Financial Statements and Firm Value 131Company-3
1999 2000 2001
Trade receivables 181.69 0 0
Inventories 0 0 0
Trade payables
Closing balance 383.9 392.68 667.43
Total cash outflow 3,939.46 4,582.99 3,565.34
Increase/decrease in –236.98 8.78 274.75
cash balance
PAT –1,617.32 –2,221.53 –1,057.46Despite a whopping loss in all the three years (Rs –1,617.32 crore, Rs –2,221.53 crore, Rs –1,057.46 crore),
the cash flow is positive due to non-operating income, loan proceeds and a decrease in the working capital.
Much of the cash generated is paid off as interest and principal. Further, the company has skipped dividends
because of cash flow difficulties. The liquidation of working capital may mean two things: the company is
improving efficiency or it is not able to sell goods. What is your assessment of the company: Good? Bad?
Ugly? Bad, perhaps. We are talking about the Steel Authority of India (SAIL), the public sector giant,
considered a model public sector unit (PSU) at one time, now struggling to regain lost ground. After
Independence, in 1947, the Government of India (GoI) assumed responsibility of developing the core sectors
such as steel, setting up three plants in the 1950s and one in the 1960s. SAIL is one such government owned
PSU, formed as a holding company in January 1973, for other companies manufacturing steel and related
products. The shares held by the GoI in various steel companies—such as Hindustan Steel, Bokaro Steel,
Hindustan Steelworks Construction, Salem Steel, and National Mineral Development Corporation—were
transferred to SAIL. In October 1976, the Durgapur, Rourkela, and Bhilai steel plants were transferred from
Hindustan Steel to become fully-owned subsidiaries of SAIL. SAIL currently operates four integrated steel
plants (one each at Bhilai, Rourkela, Bokaro, and Durgapur), one alloy steel plant (at Durgapur) and one
stainless steel plant (at Salem). Currently (at the time of writing this) SAIL is the world’s 11th largest steel
company. During the early-1980s, the company faced several problems and incurred losses. V. Krishnamurthy,
the then Chairman of SAIL, turned the company around between 1985 and 1990, through massive
modernization aimed at enhancing the proportion of steel made by the more efficient basic oxygen furnace
method instead of the older, open-hearth method.
SAIL incurred an expenditure of Rs 9,850 crore between 1988 and 1992, for this modernization. During
the initial years of liberalization, the company performed very well and was often cited as an example of
a PSU which did well post-liberalization. However, this did not last long and, by 1997–98, SAIL was back
into the red; one of the worst performers among all PSUs. Ironically, the modernization programs at two of
its plants became a drain on SAIL. The most important was the implementation delay of 4–6 years that led
to huge cost overruns, and resulted in high interest and depreciation costs. For instance, the expenditure at
both Durgapur and Rourkela plants shot up by over 100 percent (to approximately Rs 100 crore) each.
That forced SAIL to raise resources through market borrowings. Consequently, its debt burden catapulted
from Rs 100 crore in 1989–90, when the two programs were finalized, to Rs 400 crore a decade later; interest
costs rose by seven times, to more than Rs 50 crore. The second reason for the modernization programs to
become a drain on SAIL was that they were based on wrong assumptions. One report revealed that the require-
ment of hot metal in the post-modernization period would be 2 million tonnes per annum but no attempt was
made to increase the annual capacity of the blast furnaces, assessed at 1.35 million tonnes per annum. So the
Exhibit 5.6(c) contd.