CAPITAL STRUCTRUE & LEVERAGE ANALYSIS:

A CASE STUDY OF STEEL AUTHORITY OF INDIA LTD. (SAIL)

Dr. Ashok Kumar Panigrahi
Abstract
This study is born out of the need to establish the presence of the responsiveness of capital
structure performances through EBIT-EPS analysis. In this paper an attempt is made to analyze the
capital structure of SAIL during the period 1996-97 to 2003-04, so as to understand the factors that
influenced the capital structure decisions of the company and to know the impact of capital
structure decisions on profitability and performance of the company. Researchers tried to evaluate
the composition of capital structure, capital structure planning and patterns of capital structure in
SAIL and the advantages and disadvantages associated with higher and lower levels of debt which
has been observed during the period of the study. The financial parameters of SAIL reflects that
apart from the gross margin, which took sharp dip in 1998-99 on account of recessionary
conditions in steel market, the ballooning capital charges have been a major contributor to its
losses. The increasing level of debts in the balance sheet and a diminishing net worth have taken
its debt-equity ratio to an unsustainable limit of over three.

Key Words: Capital Structure, Leverage, EPS, Capital Gearing, Tax Shield, SAIL

1.0 Introduction:
Capital structure, or what is generally known as capital mix, is very important to control the
overall cost of capital in order to improve the earnings per share of share holders. After
globalization and liberalization, various financial sector reforms were started by governments,
such as reducing rates of interest etc., which directly affected the capital structure planning of
firms. Today, the financing of capital structure is one of the most significant managerial decisions
of every corporate. Initially, the company will have to plan its capital structure at the time of its
promotion. Subsequently, whenever funds have to be raised for finance and investment, a capital
structure decision is involved. With an objective to study the capital structure, its determinants,
nexus with the value of the firm and moreover the capital structure decisions on the performance
of the SAIL, we start with analyzing the share holding pattern of SAIL as on 31st March 2004.

1
Electronic copy available at: http://ssrn.com/abstract=2342489

Share holding patterns of SAIL on 31st March, 2004:

1.59
0.07
1.58
1.35
0.15

4.46

4.98

85.82

GOI

FI's

Banks

Mutual Funds

FII's

GDRs

Companies

Individuals

Fig-1

Table-1
Shareholders

No. of shares

Amount
% of
(Rs. in crores) Equity

GOI
FI's
Banks
Mutual Funds
FII's
GDRs
Companies (including
trust
&
clearing
members)
Individuals (including
employees & NRIs)
Total

3544690285
205643459
6296570
55789410
65100843
2912300
65605307

3545
206
6
56
65
3
66

85.82
4.98
0.15
1.35
1.58
0.07
1.59

184362371

184

4.46

4130400545

4130

100.00

2
Electronic copy available at: http://ssrn.com/abstract=2342489

1.1. Relevance of the Study: Many profitable companies fail each year just because of the
failure of their management to manage the capital structure properly. Now the corporates are full
of financial restructuring by a proper mix of capital structure of debt and equity capital so as to get
maximum leverage from the mix by adding value to the shareholders. The present study attempts
to identify the impact of capital structure mix for future profitability of the company.

1.2 Identification of the Problem Area: An attempt has been made to evaluate the performance
of Steel Authority of India Limited (SAIL) through Capital Structure Analysis during the period
of study from 1996-97 to 2003-04. The main problem areas of the study are:
Computation of value of firm
Analysis of existing capital structure
Performance evaluation with respect to capital structure
1.3 Objectives of the study: The followings are the objectives of the study of The Analysis of
Capital Structure of Steel Authority of India Limited:1) To study the existing capital structure maintained by the firm
2) To study the influence of various factors in determining capital structure
3) To study the nexus between capital structure and value of firm
4) To evaluate the firms performance with respect to capital structure

2.0 Theoretical Framework:

2.1 Capital Structure - An introduction: The basic objective of financial management is to
maximize the shareholders wealth and therefore all financing decisions must be taken in the light
of this objective. The theory of capital structure has derived its importance from the relationship
between the financial leverage and the earnings available to the equity shareholders. In case of
favourable financial leverage, the increase in sales or more particularly the increase in earning
before interest and tax (EBIT) will have a magnifying effect on the earning per share (EPS). The
firm should therefore, select such a capital structure or financial leverage which will maximize the
expected EPS. The decisions regarding the capital structure or the financial leverage or the
financing mix should also be based on the objective of achieving the maximization of
shareholders wealth.

2.2 Determinants of capital structure:

The following are the various factors which determine the capital structure of a company:
i) Cost of capital: Cost of capital of different sources of capital influences capital structure. A
company would be interested in less overall cost of capital and that a source that is less expensive
will be used more than the one that is more costly. Generally, debt capital is said to be less
expensive, hence the tendency to use more debt capital. But, of late, equity capital has become
cheaper due to free pricing of capital issues. Hence, now, more equity capital is used by
companies. Among debt capital, bank loans are viewed more expensive than market borrowings
and that more debt capital is raised through the capital market than from bank loans.

ii) Tax Advantage: Tax advantage of debt capital is a factor in favour of using more debt capital.
The interest paid on debt capital is deducted while computing taxable income. So, tax saving to the
extent of interest paid times tax rate enjoyed by the company, reducing the effective cost of debt.
This advantage lures companies to use more debt capital.

iii) Restrictive components: Restrictive components such as restriction on business expansion, on

raising additional capital, on declaration of dividends, nominees directors on the board,
convertibility clause etc. go with debt financing, especially borrowings from term lending financial
institutions. These restrictive conditions are the implicit cost of debt capital normally not
considered, but should be considered.

iv) Debt capacity of a business: How much debt capital a business can bear, that is comfortably
serving is a factor to be reckoned. Debt service coverage should be at least 3 for comfortable
serving. Interest coverage ratio is a measure of debt capacity and can be found out as follows:
INTEREST COVERAGE RATIO = EBIT/INTEREST EXPENSE
Businesses that do not generate sufficient cash flow should think of alternative sources.
v) Leverage Effect:
Financial leverage refers to the arte of change in earning per share (EPS) for a given change in
earnings before interest and tax (EBIT). A more than proportionate change in EPS for a given
change in EBIT might tempt management to use further debt capital initially to enhance EPS and
later go for additional equity capital at a premium.

The leverage effect is also determined with the help of debt ratio and debt-equity ratio which can
be calculated by the following formulae:
DEBT RATIO = DEBT / (DEBT+NET WORTH)
DEBT EQUITY RATIO = DEBT / NET WORTH

vi) Securitability of assets: Securitability of assets is a determining factor for using debt capital.
Firms which have assets that are readily accepted as security can raise debt capital. Land at prime
locations, modern building, machinery in good condition, etc. are accepted as security.
Undertakings owning these assets can go for debt financing.

vii) Trading on equity: It is a technique by which by low cost debt is used extensively to enhance
earnings for equity shareholders. If the management is interested in this, it would use more debt
capital. ROI must be greater than cost of debt to reap benefit of trading on equity.

viii) Stability of earnings: It is very important for practicing trading on equity and for servicing
larger debt. If earnings fluctuate, it is better less debt capital is used.

ix) Financial Risk: Financial risk perception is an influencing factor of capital structure. Financial
risk refers to the chances of bankruptcy proceedings against the firm for non-payment of debt or
failure to service debt for a period. If the risk is higher, less debt capital is preferred.

x) Investor preferences: Investor preferences for securities for investment need to be kept in
mind. At time, people want debt securities, while at other times equity is preferred. The risks
averse prefer debt instruments, while the risk seekers go for equity investments. Rate of tax on
capital gain and interest income also have a bearing impact on the choice of debt instruments or
equity investments of the investors.

xi) Capital market conditions: Capital market condition is also a factor in selecting a capital
structure. When capital market is booming, firms can take the market route to raise capital. In the
depressed situation, firms depend on bank finance, and other debt finance.
2.3 Assumptions in Capital Structure: There are several theories of capital structure which are
based on the following assumptions:
Only two sources of capital, debt and equity, are used.
Debt capital is cheaper than equity capital.
5

Debt capital cost is fixed.

There is no corporate taxation.
There is perfect competition in capital market.
There is 100% dividend payout.
The assets do not change, there is no expansion.
The operating profit, EBIT remains constant.
Business risk is constant over time and is independent of capital structure and financial
risk.
There is perpetual life of the firm.

2.4 Optimal Capital Structure: Companies want to be optimally structured as to capital. Neither
over dependence on equity nor on debt capital is advised. Again extent of dependence on any type
of capital is influenced by both firm specific and market- wide factors. Optimal capital structure
referred to is one that:
Maximizes value of the firm
Minimizes overall cost of capital
Reduces rigidity of capital structure
Enhances control over affairs of the business
Increases simplicity of capital structure
Ensures enjoyment of tax leverage
Helps reaping financial leverage benefits to the maximum, etc.

Optimum capital structure is a classical concept. Debt capital and equity capital are in fine balance
here producing optimal results on value, cost, leverage control and the like. As a firm uses debt
upto a level its value increases. Beyond certain level debt capital proves costlier and value starts
dropping downwards. The debt equity point, at which value is maximized, is called the optimal
capital structure. Optimal capital structure varies with firms and with market factors. As market
and firm specific factors keep changing, optimal capital structure also varies. Businesses try to
reach optimum capital structure. Do they reach question mark. Mostly, they are about, but not at
optimal capital structure.

3.0 Capital Structure and Value of Firm:

3.1 The value of a firm depends on the earnings of the firm and the earnings of the firm depend
upon the investment decisions of the firm. The earnings of the firm are capitalized at a rate equal
to the cost pf capital in order to find out the value of the firm. Thus, the value of the firm depends
on two basic factors i.e. the earnings of the firm and the cost of capital.

The operating profit of the firm i.e. the EBIT is divided among three main claimants (i) the debt
holders who receive their share in the form of interest, (ii) the government, which receives its share
in the form of taxes, and (iii) the shareholders who receive the residual. So, the EBIT is a pool,
which is to be divided among the three claimants. The investment decisions of the firm determine
the size of the EBIT pool while the capital structure mix determines the way it is to be sliced. The
total value of the firm is the sum of its value to the debt holders and to its shareholders and is
determined by the amount of EBIT going to them respectively. The investment decisions can
increase the value of the firm by increasing the size of EBIT where as the capital structure mix can
affect the value only by reducing the share of the EBIT going to the government in the form of
taxes.

3.2 The financing mix or the financial leverage or the capital structure does not affect the total
earnings of the firm, which is a factor of the investment decisions and the cost structure of the
firm. However, the earnings available to the shareholders may be influenced by the capital mix as
it is seen that that the financial leverage helps increasing the EPS for a given level of EBIT. The
EPS on the other hand, affects the market value of the share and hence affects the value of the
firm.

The overall cost of capital of the firm i.e. the weighted average cost of capital, WACC depends
upon the specific cost of capital of individual sources of finance and the proportion of different
sources in the total capital structure of the firm. One capital structure is represented by one WACC
which may change whenever there is change in the financing mix. So a firm can change its WACC
by changing the financing mix and thus affect the value of the firm. It may be noted that the cost of
capital and the value of the firm are inversely related. For a given level of earnings, lower the cost
of capital, the higher would be the value of the firm.

4.0 Research Methodology:

a) Period and Area of Study: Capital structure of Steel Authority of India Limited (SAIL) for the
past eight financial years from 1996-97 to 2003-04 has been analysed. The study has been
conducted at one of the SAILs unit at Rourkela Steel Plant (RSP). The area of the study is as
follows:
Analysis of determinants of capital structure:

Cost of capital
Tax advantage
Debt service capacity of the firm
Leverage effect
Trading on equity
Stability of earnings

Analysis of cost of capital and value of firm.

b) Sample Design: In this study, the sample of eight financial years from 1996-97 to 2003-04 is
taken from Annual accounts of SAIL. Secondary data has been used in this research study, which
are balance sheets and their related schedules of the past financial years from 1997 to 2004 of
Rourkela Steel Plant, Rourkela.

c) Tools of Analysis: To assess the significance of Capital structure analysis of Steel Authority
of India Limited (SAIL) during the study period of 1996-97 to 2003-04, the following tools of
analysis have been used :Ratio analysis.
Bar Chart.
Pie Chart.

d) Limitations of the study:

The study is limited to eight financial years from 1997 - 2004 performance of SAIL.

The data used in this study have been taken from Balance sheet & their related schedules of
SAIL made available at the companys unit Rourkela Steel Plant, Rourkela as per the
requirement and necessity, some data are grouped and sub grouped.
8

5.0 Analysis & Interpretation:

5.1 SAIL has used only two sources of finance to finance its assets and working capital, which are
equity capital and debt capital.

a) Equity Capital: SAIL is authorized to issue equity shares of Rs.5000 crores but the company
has an issued and paid up equity capital of Rs.4130.40 crores. The equity share capital of the
company in the year 1994-95 was Rs.3986 crores. The company issued further equity shares in the
year 1995-96 and reached the equity capital balance of Rs.4130.40 crores after which the company
has not issued anymore share till the year 2003-04. The net worth of the company is decreasing
over the years. This is because of the losses suffered by the company from the year 1998-99 to
2002-03 and the company has been able to write off all its previous losses in the year 2003-04.
The net worth of the company is calculated and represented by the following diagram:

NET WORTH= Equity share capital + Reserves and surpluses (Deferred Revenue
expenditure + Debit balance of P/L Account + Miscellaneous expenditures not written off ,if
any)

Net Worth

Rs.(in crores)

10000
8000
6000
4000
2000
0
1996- 1997- 1998- 1999- 2000- 2001- 2002- 200397
98
99
00
01
02
03
04
Years

Fig.2
The value of equity of SAIL is decreasing till 2002-03 but is improved in the year 2003-04. This is
because of the profits made by the company and all the debit balances of P/L Account are written
off.
b) Debt Capital: The debt capital of the company comprises of both secured as well as unsecured
loans. The loans taken from secured sources are more than unsecured ones till the year 2001-02.
This is because the company went a huge modernization program in the year 1991-92 and required
a huge capital. Availing unsecured loans for the company was not possible. These secured loans
9

are old loans and carry a higher rate of interest as compared to unsecured loans. The rate of interest
on secured loans vary in the range of 12 to 17 percent for the secured loans and 10 to 12 percent
for unsecured loans till the year 1999-00 but the company went for a debt swapping from the year
1999-00 and has the rate of interest on secured loans ranging from 10 to 14 percent which is
between 10 to 14 percent on unsecured loans. Most of the secured loans are taken from banks and
the bank had charged higher rate of interest than the market rate.

The sources of debt for the company are mentioned below:

Working capital borrowings from banks
Term loan from banks/ Financial Institutions
Foreign Loans
Public deposits (also includes loans from retired employees)
Government of India
Steel Development Fund (SDF)
The debt capital of SAIL is represented by the following figure:
Debt capital

Rs.(in crores)

25000
20000
15000
10000
5000
0
1996- 1997- 1998- 1999- 2000- 2001- 2002- 200397
98
99
00
01
02
03
04
Year

Fig.3
The above figure represents that the debt capital of the company increased till the year 1998-99
because of the modernization program but the company went for debt swapping and loans
repayments in the year 1999-00. So the debt capital of the company has decreased subsequently
from 2000-01.

10

Table-2
Influence of various factors on choice of capital structure:

Years

1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04

Equity

Debt

(E)

(D)
17302
19872
20851
15082.4
14250.7
14011.6
12927.9
8688.76

4130.40
4130.40
4130.40
4130.40
4130.40
4130.40
4130.40
4130.40

(Rs in Crores)
Interest Cost of debt
Cost of Equity
WACC
%
(I)
(Interest/Loan) (PAT/Net
worth)
(Kd)%
(Ke)%
1179
6.81
6.43
6.7
1554
7.82
1.56
7.39
2017
9.67
NIL
5.46
1788.79 11.86
NIL
9.01
1751.68 12.29
NIL
9.51
1562.03 11.15
NIL
9.6
1334.02 10.32
NIL
8.94
899.43 10.35
NIL
6.73

Notes:
(WACC(Ko) is calculated as (D/(D+E))Kd + (E/(D+E))Ke)
(Equity capital in all the years remains same at Rs. 4130.40 crores)
The above table shows that cost of debt is increasing till the year 2000-01 but was decreased
subsequently from the year 2001-02. This is because of the debt swapping and debt repayments in
the year 2000-01. The company has been able to decrease its interest expense there by reducing the
cost of debt.
5.2 The cost of equity of SAIL is very high in the year 1996-97 as the company was making profits
and the net worth was increasing but subsequently cost of equity reduced and is 0 in all the years
from 1997-98 to 2003-04 because the company had suffered from losses in these years and no
profits were available for equity shareholders. The company had made a profit of Rs.2512.08
crores in the year 2003-04 writing off all its previous losses and debit balance of profit and loss
account.

The WACC of the company is fluctuating over years. It is very high in the years from 1999-2002
because of huge losses and reduction in net worth. This led to an increase in debt capital and
analysis of the Table-1 reveals that cost of debt for the company is higher than the cost of equity.
The introduction of more debt capital is increasing the WACC because of the high cost of debt.
The WACC of the company is decreasing from the year 2002-03 because the company is towards
way of profitability.
11

The cost of debt (Kd), cost of equity (Ke) and WACC (Ko) is represented in the following figure:

Kd, Ke and WACC

cost

15.00
10.00
5.00
0.00
199697

199798

199899

199900

200001

200102

200203

200304

Years
Cost of debt

Cost of equity

WACC

Fig-4

Years

Table-3
Tax Advantage
Interest
PAT

1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04

1179
1554
2017
1788.79
1751.68
1562.03
1334.02
899.43

515.17
132.99
-1573.66
-1720.02
-728.66
-1706.89
-304.31
2512.08

Int. Tax Shield

((1-Tax)Interest)
766.35
1010.1
NIL
NIL
NIL
NIL
NIL
584.63

(Corporate tax for SAIL is taken as 35%)

The above table shows that the company has an interest tax shield in the year 1996-97, 1997-98
and 2003-04 because the company has made profits in these years only. Hence tax has to be paid
only in these years and the tax on interest paid could be saved only in the years of profit.

5.3 Debt capacity of the firm:

The debt capacity or debt servicing capacity of the firm can be determined by calculating the
interest coverage ratio.

Interest coverage ratio (ICR) = Operating Profit (EBIT)

Interest Expenses
12

Table-4
Years

EBIT

Interest

ICR

1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04

1767
1703
399
89.94
1020.6
134.34
1018.15
3527.64

1179
1554
2017
1788.79
1751.68
1562.03
1334.02
899.43

1.50
1.10
0.20
0.05
0.58
0.09
0.76
3.92

(EBIT is calculated by adding interest expenses to the PAT)

The interest coverage ratio of SAIL is very less in all the years from 1996-97 to 2002-03. The ratio
should be at least 3 times for comfortable service of debt but here the ratio is also less than 1 in
many years and then suddenly ballooned to 3.92 in the year 2003-04. This is because of the debt
swapping, loan repayments and reduction in interest expenses of the company.

5.4 Trading on equity:

Trading on equity refers to the technique in which low cost debt is used to enhance earnings for the
shareholders. ROI must be greater than the cost of debt to reap benefit of trading on equity.

Years

PAT

1996-97
1997-98
1997-99
1999-00
2000-01
2001-02
2002-03
2003-04

515.17
132.99
-1573.66
-1720.02
-728.66
-1706.89
-304.31
2512.08

Table-5
Total
Assets
26044
29077
28539
19847.38
18415.57
16263.73
14916.87
13347.93

ROI

Cost of debt

1.98
0.46
-5.51
-8.67
-3.96
-10.50
-2.04
18.82

6.81
7.82
9.67
11.86
12.29
11.15
10.32
10.35

ROI = PAT/Total Assets

Total asset is calculated as:
Net Fixed assets + Capital WIP + Investments + Net Working Capital.
13

Comparing the Return on investments (ROI) and cost of debt, it is observed that ROI is always less
than the cost of debt except in the year 2003-04 because of the high sales realization and better
productivity due to which the accumulated losses of the company were written off resulting in a
higher ROI than cost of debt. The ROI does not support trading on equity as cost of debt is higher
and equity holders are at a loss.

5.5 Leverage effects:

The leverage effect of the firm can be found out by calculating following two ratios:
Debt Ratio:
Debt ratio can be calculated as Debt/ (Debt + Net worth)
Debt Equity Ratio:
Debt Equity ratio is calculated as Debt/ Net Worth

Years

1996-97
1997-98
1997-99
1999-00
2000-01
2001-02
2002-03
2003-04

Table-6
EFFECTS OF LEVERAGE
Debt
Net Worth Debt + NW Debt
Ratio
17302
19872
20851
15082.41
14250.68
14011.63
12927.94
8688.76

7998
8489
6886
4764.97
4164.89
2252.1
1988.93
4659.17

25300
28361
27737
19847.38
18415.57
16263.73
14916.87
13347.93

0.68
0.70
0.75
0.76
0.77
0.86
0.87
0.65

Debt
Equity
Ratio
2.16
2.34
3.03
3.17
3.42
6.22
6.50
1.86

The debt ratio and debt equity ratio is represented in the following graph:

Leverage Effects
8.00
6.00
4.00
2.00
0.00
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04
Debt ratio

Debt equity ratio

Fig-5
14

Analyzing the debt ratio of SAIL, it is concluded that debt forms more than 65% of the total
capital employed by the firm. It has also reached to 86% in the year 2000-01 and 2002-03. It
indicates that the firm has used more debt capital

Analysis of the debt equity ratio reveals the fact that the debt component is very high as compared
to value of equity. The ratio is always more than 2 and sometimes it is also more than 6. It is very
high as compared to the industry average debt equity ratio of 2:1.

6.0 Factors responsible for selection of Capital Structure :

An analysis of the factors responsible for selection of capital structure indicate that almost all the
factors like cost of capital, trading on equity, taxes saved, leverage effect, debt capacity of the
firm, and stability of earnings are against raising debt capital by the company.

i) The cost of capital is increasing with an increase in the debt component in the capital structure.
The cost of debt is high than the cost of equity. The cost of debt i.e. interest also contributes
towards the losses made by the company. The WACC is had also increased. All these costs lead to
a conclusion that the company would not have gone for raising debt capital.

ii) The company had saved corporate tax on interest only in 3 years out of 8 years of profits. Rest
of the years, company had suffered from loss and hence no taxes were paid and saved.

iii) The interest coverage ratio of SAIL is very less than a comfortable ratio of 3 times. Hence the
company was not in a position of comfortable service of debt. Still the company had gone for
raising loan funds and thereby increasing debt component in the capital structure.

6.1 The company could also issue equity shares instead of raising loans. But the company could
not even think of increasing its capital base by issue of shares.
The reasons were:
The decisions taken by the management was very fast and hasty.
Gestation period was very short i.e. the period of finalizing the modernization process and
its implementation was very short. Hence the company needed immediate funds which
were made available through loan funds.
Financial acumen of the company was very poor. Management was not well efficient in
making financial decisions.
15

During the period of modernization, steel industry was in boom and SAIL had a monopoly
in the market. The management could not foresee the risk that might arise in the future. Till
the modernization process was over, many competitors came in the market, steel market
went down and the company suffered from losses.

Table-7
Study of nexus between capital structure and value of SAIL:
The value of the firm is calculated in the following table:
199619971998199920002001- 200297
98
99
00
01
02
03
Net worth as
per B/S
7998
Less: Profit &
Loss
A/C
debit
balance
0
Less:
Miscellaneous 0
Expenditure not W/O
Value
of
Equity (E)
7998
Value of Debt
(D)
17302
Value
of
Firm (E+D)
25300

200304

8489

6886

6061.84 5290.61 5290.4 5290.17 5037.67

796.9

753.73

2460.6 2764.93 0

499.97

371.99

577.65 536.31

8489

6886

4764.97 4164.89 2252.1 1988.93 4659.17

19872

20851

15082.4 14250.7 14012

12927.9 8688.76

28361

27737

19847.4 18415.6 16264

14916.9 13347.9

378.5

The above figure represents that the value of the firm is increasing over years till 1997-98 in the
year of profits but starts declining subsequently from the year 1998-99.

6.2 The value of any firm depends upon two things i.e. the investment decisions of the firm which
will affect the EBIT and the capital structure which affects the EPS because of the slicing of EBIT.
So, let us compare the EBIT and value of the firm to ascertain the factors responsible for the
decrease in value of SAIL.

16

The EBIT and value of SAIL can be represented by the following graph:

RS. in crores

Comparison of EBIT and Value of SAIL

30000
25000
20000
15000
10000
5000
0
199697

199798

199899

199900

200001

200102

200203

200304

Years
EBIT

Value of firm

Fig-6
The above figure represents that the value of the firm started declining from the year 1998-99. The
factors responsible for such decline in value of SAIL are observed as follows:-

a) The investment decisions of the firm which can be interpreted from the decline in EBIT. The
EBIT of SAIL has declined from the year 1998-99 to 2002-03 showing a steep decline in 1999-00.

b) The capital structure of the firm has decreased the PAT. The high cost of capital raised through
loan funds has sometimes resulted in a negative PAT because the amount of interest paid or
accrued during the year is also higher. It has resulted in a decline in EPS in these years. Hence
high cost of capital arising because of an unbalanced capital structure is also a reason for decline in
value of SAIL.

7.0 Summary of Findings and conclusion:

After the analysis of the financial statements of Steel Authority of India Limited (SAIL), the first
impression any one may frame is that the losses incurred by the company is the outcome of an
unbalanced finance mix. The findings are stated below The huge amount of interest paid by the company on the loans raised by the firm is solely
responsible for these losses. But a close scrutiny to the books of account of the firm reveals
certain important factors which prove these facts wrong. Apart from interest payments, the
factors responsible for these losses made by the company in these past years are:
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High input cost

Lower sales realization on iron and steel products
Higher amount of depreciation
Lower productivity and adverse product mix
Voluntary Retirement Payment to the employees in 1999.
Losses due to mergers and acquisitions

Net worth of the company started declining from 1997-98 to 2002-03 but again increased
in the financial year 2003-04.

Debt capital has decreased from the year 1998-99 because of debt repayments and debt
swapping.

The weighted average cost of capital (WACC) of the company fluctuated over years. It was
very high in the financial years from 1999-2000 because of huge losses and reduction in
net worth. This has led to an increase in debt capital. The WACC of the company started
decreasing from the year 2002-03 because the company is towards the way of profitability.

The debt ratio and debt-equity ratio of the company are very high suggesting high amount
of debt in the capital structure. It had reduced the owners fund and confidence as the risk
of the equity holders increase with an increase in loans. The company has obtained fixed
charges of funds more than that of returns on assets which has lowered all the ROE, ROI,
EPS etc.

The value of the company declined over years because of the investment decisions of the
company that are reflected from the EBIT as well as the high cost of capital due to
unbalanced capital structure.

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References:
1. Accounting manuals of SAIL
2. Published financial statements and their related schedules of Steel Authority of India
Limited, for the last eight financial years (1997-98 to 2003-04).
3. Advance Management Accounting, Anthony A. Atkinson, Pearson Education.
4. Cost Accounting, A Managerial Emphasis, Horngren, Datar, Fosyer, Pearson Education.
5. Management & Cost accounting, Colin Drury, Thompson Learning.
6. Fundamentals of Financial Management, Brigham & Hauston, Thomson.
7. www.sail.co.in.
8. www.google.com

The End

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