's fortunes will change only if a VRS is now offered to its CEOs-not workers!

If that weren't enough, Pande has to woo a sceptical master, the Government of India (GOI)-which owns 85.82 per cent of the company-and regards his efforts to turn it around with much apprehension. Prepared in tandem with the consultancy company, McKinsey & Co., the Pande Plan was submitted to the Union Ministry of Steel in October, 1998, but has yet to be cleared by both the steel and the finance ministries. Pande's proposals include:

• Waiving off 75 per cent of a Rs 6,069 crore loan to SAIL from the Steel Development Fund (SDF).

• Hiving off SAIL's non-core assets, like the 3 power units (asset value: Rs 1,897 crore), an oxygen plant (Rs 250-350 crore), and a fertiliser unit (Rs 50-60 crore) into joint ventures.

• Hiving off the Salem unit (asset value: Rs 500 crore) into a 51:49 joint venture with a private player.

• Shutting down the ailing Alloy Steel Plant at Durgapur.

• And cutting operational costs by Rs 1,000 crore in 1999-2000.

However, these proposals are unlikely to be cleared in a jiffy, especially with Elections 99 around the corner. What could be cleared is a watered-down version although Pande is pushing the envelope. ''The restructuring will not only help us get over our temporary problems, but will also address our structural problems,'' he says, convincingly. And adds that, once the package is in place, SAIL could easily convert its huge losses into net profits of Rs 1,000 crore per annum in 5 years.

Fortunately, the stockmarkets too feel the same, with the SAIL scrip zooming from Rs 5 on April 26, 1999, to a 12-month high of Rs 11 on July 12, 1999. BT looks at the Pande Plan, evaluates which of its proposals will be accepted by the GOI, and analyses how they will impact the steel giant's bottomline in the short run.

NON-CORE INCOMPETENCIES. By 2004, Pande plans to pull out of SAIL's non-core areas, such as the generation of power, the oxygen unit at Bhilai (Madhya Pradesh), the fertiliser unit at Rourkela (Orissa), and also hive off its special steel business, Salem Steel Plant (SSP; Salem, Tamil Nadu). That will help it focus on its 4 steel plants at Durgapur, Bokaro, Bhilai, and Rourkela.

More important, the exits-the combined value of the assets is around Rs 2,600 crore-will lead to a substantial inflow of cash, which can be used to further reduce the company's debt. At the same time, hiving off SSP into a separate joint venture will help cut losses. For instance, Durgapur Alloy Steel Plant has been incurring losses-Rs 170 crore in 1998-99-for the past 4 years, and ssp's losses (Rs 170 crore in 1998-99) will increase unless fresh investments are made.

SSP needs to spend Rs 200 crore to set up a steel-melting shop, which SAIL is unwilling to finance. Already, both Indian and foreign steel majors, like the Jindal Group and the Nissho Iwai-Nippon Metal Industries, have shown interest in picking up a 49 per cent stake once it is hived off into a separate company. Admits N.C. Mathur, 54, CEO, Jindal Strips: ''We are interested in SSP since there is a lot of synergy with our businesses.''

What's more, a 49 per cent divestment in SAIL's new power company, which would take over only the existing assets-and not the liabilities-of 3 power units with a combined capacity of 542 mw, could yield an additional Rs 929 crore. Such divestments have, suddenly, become de rigueur for steel companies limping from the effects of a crushing recession. Essar Steel has struck a Rs 720-crore deal to sell its 500-mw power unit to Marathon Power while TISCO has done the same with its 1.73-million tonnes per annum (tpa) cement unit, selling it to the French major, Lafarge. And SAIL has already got offers for its power plant from Enron Corporation and BSEs.

One problem, according to Rajesh Gupta, 34, CEO, Lloyds Steel, is ''when you sell your power plants, the cash inflow will be neutralised in the long run. For, the power cost is likely to increase once you buy power from outside at the market rate.'' True, since, in 1997-98, SAIL paid Rs 2.93 per unit for power that was outsourced while the cost of its captive power generated through steam turbines was a mere Rs 1.52 per unit. But Pande says that long-term power purchase agreements will be negotiated with the new joint ventures so that the cost of power to the company remains largely unchanged.

What will prove crucial for Pande is how soon he can manage to hive them. He himself says that the entire process will take at least 5 years. It could take longer since each of these decisions will surely be debated, tossed, and turned between the steel, finance, and industry ministries as well as SAIL's trade unions.

DEBILITATING DEBT. Enormous cost- and time-overruns during the massive Rs 12,000-crore modernisation plan in the period 1991-97 have played havoc with SAIL's interest costs. Especially since nearly 80 per cent of the investments came through expensive market borrowings and cheap loans from the SDF. The result: the company's debt-equity ratio has leapfrogged from 1.82:1 in 1995-96 to 3.30:1 in 1998-99 even as interest costs have jumped by 150 per cent to Rs 2,017.44 crore in the same period.

The steel major has, thus, appealed to the GOI for a 75 per cent waiver on its Rs 6,069-crore SDF loan (which includes accrued interest). Or Rs 4,552 crore. Explains Pande: ''We are not asking for any cash-infusion, but only trying to improve our balance-sheet.'' However, the finance ministry is not too willing to waive such a huge amount. One, it will set off an unsavoury precedent. Two, the move has already been opposed by the steel companies in the private sector.

In January, 1998, the 3 new Hot-Rolled (HR) coils manufacturers-Lloyds Industries, Ispat Industries, and Jindal Vijayanagar Steel-petitioned the finance ministry stating: ''...the Government is proposing to convert huge loans to SAIL out of SDF into equity capital. If that is done, huge amounts of SDF funds will be blocked with SAIL for all times to come, thereby making these funds permanently unavailable to other steel units who need the same.''

Explains A.K. Basu, 57, Secretary (Steel): ''The final proposal will be a combination of part-waiver, part-conversion of debt into equity.'' BT learns that while Rs 2,276 crore-or 50 per cent of the amount sought by SAIL-will be waived, a similar amount of debt will also be converted into equity. In essence, SAIL's debt will fall by 21.83 per cent to Rs 16,299 crore. That is still unlikely to help its bottomline since SDF loans carry an unbelievably low interest rate of 3-5 per cent per annum, and the annual interest saving for SAIL will not be more than Rs 150 crore. In fact, its interest payment on its SDF loans was Rs 203 crore in 1997-98.

So, the only advantage to SAIL will be that it can present a healthy debt-equity ratio of 2.33:1, and improve shareholders' perceptions. In addition, Pande feels that a financial restructuring can help the disinvestment process by improving the company's valuation. That, according to T.N. Giridhar, 30, Analyst, Kotak Securities, ''will only prove to be a sweetener for the government without helping SAIL directly.''

BLOATED WORKFORCE. Even if Pande were to get the government's approvals for his blueprint, he may still have another roadblock to contend with: SAIL's 170,000-strong workforce. In the summer of 1998, when the SAIL CEO first tried to hive off the 3 power plants, his moves were blocked by irate trade unions. Worse, manpower costs alone accounted for 14.03 per cent of its sales in 1997-98. While that is better than the figure for TISCO (15.50 per cent), compare that with the newer steel producers such as Essar Steel (1.47 per cent) and Ispat Industries (1.34 per cent). SAIL sure has a lot of downsizing to do.

Avers Pande: ''We have to explain to the workers that restructuring will not lead to loss of jobs. We've initiated a major communication exercise.'' Agrees Lloyds' Gupta: ''They will be able to carry the employees with them although it may take some time.'' But that is something SAIL cannot afford any more. Even McKinsey has advised Pande that he needs to cut the 170,000-strong labour force by a drastic 41 per cent over the next 5 years.

Last year, Pande was banking on natural attrition to reduce the number by 45,000 within 2 years. But the GOI's decision to increase the retirement-age to 60 has delayed this by another 2 years. Now, the company has asked the GOI to bail it out with a one-time assistance of Rs 1,500 crore and an equal-sized subsidised loan, guaranteed by the GOI, for a VRS to achieve the McKinsey targets. The government is dithering and, without the money, SAIL will have no option but to live with its huge workforce-and the effect on its bottomline.

OPERATIONAL INEFFICIENCIES. The good news is that SAIL has improved its cost-competitiveness over the years. For example, according to a study by Banque Paribas (October, 1998), SAIL has emerged as one of the 5 lowest-cost producers-with a cash cost of $277 per tonne-in the global market. That makes SAIL's steel cheaper than TISCO's ($356) and Nippon Steel's ($441). The bad news: it still has lots more to do to prune costs. Ever since Pande embarked on his cost-cutting exercise, he has shaved off Rs 732 crore in 1997-98, and another Rs 902 crore last year. His target for the current year (1999-2000): cut costs by Rs 1,000 crore.

However, the bulk of the savings last year came from raw material costs, which were Rs 402 crore lower. That happened because of a 15 per cent drop in global coking coal prices-something that SAIL cannot take for granted. In addition, the lower consumption of stores and spares, and savings through optimising purchases were, probably, due to the lower production of saleable steel, which came down from 9.02 million tonnes in 1997-98 to 8.68 million tonnes last year.

Clearly, Pande needs to make the cost-cutting exercise more sustainable, and target the right places to prune costs. Agrees Steel Secretary Basu: ''SAIL needs to focus more on techno-economic parameters so that the cost per tonne comes down further.'' Adding to SAIL's woes are its social infrastructure costs. The total expenditure on social amenities by SAIL (net of income) rose from Rs 271 crore in 1991-92 to Rs 460 crore in 1997-98, growing, on an average, by 11 per cent every year.

Meanwhile, SAIL has honed its marketing skills. Commends Lloyds' Gupta: ''Earlier, SAIL produced first, and then sold. Now, it sells first and then produces.'' That's why, despite the production drop, SAIL managed to improve its sales volumes by 7.60 per cent to 8.70 million tonnes in 1998-99 even as the domestic steel market grew by just 1.50 per cent to 23.20 million tonnes.

The future seems brighter. Explains A.S. Firoz, 39, Economic Research Unit, Ministry of Steel: ''Domestic demand should grow by 5-6 per cent per annum.'' Even better, prices are firming up. Thanks to the existing floor-price on imports of hr coils, SAIL managed to reduce its discounts, and improved price-realisations from Rs 15,000 per tonne in November, 1998, to Rs 17,000 today. Globally too, prices of hr coils have gone up from $185 (Rs 7,862) per tonne (freight on board) in mid-1998 to $240 (Rs 10,200) per tonne in July, 1999. In addition, according to a study by World Steel Dynamics, prices should firm up to $410 (Rs 17,425) per tonne by 2001, especially due to the 2.10 per cent compounded growth in world demand (till 2010).

That apart, Pande still has to create a market by virtue of being the leader, with a 45 per cent share. To reduce its inventory-carrying costs, SAIL can strike long-term sales agreements with large steel-users, like, say, Larsen & Toubro. But it hasn't. Past chairmen have focused on crucial aspects. While V. Krishnamurthy (tenure: 1985-90) concentrated on HRD and quality, S.R. Jain (1991-92) paid attention to operational efficiencies. Pande, of course, doesn't agree. ''Our focus is on restructuring.'' Sums up Sukumar Shah, 46, CEO, Mukand: ''SAIL has the answers. And with the support of the GOI, it can make it happen.'' If only Arvind Pande ko gussa ayega.

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