Valuation Report on

Steel Authority of India

Ltd.

There’s a little bit of SAIL in everybody’s life

STEEL SECTOR CMP: Rs 233.40
TMP: Rs 202.82 31st March 2010

Steel Authority of India Ltd. (Rs

Mn)
We are initiating the coverage of Steel Authority Key Financials * FY 07 FY 08 FY 09 FY10E FY11E
of India Ltd. With a 12 month target price in the
range of Rs 200 to Rs 270.We anticipate that Net sales 351443.70 412446.40 431500.80 429092.74 492979.88
capacity expansion with wide product mix will %Growth 17.36% 4.62% -0.56% 14.89%
drive company’s revenue on a sustained growth
EBITDA 103924.30 126827.50 90234.70 101662.40 121702.08
path. The company’s vast dealership and service
EBITDA Margin % 29.57% 30.75% 20.91% 23.69% 24.69%
network, operational expertise will help in
Adjusted PAT 64672.70 85672.60 61748.10 71234.68 79643.52
achieving the revenue and profitability
%Growth 32.47% -27.93% 15.36% 11.80%
projections.
Net profit margin % 18.40% 20.77% 14.31% 16.60% 16.16%
SAIL has highest contribution in steel EPS (based on Adj.Pat)* 15.67 20.74 14.95 17.24 19.28
industry. It has 28% market share Book value per share * 41.94 55.83 67.73 81.52 96.94
followed by Tata Steel & JSW. Return on equity 37.35% 37.15% 22.07% 21.15% 19.88%
We expect that company revenue will be
Rs 4, 92,979.88 Mn in FY11 i.e. a growth rate of 14.89% over previous year.
Key ratios (%) FY 07 FY 08 FY 09 FY 10E FY11E
The company EBITDA margin is
expected to increase from the Market Price 85.80 192.06 118.97 172.80 172.80
P/E 5.48 9.26 7.96 10.02 8.96
current level of 20.91% in FY 09 to P/BV 2.05 3.44 1.76 2.12 1.78
23.69% in FY 10. EV/EBITDA 3.02 5.53 4.41 6.29 6.37
EV/Sales 0.89 1.70 0.92 1.49 1.57
We expect that sales volume will Key data

increase by 13.64% in FY 10 & Face value (Rs.) 10

11.11% in FY 11. Steel majors like Shares outstanding (mn) 4131.71
SAIL, JSW, Tata Steel, SAIL is Market cap (Rs. In mln) 713976.70
52 week high/low (Rs.) 258.30 - 73.10 
only one with net cash position (Rs BSE Code 500113
44/ share as of 2009). NSE Code SAIL
Bloomberg Code SAIL@IN
Reuters Code SAIL.BO

The company has added new products

Share Holding Pattern (%) OND 09
like Auto grade CR products,
Galvanized coils/ Sheets. It has also
launched plates/ pipes to meet API 100 6% 1%
grade specification. For Infrastructure 4% 1%
requirements it has added Universal 3%
2%
beams/ Heavy beams with the size up 86%
to 1100. It has launched HCR-EQR
TMT for earthquake resistant Promoters Insurance companies Foreign Institutional Investors
construction, Rock bolt TMT for tunnel Mutual Fund / UTI Financial Institutions / Banks Others

construction, EN series HR coils for

LPG cylinders. It has increased
production Source:Bseindia
Of rails & wheels to meet the increasing
Requirements of Indian Railways.
 The Joint venture magnese ore India Ltd for setting up a ferro alloy plant at Bhilai
and joint venture agreement with Tata Steel for development of new coking coal
mines which will help SAIL to reduce its raw material cost as coking coal is the one
of the major raw material and 70% of it is imported from Australia & Newzeland.
350 Relative Performance
300

250

200

150

100

50

10/1/09

11/1/09

12/1/09
1/1/09

4/1/09

5/1/09

6/1/09

7/1/09

9/1/09

1/1/10
2/1/09

3/1/09

8/1/09

2/1/10
SAIL SENSEX BSE-METAL

Source: BSE INDIA

1. INVESTMENT RATIONALE...................................................................................................5
1.1. Huge Demand to Drive the growth of Industry........................................................5
1.2.Steady volume growth expected................................................................................5
1.3. Relatively higher margins and EBITDA (Operationally good position)..................5
2. KEY RISKS.....................................................................................................................5
2.1. Delay in renewal of leases for Iron ore mines..........................................................5
2.2. Government Ownership............................................................................................5
2.3. Technological Process..............................................................................................5
2.4. High Manpower Cost................................................................................................5
4. FINANCIAL FORECAST AND ASSUMPTIONS........................................................6
4.1. KEY ASSUMPTIONS.............................................................................................6
4.2. Revenue....................................................................................................................6
4.3. Plant-Wise:...............................................................................................................6
4.4. Product-Mix:.............................................................................................................6
4.5. Others:.......................................................................................................................6
4.6. Production Capacity and Sales:................................................................................6
4.6.1. For 2008-09.......................................................................................................6
4.6.1.2 For 2009-10.....................................................................................................6
4.7. Capex........................................................................................................................7
4.8. Financing of Capex...................................................................................................7
4.9. Operational Expense.................................................................................................7
4.10. Dividend distribution..............................................................................................7
5. VALUATIONS................................................................................................................7
DCF Sensitivity...............................................................................................................8
6. BUSINESS ANALYSIS..................................................................................................9
6.1. Company Background..............................................................................................9
6.2. Products and Services.............................................................................................10
7. Business model Analysis...............................................................................................10
7.1. Value Proposition...................................................................................................10
7.2. Target Customers....................................................................................................11
7.3. Distribution Channels.............................................................................................11
7.4. Promotion...............................................................................................................11
7.5. Revenue Streams....................................................................................................11
7.6. Core Capabilities....................................................................................................11
7.7. Value Configuration...............................................................................................11
7.8. Partner Network......................................................................................................11
7.9. Cost Structure.........................................................................................................12
8. SEGMENTAL ANALYSIS..........................................................................................12
8.1. Competition............................................................................................................12
8.2. Issues, concerns and Challenges.............................................................................13
8.2.1. Cyclical nature of Steel Industry.....................................................................13
8.2.2. Environmental regulation imposes additional costs and may affect the results
of operations..............................................................................................................13
8.2.3. Infrastructural facilities of steel industry in India is not conducive to a
sustainable growth.....................................................................................................13
8.2.4. High energy consumption................................................................................13
8.2.5. Dependence on import of Coking Coal...........................................................13
8.2.6. Low investment in R&D and inefficient technology leading to high carbon
emission.....................................................................................................................13
9. INDUSTRY OVERVIEW.............................................................................................13
9.1. MARKET SIZE......................................................................................................14
9.2. KIND OF STEELS.................................................................................................14
 9.3. Flat Products...........................................................................................................14
9.4. Long Products.........................................................................................................14
9.5. Structure of Indian Steel Industry...........................................................................14
Major Producers.........................................................................................................14
10. GROWTH DRIVERS..................................................................................................14
10.1. Raw Material Integration......................................................................................14
10.2. Growth drivers for company.................................................................................14
10.3. Joint venture..........................................................................................................15
10.4. MOU.....................................................................................................................15
10.5. Focus on Value Added Product, Rural Demand & Distribution channel.............15
1. INVESTMENT RATIONALE

1.1. Huge Demand to Drive the growth of Industry

Steel consumption in India is growing at a rate of 12%, a trend persist as the country enters into
Steel development phase. Construction/Infrastructure accounts for 60% of domestic steel
demand, Engineering(Approx 30%), Auto sector(approx 8%).In the union budget 2010-11 it has
planned to spend Rs 1,77,000 Cr. Mega projects in power, ports, railway, roads will increase the
demand of steel.

1.2.Steady volume growth expected

SAIL makes both flat (52%) & long (36%) products. It also makes value added products such as
pipes, plates and coated products. Alloy & special steel contributes to 6% of sales. SAIL has not
expanded its installed capacity in this financial year so; we expect its saleable steel volume will
grow by 9.44% in FY 10 & by 11% in FY 11 and subsequently by a higher rate as its new
capacity is expected to increase in FY12. It will increase its hot metal production beyond 26
Mtpa.

1.3. Relatively higher margins and EBITDA (Operationally good position)

Sail’s EBITDA margin compare favorable with its domestic peers. This is possible due to its
ongoing integrated operations, technological up gradation.

2. KEY RISKS
2.1. Delay in renewal of leases for Iron ore mines
SAIL currently meets its all iron ore requirements of ~23 mtpa from captive sources. When its
iron ore capacity is fully commissioned, its iron ore requirements will rise to ~43 mtpa. It has
looking for new mines for meets its requirements. There has been delay in renewal of leases from
the Chiria mines (Jharkhand) while further delay will be a risk.

2.2. Government Ownership

Government of India holds 86% of SAIL’s equity so it is public sector undertaking
(PSU).Government subjects several rules, procedures which can have adverse effect on its
business. There is also risk of price to which Government Company would be more susceptible.

2.3. Technological Process

Some of the technological process like twin hearth furnace and ingot casting continue to operate
and will be eliminated only after modernization/expansion plan. It can develop advance
technology and can reach better levels with reducing the cost by improving its R&D activities.

2.4. High Manpower Cost

SAIL has higher manpower cost than its competitors. Its cost is 17-18% of sales as compared to
7-8% and 2-3% for Tata steel & JSW respectively which reduces the operating profit margin.
4. FINANCIAL FORECAST AND ASSUMPTIONS
SAIL’s revenue is declined by 0.56% in FY10 due to global recession and it is expected to grow
with a CAGR of 23% to reach Rs648949.63 Mn by FY 12.

The EBITDA will grow by 23.69% in FY10 to touch Rs 101662.4Mn from Rs 90234.70 Mn in
FY09. EBITDA is expected to grow by CAGR of 16.37% from FY10 to FY11.

We anticipates that PAT would grow by 15.36% to Rs 71234.68 Mn in FY10 from Rs 61478.10
Mn in FY09. We expect PAT to grow by CAGR of 19% in next 3 years.

4.1. KEY ASSUMPTIONS

4.2. Revenue

4.3. Plant-Wise:
 Bhilai steel plant have highest share of sales among integrated plants.
 Bokaro steel plant have high share of sales after Bhilai steel plant.
 Alloy steel plants have fewer shares of sales among all plants of SAIL.

4.4. Product-Mix:
 Saleable steel is likely to be contributing about 90% of total sales turnover.
 Semis component in sales of saleable steel is 12% of 5 integrated steel plants.
 Special steel production 3.44 Mt which is increased by 20% in FY10 from FY09.
 Production through concast 6.8 Mt which is 3% higher in FY10 from FY09.
 Sale of other product like ingots, pig iron, scraps, coal chemicals etc. likely to contribute
5% of total sales turnover.
 Shares of round likely to increase 10% to 20% by 2012.
 Shares of structurals likely to increase 5% to 15% by 2012.

4.5. Others:

 Higher sales volume is expected because of higher average price realization due to higher
sales of value added products, good product-mix and better quality of techno economic
parameters.
 Major demand of growth expected to come from Railways, Automobiles, power projects,
Oil & gas and Highways.

4.6. Production Capacity and Sales:

4.6.1. For 2008-09

 Saleable steel production will decrease to 12.5 MT in2008-09.
 Crude steel production of 10.18 Mt in FY10, growth of 1% from previous year.
 Sales of saleable steel out of crude steel production are 82%.
 Net realization expected to be around Rs 36000 per tonn.
 Average capacity utilization to be 82%.

4.6.1.2 For 2009-10

 Saleable steel production will increase to 13.68 Mt by 2009-10.
 Sales of saleable steel out of crude steel production are 90%.
 Net realization per tonn would be ~ Rs 31000 due to global slowdown and it is expected
to increase in future because economy is emerging from global economic crisis.
4.7. Capex
Total capex for 2007-08 was Rs. 2181 Cr and for 2008-09 it is Rs 5233 Cr. For this option for
raising funds to finance the capex plan are being explored. Capex plan for 2009-10 is
approximately Rs 10000 Cr. For modernization, expansion of plants various plans have already
been taken.

4.8. Financing of Capex

Company has sufficient cash deposits and internal accruals which do not warrant any borrowings,
may be done through ECB route.

4.9. Operational Expense

1. Raw material expenditure is increased from 49% in FY08 to 56% in FY09 and is expected
to decrease in FY10. The increase in raw materials is expected because of increase in price of
Ferro & Silico manganese, nickel, Ferro alloys and increase in freight on imported coal. The
increase in expenditure on account of stores & spares consumption and repair & maintenance
is expected due to major repairs undertaken for blast furnaces, coke oven batteries and other
mills at integrated steel plants.

2. Staff costs are expected to be in the range of 17-18% from FY09 to FY11 of sales. However
company will increase its production capacity which will help company achieve economies
of scale. Wage revisions are not expected to happen in the coming years.

3. Other expenditure is expected to be between 7.8% to 7.6% from FY09 to FY11.

4. Depreciation will takes into account the capital investment being made from FY08 to FY11.

5. Tax Rate- has been taken at 33% for the coming years.

4.10. Dividend distribution

It has been assumed to be 20% of the share face value during FY09 and for remaining 3 years.

5. VALUATIONS
SAIL’s stock is valued at Rs 202.82 based on my DCF valuation, which is 13% down from the
current levels.

All parameters like EBITDA, PAT are expected to grow at 23.69%, 16.60% respectively in 2010
but the sales would declined by 0.56%. These would further grow at a CAGR of 21%, 19% &
20% respectively for next four years up to 2014.

The expected higher growth rate is due to the following reasons

 We expect the automobile sector to grow in a double digit and huge demand comes from
construction sector. Demand of steel is increasing in engineering sector, railways, and in
defence sector.

 The company continues to dominate in long product range.

 Large sales network and service network gives substantial customer reach and loyalty.
 DCF Sensitivity
The DCF valuation is relatively sensitive to the continuing growth rate and the discounting factor
used. The base case uses continuing growth rate of 8% in 2014 onwards. Considering 10 year
government bond yield and risk premium as per Leman brother’s report gives the WACC
13.02%.We have analyzed the DCF sensitivity with respect to different scenarios with different
combination of growth rates and cost of capital. Our fair price for the stock will based on the
terminal growth rate of 8%, owing to higher growth rate in automobile and infrastructure
segment which is the major contribution in steel industry.

Weighted Average Cost of Capital (%)

Continuing Growth (%)

11 11.5 12 12.5 13 13.02% 14 15

0.075 314.15 269.42 234.64 206.83 184.09 183.27 149.13 123.52
8% 368.39 309.55 265.44 231.15 203.72 202.74 162.61 133.27
0.085 444.32 363.07 305.04 261.54 227.71 226.51 178.54 144.53
9 558.23 437.99 357.84 300.61 257.70 256.21 197.66 157.66
10 1127.75 737.67 542.65 425.65 347.67 345.09 250.23 191.80

Assumptions FY08 FY09 FY10E FY11E FY12E FY13E FY14E

Revenue Growth (%)17.4% 4.6% -0.6% 14.9% 31.6% 16.5% 16.1%

FCF Margin (%) 10.0% -6.1% -2.0% -22.3% 18.0% 7.6% 7.3%
Tax Rate (%) 31.5% 34.3% 33.0% 33.0% 33.0% 33.0% 33.0%
Capex/Sales 5.3% 13.8% 18.6% 44.6% 4.6% 2.6% 1.7%
We expect the trailing P/E is between 7.10 to 20. Considering the expected adjusted EPS of Rs
17.24 for FY10 the stock to have a price range of Rs 122.4 to Rs 344.8. Similarly, the expected
range of P/BV gives a range of Rs 85.6 to Rs 187.5 and EV/EBITDA gives range of Rs 135.3 to
Rs 200.5.

6. BUSINESS ANALYSIS

Steel Authority of India Limited (SAIL) is among the top ten public sector, steel maker in India.
It is a fully integrated iron and steel maker, producing both basic and special steels for domestic
construction, engineering, power, railway, automotive and defense industries and for sale in
export markets. Its strength has been the diversified range of quality steel products catering to the
domestic, as well as the export markets and a large pool of technical and professional expertise.
The company has the distinction of being India’s largest producer of iron ore and of having the
country’s second largest mines network. This gives SAIL a competitive edge in terms of captive
availability of iron ore, limestone, and dolomite which are inputs for steel making.

6.1. Company Background

SAIL incorporated in 1973 by Government of India. It’s headquarter is situated at New Delhi.
The chairman of SAIL is Mr.S.K.Roongta. It has five major steel plant units at Bhilai, Bokaro,
 Durgapur, Rourkela, & Burnpur and three special steel plants at Salem, Durgapur & Bhadravati.
All the units having combined capacity of 15.2 Mt of crude steel and 12.5 Mt of saleable steel.
SAIL was made responsible for managing five integrated steel plants at Bhilai (production
capacity of 4.22 MTPA saleable steel), Bokaro (3.86 MTPA), Durgapur (1.7 MTPA), Rourkela
(1.94 MTPA) and IISCO (west Bengal) (0.40 MTPA). It also manages the Alloy Steel Plant (0.14
MTPA), the Salem Steel Plant (0.18 MTPA) and the Visvesvaraya Iron and Steel Plant (.13
MTPA). It has a subsidiary in Maharashtra (Maharashtra Elektromelt Limited).

6.2. Products and Services

TYPES PRODUCTS
Blooms, Billets,
Semis product Slabs
Structural crane rail bars,
Rods & Rebars,
Long product Wire rods
HR coils, Sheets & skelp,
Plates, CR coils& sheets,
GC sheets/Gpsheets,
Flat products Coils tinplates, Electrical steel
Tubular products Pipes
Rail wheels, Axles,
Railway products Wheel sets

A. Consultancy Services Design & Engineering Bankable project proposals, Detailed project reports etc.
Services
Project Management Plant erection & construction, Procurement & inspection, project planning,
Services Monitoring & Supervision

Technical Services Plant Operation and Maintenance, Technology Up-gradation, Quality,

Productivity and Performance Improvement

HR and Training Services Training Needs Assessments and Training Module Development, Setting up
Training Systems and Facilities

B.Management Services . Total Quality Management and ISO: 9001 Certification Assistance, Corporate
Planning, Benchmarking, Corporate Restructuring, Software Development and
System Design etc.
C. Research & Development - Transfer of technologies, contract research, specialized testing services & Training

7. Business model Analysis

7.1. Value Proposition
SAIL provides better quality of steel products such as TMT, semis, round bars, CR coils/ sheet,
structural railway materials, HR coils/ sheet, plates & pipes, tar products. It provides project
management services, design and engineering services, HR and training services to other steel
companies under consultancy part. It also provides technology to other steel companies under its
research and development.
7.2. Target Customers
Construction, Railway, Power, Engineering, Automotive, Cement and Defence industries are
major customers of SAIL. Other sectors are Cycle industry, Transportation etc.

7.3. Distribution Channels

SAIL has the largest distribution network in India including 37 branches of sales offices across
the four regions, 25 departmental warehouses, 42 consignment agents and 26 customers contact
offices. It is spreaded in all districts in India through its dealer network. It has crossing over 2000
dealers across the country. It also reaches it’s customer through “APNA SAIL SHOP”, “SAIL
JYOTI”.

7.4. Promotion
For promotion SAIL has adopted 79 villages as model steel villages across 8 states for
development of education, roads, sanitation, and medical facilities. It has established 61 primary
health centres and 35 hospitals to provide healthcare services. For awareness of public about the
ranges of products SAIL publish its market share and size.

7.5. Revenue Streams

SAIL’s revenue comes from a large dealer network, which is spreading all over the country.
Government and other industries like construction, automobile are also major sources of revenue
for the company.

7.6. Core Capabilities

It has captive power plant with a capacity of 872 mw. It has the largest distribution network in
India, research and development centre, various ranges of products mix enabling it to develop
superior products matching customer’s need are the core capabilities of this company

7.7. Value Configuration

 Auto operation of blast furnace charging conveyors and monitoring of vibrators at BSL
resulting reduction in time of conveyors (7 hrs/ month) and increase in hot metal
production.
 Optimization of VAD process parameters for enhanced production in special quality of
steel slabs at Bhilai steel plant.
 Low Mgo sinter practice for control of sinter return in sinter plant at Bhilai steel plant
resulting in higher productivity.
 Introduction of water quality monitoring system in cooling water circuit in BOF method
at Durgapur steel plant.
 For reduction in fuel consumption Bokaro steel plant has improving thermal
performance of annealing furnace of steel.

7.8. Partner Network

SAIL has promoted many joint ventures in different areas like with Damodar valley corporation
for managing 302 MWpower generating station and produce 660 tonnes per hour steam
generating facilities at Bokaro steel plant with TATA steel it promotes e-commerce activities in
steel, with BMW industries ltd it promotes a service centre at Bokaro for increase the value of
steel, with Jaiprakash associates ltd it has setup a 2.2 mt slag based cement plant at bhilai, for
getting the target of steel PSU’s self reliant in the area of coaking coal area it has joint venture
with RINL, CIL, NTPC, and NDMC for survey of coal properties in Australia, Mozambique and
other target countries.
It has also mou’s with Defence for long term supply of steel, with Indian railways for making
high power locomotives, with IIM Ahmedabad for knowledge sharing.

7.9. Cost Structure

Cost structure jas09

The major element of overall cost is raw material Interest
consumption (55% of total expenses) because delay in Staff cost
1%
clearance of mines lead to shortage of raw materials for 16% Tax
steel making. Depriciation
12%
SAIL is endeavoring to provide its customers with the 5%
benefit of competitively priced products of world-class Other
quality, through its continuous efforts to utilize its 23%
capacity at its full level and achieve cost-effectiveness. Raw material Other
To achieve cost leadership, the company is currently 55% 11%
implementing a business restructuring plan which
envisages the separation of all non-core activities into Purchase of
traded goods
secondary businesses, in addition to regular cost- 0%
cutting measures, including manpower cost
Source : Bseindia

8. SEGMENTAL ANALYSIS
It, s major plants are located in eastern
zone and major consumption parts are
located in south & west zones. Bhilai
steel plant contributes 36 % of
revenue; it produces 3.15 MT of
saleable steel. Bokaro steel plant
contributes 24% of total revenue.
Rourkela steel plant produces 1.67 MT
of saleable steel whereas Durgapur
steel plant produces 1.58 MT of
saleable steel annually.
Source: Bseindia

8.1. Competition
Rivalry is intense due to pressure from both Indian and foreign companies which may affect its
revenues. The Indian Steel industry is highly competitive. As an Integrated steel manufacturer
company’s direct competitors includes:
 Tata Steel – It is a largest private sector steel company, incorporated in 1907. Tata
Steel’s products include hot and cold rolled coils and sheets, galvanized sheets, tubes,
wire rods, rings and bearings.
 ISPAT – It is also one of the largest producers of HRC in India. It has signed a MOU
with Jharkhand government for setting up a 1980MW coal based power plant.
 JSW – It is 3rd largest steel maker in India, consisting of most modern, eco- friendly steel
plants with the latest technologies for both upstream & downstream processes.
8.2. Issues, concerns and Challenges

8.2.1. Cyclical nature of Steel Industry

The steel industry is cyclical in nature, sensitive to general economic conditions and the condition
of certain other industries. Future economic downturns or stagnant economies in India could
adversely affect the business and results of operations. Demand for steel is driven mainly by
construction, automobile and auto component industries, any ups and down in these industries
will influence the demand for steel.

8.2.2. Environmental regulation imposes additional costs and may affect

the results of operations
The steel manufacturers are subject to various central, state and local environmental, healthy and
safety laws and regulations concerning issues such as damage caused by air emissions,
wastewater discharges, solid and hazardous waste handling and disposal, and the investigation
and remediation of contamination. These laws and regulations are increasingly becoming
stringent and may in future create substantial environmental compliance or remediation liabilities
and costs.

8.2.3. Infrastructural facilities of steel industry in India is not conducive to a

sustainable growth
The condition of the infrastructural facilities of the steel industry in India is not at all conducive
to a sustainable growth and development. The methods that are adopted for the creation of wealth
in the Indian steel industry are also supposed to act as hindrances to the growth and development
of the India steel industry. The Indian steel industry has also not able to draw the best
professionals in the steel industry and that has been a major draw back of the industry.

8.2.4. High energy consumption

Energy consumption levels not matching with world steel benchmark. Indian steel companies are
having the levels of 6.5-7 giga calories per tonne of crude steel as compared to world levels of
4.5-5 giga calories per tonne.

8.2.5. Dependence on import of Coking Coal

Iron ore and coking coal are the basic raw material required for production of steel. But the
quality of raw material is not good as Coking coal contains high ash and Iron ore contains high
alumina. Also major companies like SAIL and TATA steel are having 100% captive iron ore
mines but are not having linkages for coking coal. Hence existing mines need to be reworked and
new linkages/alliances need to be explored. Thus import component of coking coal is
approximately 70% of total requirement, which is likely to increase as it will take some time to
get linkages. High coking coal demand by the Indian steel industry and low reserve base has
boosted the import of coking coals. Coking coal requirement in steel production is expected to
touch over 85.34 Million Metric Tons in 2011-12.

8.2.6. Low investment in R&D and inefficient technology leading to high

carbon emission
Indian industries are spending only 0.2%-0.5% of total turnover on R&D which is very less as
compared to other developing countries. Carbon emission norms are 1.5 to 2 times the best steel
plants in the world. It creates environmental problems and hence corporate social responsibility
forms a crucial role.
9. INDUSTRY OVERVIEW
The Indian steel industry has entered into a new development stage from 2005–06, resulting in
India becoming the 5th largest producer of steel globally. Producing about 53 million tonnes
(MT) of steel a year, today India accounts for a little over 7 per cent of the world's total
production. The total steel production is likely to achievable by 2019–20 will be over 275 MT
and this additional capacity enhancement in the sector is expected to generate employment for
around 4 million people. About 60 per cent of the country’s steel production is used by the
construction and infrastructure sectors.

9.1. MARKET SIZE

The Indian steel industry has a capital base of Rs. 90000cr and it constitutes 5.13% weightage in
IIP.
SAIL has a market share of approximately 28% in context to steel production.

9.2. KIND OF STEELS

All steel products are made from semi-finished steel that comes in the form of slabs, billets and
blooms. Though today there are over 3500 varieties of regular and special steel available, steel
products can be broadly classified into two basic types according to their shape.

9.3. Flat Products

These products are derived from slabs and mainly comprises of hot rolled (HR) plates, coils and
sheets. Cold rolled steel is used primarily for precision tubes, containers, bicycles, furniture and
for use by the automobile industry. Galvanized steel is used for making roofs in the housing and
construction sector. HR plates are used for applications such as shipbuilding, large diameter
pipes, boilers, industrial equipment.

9.4. Long Products

These products derive their name from their shape. Made using billets and blooms, they include
rods, bars, pipes, ropes and wires, which are used largely by the housing/construction sector.
There are also other products like rail tracks in the category. Bars and rods, including wire rods,
constitute around 40% of the long product segment.

9.5. Structure of Indian Steel Industry

Major Producers
Also known as Integrated Steel Producers (ISPs), this group includes large steel producers with
high levels of backward integration and capacities of over 1 MT. Steel Authority of India Limited
(SAIL), Tata Steel, JSW Steel Limited (JSWSL), Essar Steel Limited (Essar) and Ispat Industries
Limited (Ispat) form this group. SAIL, TISCO and RINL produce steel using the blast
furnace/basic oxygen furnace (BF/BOF) route that uses iron ore, coal/coke as the basic input mix
for producing finished steel, Essar and Ispat employ Electric Arc Furnace (EAF) route that uses
sponge iron, melting scrap or a mix of both as input and JSWSL uses COREX, a revolutionary
technology for making steel using basically iron-ore and coal.

10. GROWTH DRIVERS

10.1. Raw Material Integration
The increase in iron ore & coking coal prices due to increasing demand globally . Most Indian
Steel companies are also aggressively looking to increase integration of raw materials. The cost
reduction possible with captive sources of coking coal and iron ore over current market prices
could lead to more than the doubling of operating margins.
10.2. Growth drivers for company

Capacity expansion-SAIL has drawn up aggressive modernization & expansion plans of all the
plants and mines simultaneously to achieve hot metal production of over 26.2 million tones by
the year 2012 from current level of 14.4 million tones.

Launch of new products -The Company introduced several new products in the domestic market
during the year:
 HCR-EQR TMT for earthquake resistant construction
 Rock bolt TMT for tunnel construction
 EN series HR coils for LPG cylinders
 MC 12 HR coils for chains etc.
 Bhilai Steel Plant developed high strength vanadium rails
 Durgapur Steel Plant produced S-profile loco wheels for high speed locos and
 Rourkela Steel Plant rolled special plates which were used in the indigenously
built rocket PSLV C-7

10.3. Joint venture

 SAIL signs Joint Venture Agreement with Jaiprakash Associates
 Joint Venture agreement with Manganese Ore India Limited for setting up a Ferro
alloy plant at Bhilai.
 Joint venture agreement with Tata Steel for development of new coking coal mines

10.4. MOU
 MOU with ministry of Railways, NMDC and state Government of Chhattisgarh f for
construction of a new Railway line from Dall Rahjehra to Jagdalput via Rowghat.
 MOU signed between SAIL, RINL and NMDC for setting up a green field Steel
Plant in Chhattisgarh
Government of India has given formal approval for development of SEZ in the area
adjoining Salem Steel Plant. SAIL will be developing SEZ in collaboration with IL&FS
IDC

10.5. Focus on Value Added Product, Rural Demand & Distribution channel

SAIL today is one of the largest industrial entities in India. Its strength has been the diversified
range of quality steel products catering to the domestic, as well as the export markets and a large
pool of technical and professional expertise. It is also undertaking promotion programmes where
it brings new products in the market. Its new products include Earthquake resistant TMT wire
rods with improved corrosion resistance, e-payment and e-receipts introduced for customer
services, Armor steel plates for defense sector, Low carbon HR/CR steel for auto bodies, Wide
area network through VSAT installed in all mines. Largest distribution network-covers 602 (out
of 603) districts & crossing 2000 dealers in India.
 Balance Sheet of Steel Authority of India Ltd.
Particulars FY08 FY09 FY10(E) FY11(E) FY12(E) FY13(E) FY14(E)
Gross Asset 309,227.30 327,286.90 408,659.75 428,678.16 721,055.15 741,015.15 756,559.43
Accumulated Depriciation 193,514.20 204,598.60 218,052.90 233,510.40 253,858.37 277,557.77 305,075.41
Capital WIP 23,895.50 65,442.40 64,069.55 264,051.14 1,674.15 1,714.15 1,169.87
Net Fixed Asset 139,608.60 188,130.70 254,676.40 459,218.90 468,870.93 465,171.53 452,653.89

Investments & Deposits 5,382.00 6,527.00 10,527 5,527 5,527 15,527 25,527
Investment & Deposits/(Cash+Inv &deposits) 3.76% 3.46% 4.20% 4.20% 4.20% 4.20% 4.20%
Current Asset 263,176.20 345,108.70 335,699.20 345,866.07 381,746.45 491,220.40 628,272.39
Cash (balancing figure) 137,594.40 182,285.30 192,323 180,986 182,293 236,238 338,704
Other Current Assets 2,730.80 10,144.70 4,930.59 6,839.60 10,572.47 10,495.13 12,886.55
Inventories 68,572.30 101,214.50 86,406.97 97,542.73 116,810.93 153,774.48 171,722.73
Trade Debtors 30,481.20 30,243.60 30,036.49 34,508.59 42,181.73 52,908.48 61,432.63
Loans and Advances 23,797.50 21,220.60 22,001.94 25,988.66 29,888.80 37,804.42 43,526.89
Interest Receivable/Accrued

Current Liabilities & Provisions 131,987.50 171,216.00 145,891.53 167,613.16 220,642.87 256,984.05 298,387.04
Net Current Asset 131,188.70 173,892.70 189,807.67 178,252.91 161,103.57 234,236.35 329,885.35
Miscellaneous Items 594.80 0.00 0.00 0.00 0.00 0.00 0.00
Deffered Tax (Net)
Total net assets 276,774.10 368,550.40 455,011.06 642,998.81 635,501.50 714,934.88 808,066.24

Non-Current Liabilities
Secured Debt 9,253.10 14,736.00 34,336.67 63,835.51 37,907.70 35,811.13 29,586.21
Non-secured debt & Trade deposit 21,199.30 60,651.90 83,845.66 178,619.75 113,865.45 97,880.14 84,073.18
Deferred Tax Liabilities 15,686.00 13,321.50 0.00 0.00 0.00 0.00 0.00
Deferred Paymaent Credit 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total Liabilities 46,138.40 88,709.40 118,182.33 242,455.26 151,773.15 133,691.27 113,659.40
Contingent Liabilities
Share Capital 41,304.00 41,304.00 41,304.00 41,304.00 41,304.00 41,304.00 41,304.00
Reserve and Surplus 189,331.70 238,537.00 295,524.74 359,239.56 442,424.35 539,939.60 653,102.84
Total Stock Holder's Equuity 230,635.70 279,841.00 336,828.74 400,543.56 483,728.35 581,243.60 694,406.84

Total liabilities and stockholder's Equity276,774.10 368,550.40 455,011.07 642,998.81 635,501.50 714,934.87 808,066.24
 Profit and Loss Account of SAIL
Particulars FY05 FY08 FY09 FY10(E) FY11(E) FY12(E) FY13(E) FY14(E)
Net Sales 412446.40 431500.80 429092.74 492979.88 648949.63 755835.45 877608.94
% Growth 17.36% 4.62% -0.56% 14.89% 31.64% 16.47% 16.11%
Total Revenue 425475.20 450524.00 450842.01 510395.94 671875.81 782537.71 908613.23
% Growth 18.24% 5.89% 0.07% 13.21% 31.64% 16.47% 16.11%
EXPENDITURES
Staff Costs 79190.20 84015.10 59216.14 79065.94 104080.95 121223.70 140754.18
% of Net Sales 19.20% 19.47% 13.80% 16.04% 16.04% 16.04% 16.04%
Other Manufacturing/Operating costs 179632.50 229826.30 234593.19 254441.18 334941.68 390108.55 452959.37
% of Net Sales 43.55% 53.26% 54.67% 51.61% 51.61% 51.61% 51.61%
Miscellaneous Expenses 26796.20 38228.20 33621.00 37770.68 49720.63 57909.91 67239.84
% of Net Sales 6.50% 8.86% 7.84% 7.66% 7.66% 7.66% 7.66%
Total Expenditures 285618.90 352069.60 327430.33 371277.80 488743.26 569242.15 660953.39
% of Net Sales 69.25% 81.59% 76.31% 75.31% 75.31% 75.31% 75.31%
EBITDA 126827.50 90234.70 101662.40 121702.08 160206.37 186593.30 216655.56
EBITDA Margin % 30.75% 20.91% 23.69% 24.69% 24.69% 24.69% 24.69%
Growth % 22.04% -28.85% 12.66% 19.71% 31.64% 16.47% 16.11%
Depreciation & Amortisation 12354.80 12851.20 13454.30 15457.50 20347.97 23699.40 27517.64
EBIT 114472.70 77383.50 88208.10 106244.58 139858.40 162893.90 189137.92
Financial Charges 2509.40 2532.40 3636.96 4789.72 7589.08 7664.72 9016.75
Other Income 13028.80 19023.20 21749.28 17416.06 22926.18 26702.26 31004.29
Inter Account &Adjustments pertaining to earlier years 0.00 0.00
PBT 124992.10 94034.50 106320.41 118870.92 155195.51 181931.44 211125.46
Pre-tax Margin % 30.31% 21.79% 24.78% 24.11% 23.91% 24.07% 24.06%
Tax 39319.50 32286.40 35085.74 39227.40 51214.52 60037.38 69671.40
Effective Tax Rate % 31.46% 34.33% 33.00% 33.00% 33.00% 33.00% 33.00%
Adjusted PAT 85672.60 61748.10 71234.68 79643.52 103980.99 121894.07 141454.06
Net Profit Margin % 20.77% 14.31% 16.60% 16.16% 16.02% 16.13% 16.12%
Growth in Adjusted PAT % 32.47% -27.93% 15.36% 11.80% 30.56% 17.23% 16.05%
Extrodinary Income 0 0 0 0 0 0 0
Reported PAT 85672.60 61748.10 71234.68 79643.52 103980.99 121894.07 141454.06
Shares In Issue 4130.81 4131.71 4131.71 4131.71 4131.71 4131.71 4131.71
Adjusted EPS 20.74 14.94 17.24 19.28 25.17 29.50 34.24
Growth % 32.39% -27.94% 15.36% 11.80% 30.56% 17.23% 16.05%

Dividend paid 17872 10739 14247 15929 20796 24379 28291

Dividend pay out ratio 20.86% 17.39% 20.00% 20.00% 20.00% 20.00% 20.00%
Net profit transferred to Reserves Acccount 67801.00 51009.10 56987.74 63714.81 83184.79 97515.25 113163.24
 Cash Flow Statement of SAIL

Cash Flow from Operating Activities

FY08 FY09 FY10(E) FY11(E) FY12(E) FY13(E) FY14(E)
PAT 85672.60 61748.10 71234.68 79643.52 103980.99 121894.07 141454.06
Depreciation 10364.20 11084.40 13454.30 15457.50 20347.97 23699.40 27517.64
Interest Expense 2509.40 2532.40 3636.96 4789.72 7589.08 7664.72 9016.75
Other Non-Cash Charges 696.70 594.80 0.00 0.00 0.00 0.00 0.00
Direct taxes paid 39319.50 32286.40 35085.74 39227.40 51214.52 60037.38 69671.40
Operating Profit Before WC Changes(EBDIT)138562.40 108246.10 123411.68 139118.14 183132.55 213295.56 247659.85

Changes in Current Assets (excluding cash) (17893.90) (37241.60) 19447.40 (21503.58) (34574.35) (55528.57) (34586.30)
Changes in Current Liabilities 22872.90 39228.50 (25324.47) 21721.63 53029.72 36341.18 41402.99
Changes In WC(CA-CL) 4979.00 1986.90 (5877.07) 218.04 18455.37 (19187.39) 6816.69

Cash Generated From Operations 143541.40 110233.00 117534.61 139336.18 201587.92 194108.17 254476.53

Direct Taxes Paid 39319.50 32286.40 35085.74 39227.40 51214.52 60037.38 69671.40
Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net Cash Generated From Operations 104221.90 77946.60 82448.88 100108.78 150373.41 134070.79 184805.13

Cash Flow from Investing Activities

Capital Expenditure (CAPEX) (22010.50) (59606.50) (80000.00) (220000.00) (30000.00) (20000.00) (15000.00)
Investments (244.10) (1145.00) (4000.00) 5000.00 0.00 (10000.00) (10000.00)
Others 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net Cash Used In Investing Activities (22254.60) (60751.50) (84000.00) (215000.00) (30000.00) (30000.00) (25000.00)

Cash Flow from Financing Activities

Change in Debt (9793.40) 42571.00 29472.93 124272.93 (90682.10) (18081.88) (20031.88)

Change in Equity 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividends Paid (17871.60) (10739.00) (14246.94) (15928.70) (20796.20) (24378.81) (28290.81)
Interest Paid (2509.40) (2532.40) (3636.96) (4789.72) (7589.08) (7664.72) (9016.75)
Others (10296.80) (1803.80) 0.00 0.00 0.00 0.00 (0.00)
Net Cash used in Financing Activities (40471.20) 27495.80 11589.03 103554.51 (119067.38) (50125.41) (57339.45)

Net Increase in Cash and Cash Equivalents 41496.10 44690.90 10037.90 (11336.71) 1306.03 53945.38 102465.69

Cash and cash equivalents At the beginning 96098.3 137594.4 182285.3 192323.2 180986.49 182292.52 236237.9
Net Increase in Cash and Cash Equivalents 41496.10 44690.90 10037.90 -11336.71 1306.03 53945.38 102465.69
Cash and cash equivalents At the end 137594.40 182285.30 192323.20 180986.49 182292.52 236237.90 338703.59

Financial Ratio