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Jan 01, 2018 04:06 PM IST | Source:

SAIL’s plan to buy distressed steel firms may face headwinds

Ever since the emergence of private steelmaker JSW Steel, and Tata Steel trimming its losses in Europe, SAIL has found itself overshadowed.

Prince Mathews Thomas @newlekhakh

Going by the buzz around SAIL, it appears that the steel maker’s Chairman and Managing Director PK Singh wants to end his stint on a high.  After getting the oft-delayed JV with ArcelorMittal back on track in December 2017, Singh now has his sights on a few acquisitions to help SAIL reclaim its numero uno position in the industry.

Media reports say the state-owned company is interested in buying Essar Steel and Bhushan Steel, the two troubled steelmakers which have been referred to the National Company Law Tribunal by its lenders. The buzz lifted SAIL’s scrip to a 52-week high of Rs 94.70 on Monday.

For starters, the company’s interest is obvious. Ever since the emergence of private steelmaker JSW Steel, and Tata Steel trimming its losses in Europe, SAIL has found itself overshadowed. At present, it lags JSW Steel, whose 18 million-ton-a-year capacity is just a shade higher than SAIL’s.

But is it possible for the loss-making steel behemoth to steal a march on its financially sounder peers like JSW Steel and Tata Steel, both of whom are vying for either Essar Steel or Bhushan Steel?

“For a company that is struggling to stay afloat, even with government support, this might be a bit too ambitious,” said an official from a private steelmaker. He didn’t want to be identified.

The odds are stacked against SAIL. Its present financial condition will not instill confidence among bankers looking to sell Essar Steel and Bhushan Steel. SAIL’s margins lag behind its immediate peers despite having access to captive mines  As on March 2017, SAIL’s profit before depreciation, interest and taxes margin of 1.29 percent is way lower than JSW's 22.56 percent and Tata Steel's 25.6 per cent.

Also, it’s heading towards another year-- the third consecutive—of losses. Last year, SAIL reported a net loss of Rs 2,833 crore. In comparison, Tata Steel and JSW Steel reported net profits of Rs 3,444 crore and Rs 3,576 crore, respectively. SAIL’s expansion plans have been delayed by almost a decade, resulting in huge debts.

Steel Secretary Aruna Sharma minced no words in saying that SAIL needs to “perform or perish”, in an interview to a newswire last week.

SAIL’s track record in handling partners also leaves much to be desired. Its project with POSCO has been a non-starter, and until recently, its venture with ArcelorMittal seemed to be going down the same lane.  Almost all of its major ventures at home and abroad, including the huge investment to develop mines in Afghanistan, have flopped.

Singh, whose stint gets over in June, would want to leave behind a legacy more enduring than those by his predecessors.  A lifer in SAIL, Singh had shown gumption to bring about improvements in the company’s plants that he managed. And the three initiatives – to complete expansion projects, give form to the JV with ArcelorMittal and the acquisition of steel companies on the block – will surely build his legacy. But history and SAIL’s financial ability are against him.

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