State-run Steel Authority of India Ltd (SAIL), faced with a flagging share of the domestic market, aims to step up a diversification programme that will result in one-fourth of its revenue coming from areas other than steel by 2020.
The company’s strategy, which involves initiatives in sectors such as mining, power generation and rail transport, has been detailed in a Vision 2020 document drafted for the board, a sub-committee of which is evaluating the plan.
“The issues were discussed at our board meeting on Friday. Steel is a commodity and is subject to fluctuation. Establishing revenue streams in other areas will minimize our risks,” said a top SAIL executive who did not want to be identified. “All the plans will be carried out through joint venture companies.”
Another SAIL executive confirmed the Vision 2020 plan.
SAIL, which has a local market share of 20% for steel compared with 30% a decade back, ranks as the country’s second-biggest maker of the alloy.
Analysts, however, remain unconvinced about SAIL’s ability to go ahead with the plan.
SAIL, which has a follow-on public offer (FPO) of shares in the works, won’t be able to step up diversification plans until current investments for steel capacity building are completed, said Chintan Mehta, an analyst with Sunidhi Securities and Finance Ltd.
SAIL has a stated objective of investing Rs 60,000 crore as capital expenditure for brownfield projects to raise capacity to 24 million tonnes (mt).
“Till now, they have invested only about half. It will take them at least till 2013 to invest the other half. Only after that can they go ahead with the other proposed plans,” he said. “Even their proposed plans with Posco are facing delays. So, the market is not very bullish on SAIL.”
Mehta said it was also unlikely that SAIL would go ahead with its overseas expansion plan.
Mint reported on 10 February that SAIL was seeking to set up steel plants overseas in ventures that called for an estimated total investment of $10 billion (Rs 45,000 crore).
The proposed FPO involves the divestment of a total 10% stake—half by the government and half in the form of fresh equity by SAIL—for Rs 8,000 crore. The exact timing of the sale has not been decided.
“All the mutual funds are shying away from buying SAIL’s stock, which is favoured mostly by insurance companies that have a long-term investment horizon. In the short term, the stock looks dead,” Mehta said.
SAIL posted a net profit of Rs 6,754.3 crore in the year to March 2010 on a turnover of Rs 41,307.2 crore, compared with a year-ago profit of Rs 6,170.4 crore and sales of Rs 43,717 crore.
As part of its diversification plans, SAIL is exploring the possibility of titanium and manganese mining and is in talks with the state governments of Kerala and Rajasthan, respectively, for mining the two minerals through joint ventures.
It also plans to set up a separate company called SAIL Natural Resources for mining resources.
“This will generate a separate revenue stream for us. We have a production capacity of 13.84 mt today, which we plan to raise to 60 mt by 2020. By then the country’s capacity will be 180 mt,” said the SAIL executive.
As part of its power generation plans, SAIL plans to set up a power generation capacity of 1,500MW that will require an investment of around Rs 7,000 crore.
While 1,000MW of this capacity is proposed to be set up at its Jagdishpur plant in Uttar Pradesh, the remaining 500MW will be set up at Sindri in Dhanbad, as part of the revival of a closed fertilizer unit.
The company will use 450MW of the total capacity for its own consumption and the rest will be sold to other consumers as merchant power.
For the Sindri unit, the department of fertilizers has reached an in-principle agreement with SAIL, which will set up an integrated steel and power plant, along with a urea manufacturing facility with an annual production capacity of 1.1 mt of urea.
“Around 6% of our production cost is the cost of power and fuel. We are currently purchasing around 700MW from outside. We should produce double that to sell in the open market,” said the SAIL executive.
SAIL also plans to set up two joint ventures with state-run NTPC Ltd and Damodar Valley Corp.
NTPC and SAIL already have an equal venture—NTPC-SAIL Power Co. Pvt. Ltd (NSPCL).
A senior NTPC executive confirmed the plans. “They had approached us,” he said, declining to comment further.
In the rail transportation sector, SAIL expects to be nominated to construct the eastern part of the Indian Railways, marquee dedicated freight corridor to be developed through the public-private partnership route. It also plans to manufacture passenger coaches.