Company Chosen : SAIL

MANAGERIAL ACCOUNTING
ASSIGNMENT

Submitted by,
Siddiq Ul Akber T.M
PGDM(2017-19)
Division : B
Roll no. 1701082

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Summarize in half to one page the outlook for the Industry, performance of the company
and any issues and concerns raised by the management:
OUTLOOK OF THE INDUSTRY:

WORLD ECONOMIC ENVIRONMENT: Global economy grew by 3.1% in the fiscal year 2015,as
estimated by IMF. The economic growth was driven by emerging markets and developing economies
that grew by 4% during the year.This was also supported by advanced economies that registered a
growth of 1.9%.However,Global economy continues to be impacted by the slowdown and rebalancing
of the Chinese economy, lower commodity prices and the gradual tightening of monetary policy in
United States.Still, IMF forecasts world output growth to be stable at 3.2% and pick up to 3.5% in 2017.

WORLD STEEL SCENARIO: In 2015,World steel production was 1623 million tonnes which is 28% lower
than the previous year,as estimated by WSA(World Steel Association).All countries except India
registered a decline in the production of steel. India’s crude steel output increased by 2.6% in
2015.China is still the world’s largest steel producer and it accounts for the 50% of total
production.But,China’s crude steel output declined by 2.3% in 2015 compared to their output in
2014.WSF has forecast that steel demand will decrease by 0.8% in 2016 following a contraction of 3%
in 2015.But,in 2017 it will return back to gowth of 0.4%.

INDIAN ECONOMY ENVIRONMENT: Indian economy had registered a growth of 7.2 % in 2015 and 7.6
% growth in 2016.India’s economic scenario is expected to grow due to government’s commitment to
reforms.IMF has estimated indian economy to grow by 7.5% in both 2016 and 2017.

INDIAN STEEL SCENARIO: During 2015,India overtook USA to be the 3rd largest steel producer in the
world followed by China and Japan.India’s crude steel production stood at 89.3 million tonnes during
the fiscal year 2015-2016 which indicated a growth of 0.4% from last year.But,Finished steel
production declined by 1.1%. Also,Import of finished steel products grew by 20.2%.Even though the
consumption of steel in india grew by 4.3%,it was mostly catered by imports due to the decline in
production.In February 2016,Government imposed MIP(Minimum Import Price) condition on imports
of 173 steel units inorder to reduce the imports of steel.With the government’s focus on
manufacturing and industry coupled with focus on infrastructure(roads,rails,ports etc),the demand
for steel is going to increase in the coming years.

PERFORMANCE OF THE COMPANY: SAIL achieved sales turnover of Rs. 43,337 crore during the
financial year 2015-16 which was lower by 14% compared to previous year.During the financial year
2015-16 SAIL registered a loss after tax of 4,137 crores as compared to profit after tax of 2,093 crores
last year.Profitability of the company was affected by lower saleable steel products on account of
adverse market conditions,lower net sales realisation and adverse financial impact of contribution to
District Mineral Foundation and National Mineral Exploration Trust.Also,Higher usage of imported
coal in the blend due to unavailability of indigenous coal added to SAIL’S woes.

ISSUES AND CONCERNS: The Indian metal and mining sector has been hit by the ongoing crisis and is
currently facing a lot of challenges like tightened liquidity position,leveraged balance sheets,surge in
imports and declining sales realization.SAIL’s profit has been impacted by lower NSR of
products,higher Royalty rate on iron ore,depressed domestic demand and a surge in imports which
had captured the market at the expense of domestic producers.Also,higher capital related charges on
account of incremental depreciation and interest related charges of new facilities have also increased

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the expenses.Some lease extension orders are still awaited.In addition to this,SAIL has to pay an
amount of about Rs. 1100 for entire forest land within mining lease area to ministry of environment.

Who is the main promoter of the company? What is the shareholding of promoters? Do
any large institutions/ mutual funds hold shares in the company? Comment if this is a
family run business. Is the Managing Director/CEO from the promoter family?
Central government of india is the main promoter of the company and it holds 75% of shares in the
company(exactly 3097767449 shares).Mutual funds hold 0.79% shares(exactly 32534871
shares),banks hold 3.50% shares (exactly 144389233 shares) in the company. Also insurance
companies hold 11.41% shares (exactly 471434879 shares) and Foreign institutional investors(FII) hold
4.99 % shares (exactly 206229237 shares) in the company. SAIL is not a family run business. It is a
public sector undertaking.

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Read through the auditors’ report and summarize if any concerns have been raised by the
auditor:
Auditor has raised some concerns regarding fixed assets

1. The location and the extent of area in few in respect of land needs to be updated in
the fixed assets registers and have to be reconciled with the revenue records as to the
extent of holding and location of land. The delay is due to government procedures and
is concerned with revenue departments of respective state governments
2. Auditor noticed that certain land and buildings are under encroachment/unauthorised
occupation and should be addressed.

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Select and summarize the accounting policy for two to three items e.g.
Depreciation, Fixed Assets, Inventory, Revenue Recognition.

• Depreciation:
The accounting policy adopted by SAIL for depreciation is straight line method,
considering a residual value of 5% of the cost of the asset, over the useful life of assets.
This is as specified in Schedule 2 of Companies act 2013, except in case of Factory
Buildings, Plant and Machinery, Water Supply & Sewerage and Railway Lines &
Sidings and components. Expert advice have been sought to find out useful life
of above mentioned assets. For these class of assets, based on technical
evaluation carried out by external technical experts, the company believes that
the useful lives best represent the period over which Company expects to use
these assets. Hence, the useful lives for these assets are different from the
useful lives as prescribed under Part C of Schedule II of the Companies Act 2013
• Fixed Assets:
Fixed assets are accounted at cost of acquisition less depreciation except land
gifted by state governments, which is stated at nominal value with
corresponding credit to capital reserve. Expenditure on development of land
is also included in cost of land. Cost of lease hold hand is amortised over the
period of lease. Mining costs are treated as intangible assets and are written
off on the basis of annual production to the total estimated mineable reserves.
Software which is not an integral part of related hardware, is treated as
intangible asset and amortised over a period of five years or its licence period,
whichever is less.
• Grants:
Grants related to the acquisition of a specific asset are adjusted against the
cost of concerned asset. And, grants related to revenue expenditure are
adjusted against the related expenses

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How has the company performed as compared to the previous year. Which are
the major items of expenses. Have the percentage of expenses to revenue for
the major heads remained stable across the two years. (2015-16 and 2014-15,
you may need to go through notes to accounts for this

PERFORMANCE OF THE COMPANY

(In R.s crores)
Parameters FY 16 FY 15 Change %
Sales turnover 43336.99 50626.65 -14.39%
Profit / (loss) before (7198.44) 2358.91 -200.15 %
tax
Profit / (loss) after tax (4137.26) 2092.68 -97.70 %
Earnings per share (10.02) 5.07 -97.6%

The above table shows the details about company’s performance in the market for the last 2 years. As
shown in the table, sales turnover has decreased by 14.39% and company is currently on loss. In 2015,
SAIL made a profit of Rs. 2358.91 crores. However, coming to the current year(2016), SAIL has made
a loss of Rs. 7198.44 crores. Earnings per share have also come down significantly. So, the company’s
performance is poor compared to last year.

MAJOR ITEMS OF EXPENSES:

Parameters Rs. In crores

Cost of materials consumed 17150.61
Other expenses(Power and fuel, Repairs and 15118.45
maintenance, Consumption of stores and spares
parts etc)

COMPARISON OF EXPENSES TO INCOME:

(in crores)
Parameters Expenses Total Percentage(A/B) Expenses Total Percentage
incurred revenue incurred revenue (C/D)
in FY earned in FY earned
2016(A) in FY 2015(C) in FY
2016(B) 2015(D)
Cost of 17150.61 39666.84 43.23% 18522.90 46731.55 39.63%
materials
consumed
Other 15118.45 39666.84 38.11% 14205.29 46731.55 30.39%
Expenses

According to the stats given in the above table, we can see that the proportion of expenses to income
of SAIL in FY 2016 has increased considerably compared to the previous financial year. The percentage
change of ‘cost of raw materials’ consumed is 3.6% and that of ‘other expenses’ is 7.72%

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What are the major components of Assets and Liabilities for the company? What
is the level of total borrowing for the firm as a percentage of total equity +
liabilities. Additional comments may be provided on the components of fixed
assets, current assets. Does the firm have an investment portfolio? What are the
nature of its investments. (listed equity shares/bonds/unlisted entities)

Major Components of Assets:

• Tangible fixed assets(43.46% of total assets)
Examples: Land, plant & machinery, Furniture, Vehicles etc
• Intangible fixed Assets(25.32% of total assets)
Examples: Good will, Computer software, Mining rights etc

Major components of liabilities :

• Reserves and surplus (35.76% of total liabilities)
Examples: Capital reserve, Securities Premium reserve etc
• Long term borrowings (16.26% of total liabilities)
Level of total borrowings:
Long term borrowings(A) : Rs. 15980.72 crores
Short term borrowings(B): Rs. 15530.31 crores
Total equity + liabilities(C): Rs. 98269.44 crores
Percentage = (A+B)/C =32 %

Fixed Assets:
Fixed assets include both tangible and intangible assets. Tangible fixed assets include land,
plant and machinery, furniture and fittings, vehicles, railway lines and slidings etc. Intangible
assets include good will, computer software, mining rights etc.

Current Assets:
Current assets include inventories, trade receivables, Short term loans and advances etc

Investment portfolio:
• SAIL has invested in some companies like Almora Magnesite Ltd., Bihar State
Finance Corporation, Indian Potash Ltd., icci bank, hdfc bank etc and the
security type is equity share
• SAIL has also made some joint venture investments like Bhilai Jaypee Cement
Ltd etc and it has also invested in it’s subsidiaries. All of the investments are in
the form of equity share

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comment on the cash flow statement. Is there a large difference between Profits and
actual cash flow from operations? Comment on large items that cause the difference
between the two figures (e.g. receivables, other income etc.) Is the company making
sufficient cash flows from operations to fund its investing activities? Is the firm able to
repay borrowings from operating cash flows? Or is it borrowing in order to repay

Sail is on loss currently (Fiscal year 2016)

Profit/loss before tax : Rs. (7198) crores
Net cash from operating activities : Rs. 2817.87 crores

By thorough analysis, an analyst can notice that even though the company is on loss, the net
cash from operating activities is Rs. 2817.87 crores. This is because depreciation which is not
an operating activity is considerably high (Rs. 2121.96 crores). This should be added back to
the loss incurred because depreciation doesn’t account for any actual cash flow. Finance
charges and interests have similar impact. They are also added back since it is a non-operating
expense (Rs. 2046.25 crores). Along with this, there are huge changes in working capital like
decrease in inventory(Rs.2600.45), decrease in sundry debtors(Rs.380.14), decrease in loans
and advances(Rs.2141.96 crores), increase in current liabilities (Rs. 2141.96) etc. All these
factors reduce the loss incurred by the company. And, That is why actual cash flow is showing
a huge difference from the loss incurred by the company

Investments made by the company add up to Rs. 10,408.96 crores. This amount is higher than
net cash obtained from operating activities. So cash is not sufficient

Interest paid and financial charges add up to Rs. 1781.39 crores which can be paid using the
cash from operating activities.

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Does the firm have any contingent liabilities? What are the items of contingent
liabilities.

Yes, SAIL has many contingent liabilities like claims against the company pending judicial
decisions on Excise duty, Sales tax on interstate stock transfers from plants to stockyards,
income tax, civil matters etc. Contingent liabilities also include disputed income tax on joint
venture company, price escalation claims by contractors and suppliers, Bills drawn on customers
and discounted with banks etc

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Does the company provide segmental reports? What is the percentage share of the
various segments in the total revenue and assets of the firm

Yes, The five Integrated Steel Plants and three Alloy Steel Plants, being manufacturing units, have
been considered as primary business segments for reporting under `Accounting Standard-17 -
Segment Reporting' issued by Ministry of Corporate Affairs.
(Rs. In crores)
Segments Revenue Revenue Assets Assets
Percentage percentage
Bhilai Steel Plant 14654.53 33.81 % 24327.08 24.93%
Durgapur Steel 6098.45 14.072 % 5596.68 5.73%
Plant
Rourkela Steel 7711.94 17.79 % 18596.12 19.06%
Plant
BSL 9097.91 20.99 % 14038.02 14.38%
ISP 3318.79 7.65 % 18804.53 19.27%
Alloys steel plant 393.42 0.907 % 580.24 0.59%
Salem Steel plant 1774.01 4.09% 2768.09 2.83%
VISL 219.47 0.506 % 637.10 0.65%
Others 68.47 0.157% 12213.73 12.51%
SAIL 43336.99 97561.59

Which is the most profitable segment for the company?

Bhilai steel plant is the most profitable segment for the company. It made an operating profit
of Rs. 708.20 crores during 2016.All the other segments are unfortunately on loss.

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Provide a half page executive summary of your analysis of the firm.

(Rs. in crores)
Parameters FY 2016 FY 2015
Revenue 39666.84 46731.55
Profit after tax (4137.26) 2092.68
Earnings per share (10.02) 5.07

SAIL is currently on loss due to some really tough market conditions and considerable
decline in company’s sales. During financial year 2016, SAIL’s market performance
was poor compared to the previous year. The company made a loss of Rs.4137 crores
after tax. And the way ahead is going to be difficult due to dumping of steel from abroad
and increased competition from international markets. However, SAIL can get back on
track if they minimise their expenses and utilise the plethora of opportunities coming
it’s way. Indian government’s new initiative ‘Make in India’ will aid SAIL’s cause. SAIL
can make use of high export potential for markets of middle east, South east Asia to
overcome the ongoing lean patch. Indian government’s move to check the imports will
also work in favour of SAIL. In order to make the company profitable again, Sail
management should focus on cost control measures in such a way that there is
improvement in productivity with reduced cost.

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