SAIL's huge investment plan cheers few investors

Steel Authority of India (SAIL) is looking to make a gargantuan Rs 1,50,000 crore of investments in the country but that brings little cheer for investors and analysts, who say the 15-year-long spending plan makes little sense.

Shares of the state-run steelmaker fell one per cent on Friday while the BSE Sensex gained moderately.

SAIL, which had a market value of Rs 31,891 crore at the end of trading on Friday, aims to ramp up steel production from 23 million tonne to 50 million tonne by 2030/31.

Chairman CS Verma told PTI the company has prepared the investment proposal and would present it before the board for approval. About Rs 40,000 crore of the total investment will be in West Bengal for new capacities and allied activities, including mining. The steel capacity for West Bengal will be doubled to 10 million tonne with the expansion.

Deven Choksey, Managing Director, KR Choksey Securities, says the 15-year plan is too long. "In the commodity cycle, there would be many ups and downs in this period. It's better for SAIL to go with short- and medium-term growth plans and consolidate growth."

The SAIL chairman made the announcement when the government is goinahead with its disinvestment programme in PSU companies. In December, the government had divested a five per cent stake in SAIL and raised Rs 1,700 crore. But the government controlled companies were the major subscribers.

Life Insurance Corporation of India invested as much as Rs 700 crore, about 40 per cent of the issue. Other prominent investors were State Bank of India (Rs 150-200 crore) and United India Insurance (Rs 15 crore).

There is another reason for the drop in SAIL's market value. The company's net profit has fallen 65 per cent in the last six years, while the revenue registered a moderate 16 per cent growth. SAIL's share price is down 72 per cent at Rs 78.70 now, compared to its peak of Rs 280 on December 28, 2007.

Ambareesh Baliga, Managing Partner, Global Wealth Management, Edelweiss Financial Services, says overall sentiment towards metal stocks is low. "In this scenario, the company needs to have a clarity on its long-term growth. Demand will improve with infrastructure growth. SAIL should design a detailed plan to capture the opportunity."

A steel analyst says he lost interest in tracking the company because of declining growth. "There is no recovery plan while they offer investments. The company first needs to consolidate and rationalise its operation rather than announcing long-term investment plans," he adds.