SAIL: Unattractive

Recommendation: Unattractive

Sowmya Krishnan

THE fixed deposit programme of Steel Authority of India (SAIL) is not a good option for investors, regardless of the risk class they belong to.

The question is if the rates offered factor in the risk premium the company's fundamentals warrant. Though the rates on offer look reasonable, investors do have other investment options with similar coupon and with a lower risk profile too. The gearing level and the interest coverage ratio are also high. Under present circumstances, it appears that SAIL could need the support of either the government or the financial institutions to service its debt obligations. This makes this FD programme an unattractive option.

The fixed deposit programme of SAIL is open for investment. The company offers both fixed and cumulative schemes with tenors ranging from one to three years. The rates on offer for the fixed deposit scheme is 9.5 per cent, 10 per cent and 11 per cent for one, two and three years respectively. Interest is paid quarterly.

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In the cumulative scheme, the rates, on a compounded basis, work out to 9.80 per cent, 10.36 per cent and 11.47 per cent respectively. The minimum deposit under both the schemes is Rs 25,000 and, thereafter, in multiples of Rs 1,000. Deposits are accepted at the Public Deposit Department, located at `Arunachal' 4th floor, 19, Barakhamba Road, New Delhi - 110 001.

SAIL is a major player in the steel industry. The performance of the industry in recent times has not been impressive. Though 2000 was somewhat better, the prospects in the coming fiscal do not augur well. For instance, global steel consumption is expected to decline in 2001.

The other major problem plaguing the industry is the weak prices for steel products. This coupled with the over-capacity in the market has had a negative impact on cash flows for most major producers. International steel prices are not expected to recover before the first quarter of 2002.

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The company's earnings performance for the quarter ended June 2001 was not very impressive. Net sales revenues fell 22 per cent to Rs 2,875.14 crore compared to the corresponding previous period. In the same time-frame, while operating margins declined from 13.69 per cent to 10.59 per cent, post-tax losses rose from Rs 230.54 crore to Rs 375.72 crore.