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SAIL’s expansion plan will transform it in the long run

SAIL’s expansion plan will transform it in the long run
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First Published: Thu, Nov 19 2009. 11 26 PM IST

Updated: Thu, Nov 19 2009. 11 26 PM IST
The expansion and modernization plans of Steel Authority of India Ltd(SAIL) will see it emerge as a much larger and more profitable steel firm by 2012. Investors, unfortunately, tend to focus on the more foreseeable future.
First in their sights is a mega equity issue from SAIL, in which the government will sell 10% from its 85% stake. Also, SAIL itself will sell 10% in new shares to fund capital expenditure. A higher public holding will make it more popular with large investors, due to better liquidity. Another factor will be steel prices, which are causing some concern.
In recent months, Indian steel makers have dropped prices, with SAIL reported to have lowered prices of flat products by about Rs500 a tonne, shortly after it cut prices by around Rs1,200-1,500 a tonne. But this is in line with international trends. Higher steel inventories have led to weaker prices. The strengthening of the dollar also has a lagged effect on domestic steel prices, as landed imports become cheaper. SAIL’s average realizations during the September quarter were down 25% over the year-ago period. But lower input costs and better efficiencies limited the decline in margins to just 1 percentage point.
The long-term outlook for steel is improving. Global steel consumption is expected to grow by 9% in 2010, after a decline of 8.6% in 2009, according to the World Steel Association. India will grow by 12% and China by 5% in 2010. Higher demand is evident, as SAIL’s steel sales rose by 9% in the first half of fiscal 2010, over the year-ago period.
Higher global demand will eventually translate to higher prices, but its timing and strength is uncertain. While demand in India has improved, higher demand from China and developed economies would be key trigger points.
SAIL is operating at 112% of its capacity, explaining the need for an expansion. Its Rs60,000 crore programme is split between Rs37,000 crore for 10 million tonnes of steel capacity and the rest will be spent on improving its product mix, technology and de-bottlenecking. It would have spent Rs17,400 crore by the end of fiscal 2010.
While this plan will transform SAIL into a larger and better run company, in the near term, an improvement in steel prices and a successful public offering will be key factors influencing its share price.
Write to us at marktomarket@livemint.com
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First Published: Thu, Nov 19 2009. 11 26 PM IST