SAIL’s weak operational performance, elevated debt levels affected credit profile: CAG

• 'Declining operating cash flows and repayment obligations could result in further downward revision of Credit Rating'
• Borrowings by SAIL had increased from Rs 16,320 crore in 2011-12 to Rs 54,127 crore as on March 31, 2020, said the CAG

New Delhi: In its latest report, the CAG (Comptroller and Auditor General) has pointed out several shortcomings in SAIL's (Steel Authority of India Ltd) financial performance between 2015-16 and 2019-20, like deviations in budget estimates and actuals, inability to maintain a desired ratio between short-term and long-term borrowings and non-hedging of loans, inability to pay the stipulated dividend during a part of this period and poor investment decisions in joint venture companies. The audit report said that due to weak operational performance, elevated debt levels and increase in interest cost, SAIL's credit profile during the last five years has either declined or remained stable.

"SAIL incurred losses during 2015-16 to 2017-18 and subsequently earned profits during 2018-19 and 2019-20 mainly on account of valuation of sub-grade fines, scrap etc. The Company was faced with declining/stable Credit Rating over last 5 years, which was attributable to weak operational performance, debt levels and interest cost," said the CAG.

SAIL credit rating declined in comparison to private peers

While noting that the credit rating of SAIL during the last five years has either declined or remained stable, the CAG said that this was attributable to its weak operational performance, elevated debt levels and increase in interest cost. "Declining operating cash flows and repayment obligations could result in further downward revision of Credit Rating, which is also indicated in the rating outlook being negative in respect of funds and long term loans. Such downward revision in ratings would lead to increase in borrowing cost and further difficulty in raising funds in the future," the CAG said in the report.

The CAG said that the SAIL management replied (May 2021) that rating of all the steel players in India were downgraded due to depressed domestic Indian steel industry. However, the auditor said that the response should be considered in view of the fact that the credit rating of a similar private sector steel company for long term loans was stable during 2016-17 to 2019-20.

The critical ratios depicting SAIL's financial position like Debt Equity ratio, Interest Coverage Ratio and Net Debt to Earnings before interest, taxes, depreciation and amortization ratio also indicated financial instability and worsening credit profile of the PSU, said CAG.

Borrowings increased from Rs 16,320 cr to Rs 54,127 cr

Borrowings by SAIL had increased from Rs 16,320 crore in 2011-12 to Rs 54,127 crore as on March 31, 2020, said the CAG. The audit noted that the decision to hedge loan and interest by the company was not consistent. Non-hedging of loans of USD 400 million in terms of foreign exchange fluctuation led to avoidable expenditure of Rs 194 crore. SAIL did not hedge the interest on Buyers Credit (LIBOR) except in few cases during March 2017 to December 2017.

Poor investment in JVs

Out of 21 Joint Venture Companies of SAIL, eight were operational, three under project/ feasibility stage and 10 were inactive or under closure. "SAIL had not framed any policy or guidelines for investment of funds in the Joint Venture Companies. Audit noted cases of unfruitful investment in the Joint Venture Companies by SAIL," said the CAG. The list of such JVs includes, Bhilai Jaypee Cement Limited, SAIL-SCL Kerala Limited, SAIL and MOIL Ferro Alloys Private Limited and S&T Mining Company Private Limited.

Debtors had increased from Rs 3,297 crore (2015-16) to Rs 9,020 crore (2019-20). There was delay in submission of claim of Rs 1,959.46 crore towards price escalation for rails.

Dividend & disinvestment

The CAG report has also pulled up the PSU for non-payment of dividend in the year 2019-20 despite being in profit. "The Company declared nominal dividend (Rs 206.53 crore being 5 percent of the Paid up Share Capital) during 2018-19 and no dividend during 2019-20 despite being in profit. Thus, SAIL has not paid dividend amounting to Rs 3,690 crore (Rs 3,897 crore – Rs 207 crore) to its shareholders (including GoI) for the years 2018-19 and 2019-20 in violation of guidelines of Department of Investment and Public Asset Management," said the CAG.

The CAG also observed that there were delays in the disinvestment process. During review of status of disinvestment of PSUs, Principal Secretary to the Prime Minister observed undue delays at the level of Ministry and SAIL in the disinvestment process in case of Alloy Steel Plant and Visvesvaraya Iron and Steel Plant, said the report.

The CAG said that DIPAM had prepared a timeline of 202 days (ie, 15 June 2017) from the date of constitution of the Inter-Ministerial Group for opening of the financial bids and making recommendations to Inter-Ministerial Group for approval of the Strategic Partner for the sale of Salem Steel Plant, Visvesvaraya Iron and Steel Plant and Alloy Steels Plant. "The Inter-Ministerial Group was constituted on November 25, 2016. As of May 2021, disinvestment of these units had not been completed even after a lapse of more than four years," said the CAG.

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