The global steel industry employs more than two million people worldwide, with further two million contractors and four million people in supporting industries. It is at the source of employment for more than 50 million people. In 2014, global demand for steel is forecast to grow at about 3.3%. Much of the demand growth is expected to come from outside of China. Global demand and supply for steel will be mostly from the developing economy and also from recovering economies. As urbanization projects continue, accompanied by a strong domestic economy and a growing middle class, the demand for steel will continue to stimulate. It will also shift the product range as more sophisticated consumer products, such as automobiles and home appliances, are sought after. This will benefit steelmakers with high-end, value-added products (Global steel 2014, Ernst & Young Publications p. 6). World crude steel production increased from 28.3 mega tonnes (MT) in 1900 to 1,607 MT. in 2013 and currently stands at 405677 thousand tonnes as on March 2014 (World Steel Association).

Global steel demand increased by an estimated 3.2% in 2013 as compared to 2012, largely due to increased infrastructure and construction activity, especially in Asia.

China leads from the front, recording 6% growth in 2013 compared to 2.9% in 2012 in the global steel industry. However, the rest of the world failed to meet expectations and was lower than as forecasted in 2013. A larger portion of the demand (+4.9%) came from emerging economics; North America showed a slight increase in demand of steel usage (+0.2%), whereas demand in EU continues to decline for the apparent use of steel (-3.8%). In 2013, global production of steel increased by 3.5% to 1,607 million tonnes despite low demand growth in most parts of the world, lead by China, where at least 58 new furnaces have come online, which increased the annual capacity by 80 million tonnes. Japan also showed an increase in steel production by 3.1% to 110.6 million tonnes. Some countries show decline in the production, with a 4.4%, 2%, 2% and 1% fall in South Korea, the US, Europe and Brazil, respectively. Average capacity utilization in the industry increased from 76.2% during 2012 to 78.1% in 2013 (Global steel 2014, Ernst & Young Publications p.4).

India has become the second best in terms of growth amongst the top ten steel producing countries in the world and a net exporter of steel during 2013–14. Steel production in India recorded a growth rate of 4.8 per cent in February 2014 over February 2013. The cumulative growth during April–February, 2013–14 stood at 4.2 per cent over the corresponding period of the previous year (India Brand Equity Foundation, updated May, 2014) .

India's real consumption of total finished steel grew by 0.6 per cent year-on-year in April–March 2013-14 to 73.93 million tonnes (MT), according to Joint Plant Committee (JPC), Ministry of Steel. Construction sector accounts for around 60 per cent of the country's total steel demand while the automobile industry consumes 15 per cent (Economic times, online article, March 2014). India became net steel exporter in 2013–14 and is likely to maintain the momentum in 2014-15 as producers are looking to dock more overseas shipment to tide over subdued domestic consumption. Total steel exports by India during 2013–14 stood at 5.59 MT, as against imports of 5.44 MT. (Indian steel industry facts and figures, retrieved may 8 2014, from http://www.ibef.org/industry/ steel.aspx)

Figure 1 shows the consumption pattern of steel in the Indian market, as can be seen the largest share is of infrastructure 63%. Thus we can say that, as the construction and real estate industry grows in India so will the steel industry.

Figure 1. Indian Steel Consumption

Indian steel industry has a bright future. Infrastructure spending are projected to be increased from 5 per cent to 10 per cent in 2017 and the country has a plan of investing around US$ 1 lakh crore in infrastructure in its 12th five-year plan. (Data Retrieved from working group report on Indian steel industry, retrieved may 8 2014, from http://planningcommission.gov.in/aboutus/committee/w rkgrp12/wg_steel2212.pdf)

Investment planning is a long term exercise and involves a huge amount of time and money. It therefore involves careful analysis of the proposal. SAIL (Steel Authority Of India Limited) has specified procedures for such modernization and replacement proposals and their approval. Some of the objectives of the study are as follows:

• To study the financial performance of Steel Authority of India, its growth and profitability in the recent years.
• To study and understand the process of investment appraisal at a big government undertaking with Steel Authority of India as the platform.
• To learn and understand the tools and techniques used in capital budgeting like NPV (Net Present Value method) and IRR (Internal Rate of Return method), Cost Benefit Analysis and Sensitivity Analysis.

The study is mainly based on secondary data. In order to study the global steel industry, the data is collected from world steel association's website and for the domestic steel industry, data from various sources like Ministry of Steel publications is amassed. The company data is taken from company's annual reports and official website. To study the process of investment appraisal, details for the same is studied from the company’s appraisal books and for financial analysis part, a live project was studied and the project was appraised with techniques like Net Present Value method, Internal Rate of Return method, Gross margin calculation and sensitivity analysis.

Singh Shveta, Jain P.K., Yadav Surendra S., Department of Management Studies, Indian Institute of Technology Delhi, New Delhi, India (2012) have studied “Capital budgeting decisions: Evidence from India” for 10 years from 2001 to 2011. The authors found that, trends towards sophisticated techniques and sound capital budgeting decisions have continued in India. All sample respondent firms used Discounted Cash Flow (DCF) techniques in conjunction with non-DCF techniques. Internal Rate of Return (IRR), used by more than three quarters of the sample companies, is favoured over Net Present Value (NPV), used by half of the sample companies. Real options are used by half of the sample companies. Permanent (long-term) capital has been used to finance fixed assets (net) and working capital (net).

The authors highlight that, Capital budgeting practices in India appear to have improved over the past decade or so with an increasing number of companies using more sophisticated DCF techniques. To assess risk, sensitivity analysis is perceived to be the most important technique. It is a matter of gratification to note that all the respondent sample companies used DCF techniques in conjunction with non-DCF techniques. There was a strong preference for DCF with 50 per cent using NPV and 78.57 per cent using IRR. The results also indicated that firms still relied on simple capital budgeting techniques such as the payback period and the ARR. Despite the recommendations of the financial literature on using NPV as the primary technique, this research too found that respondent firms indicated a preference for IRR compared to NPV. (Journal Retrieved May 13 2014, from http://www.emeraldinsight.com/journals.htm?articleid=1 7035911)

Cooper William D., Morgan Robert G., Regman Alonzo, Smith Margart (2001) have done a study to assess the current level of capital budgeting sophistication in Corporate America. A survey questionnaire was sent to the CFOs of the Fortune 500 companies. They received response from 113 companies having a response rate of 23%. As per the results of their study, the most commonly used primary capital budgeting evaluation technique is the IRR (57%). The second most popular technique is the PBP (20%). The most popular backup technique is the PBP (23%), which is slightly more popular than the IRR and the NPV (21%). Many firms use a team approach to evaluate capital projects. The largest number of their respondents believe that project definition and cash flow estimation is the most important and difficult stage of the capital budgeting process. Majority of the firms used cut-off rate between 10% and 15%. The most popular method of handling risk in the capital budgeting process identified by 33% of the respondents was to increase the required rate of return of cost of capital.

Venkatesan T., Dr. Nagarajan S. K. (2012) had done a study on the topic titled “An empirical study of profitability analysis of selected steel companies in India” founded that, profitability more or less depends upon better utilization of resources, cut-off expenses and quality of management function in the products, customer services and to manpower and goodwill and market share. It is worthwhile to increase production capacity and use advance technology to cut down cost of production and wage cost in order to increase profitability, not only against the investment, but also for the investor's return point of view. These programs are helpful to increase the profitability of selected steel companies in India in future prospects. If the management or government does not look into it seriously, it can result in loss of jobs and the company will become a sick unit. And founded in numerical statement, the correlation of SAIL to Tata (0.56) of NP and SAIL to Tata 0.64 of OP ratio was positive. It shows that they maintained similar level in NP and OP ratio and negative correlation was observed among bhushan to jsw (-0.12) of NP ratio and bhushan to jsw of (-0.394) OP ratio. Conclude by “t” test, there is no correlation among SAIL to Tata and bhushan to jsw of NP ratio and SAIL to Tata and sail to Tata and bhushan to jsw of OP ratio and in ANOVA test, there is no significant difference in the ROI of SAIL, Tata, bhushan, visa, & jsw.

• Industry norms are defined.
• Full disclosure of the company information is not allowed.
• Manufacturing expenses for the modernization of battery are calculated by Engineers.
• Approval time is 30 months Therefore, it takes a long time to pass on from one stage to another, thus appraisal may be effected by macro forces.

Started with the name of Hindustan Steel Private Limited set up on January 19, 1954, Steel Authority of India Limited has grown immensely. The Government of India owns about 80% of SAIL's equity and retains voting control of the Company. However, SAIL, by virtue of its 'Maharatna' status, enjoys significant operational and financial autonomy. SAIL is India's largest steel producing company, with a turnover of `. 49,350 crore. SAIL has five integrated steel plants, three special plants, and one subsidiary in different parts of the country. It holds a handsome 2^nd position in the Indian steel industry and a decent 24th position in the global arena. (Retrieved April 10 2014, from http://sail.co.in/aboutus.php?tag= company-aboutus)

SAIL achieved the saleable steel production of 12.385 Million Tonnes (MT) during the financial year 2012-13. The profit after tax of Rs. 2170 crore was lower by Rs. 1373 crore over the last year (Rs.3543 crore).

Table 1 shows the comparison between the financial performance of 2012-13 and 2011-12 as it can be seen that the company achieved a turnover of Rs. 49,350 crore during the Financial Year 2012-13, which was almost at the same level as that of last year (. 50348 crore). The profit after tax of the Company for the Financial Year 2012- 13 was . 2170.35 crore compared to . 3542.72 crore in the previous Financial Year. Net profit was down largely due to the lower Net Sales Realization resulting from a subdued market. Higher usage of external inputs like BF Coke & pellets and higher salary & wages were other key factors impacting profitability adversely. The debt equity ratio of the Company was 0.53:1 as on 31st March, 2013 as against 0.41:1 as on 31st March, 2012 which went up on account of increase in borrowings during the year to fund the ongoing capital expenditure. The net worth of the Company improved from . 39,811 crore as on 31st March, 2012 to . 41,025 crore as on 31st March, 2013. The Company paid interim dividend at 16% of the paidup equity share capital during the year. The Board of Directors have further recommended a final dividend at 4%, subject to approval of shareholders, thus making the total dividend at 20% of the paid up equity share capital for the Financial Year 2012-13. A sum of Rs. 163 crore has been transferred to the general reserves during the Financial Year 2012-13 (Steel Authority Of India Limited, annual report 2013 p.6).

Table 1. Comparative performance sheet for the year 2012-13 and 2011-12

At SAIL, regular capital investments are necessary for maintaining health of the plants and to face technological obsolescence. Since such investment decisions are quite critical owing to the risks involved, they need to be critically analyzed both technically and financially. SAIL has an effective investment appraisal process which is mandatory for any investment decision to pass through before it gets approved for execution.

Figure 2 shows the appraisal process at SAIL, where the plan starts, how it flows through various departments, and who approves it. (Retrieved on April 10, 2014 Guidelines for Formulation of Investment Proposals for Appraisal, SAIL)

Figure 2. Appraisal process at SAIL

Table 2 shows the present delegation of powers for sanction of investment proposals for SAIL plants/units, including Enabling /Auxiliary Package sunder Modernization & Expansion Plan of SAIL, as approved by SAIL Board in its 359th meeting held on 17.03.10.

Table 2. Delegation Power for Sanction of Investment Proposal

Table 3 outlines a time schedule for scrutiny, appraisal and sanction of Investment Proposals from the date of its submission by Plants / Units to Projects Directorate.

Table 3. Time Schedule for Appraisal

If the Proposal is required to be appraised by an Independent Institution, then the activity will commence in Week 1 and will get complete by Week 5. This activity will be carried out in parallel with above listed activity.

At SAIL, regular capital investments are necessary for maintaining health of the plants and to face technological obsolescence. Since such investment decisions are quite critical owing to the risks involved, they need to be analyzed financially. SAIL has an effective financial appraisal process which is mandatory for any investment decision to go through.

Once the investment proposal is received by the finance department for financial appraisal to assess the investment viability, it is assessed through the following step-by-step method :-

The Capital Cost of the Project should be based on Budgetary Quotation / Engineering Estimate. Basis of Capital Cost should include FE parity, base date, taxes & duties and Interest During Construction (IDC). The Capital Cost should be indicated on net of CENVAT basis indicating the CENVAT amount specially.

The Project shall be financed through the following

• Equity / Internal Resources
• Loans from …. @.. p.a.

Ratio of Loan to Equity and the Interest Rate on the loan portion are to be considered based on the guidelines issued from time to time.

The phasing of Capital Expenditure should be estimated according to the Bar-Chart for Project implementation for each of the Project activity. Based on the construction schedule and the financing pattern, the Interest During Construction (IDC) should be calculated.

Table 4 shows the format for phasing of expenditure including Interest During Construction (IDC).

Table 4. Phasing of Expenditure Including IDC - Format

The benefits envisaged for the selected alternative should be clearly brought out in quantitative as well as qualitative terms. While working out the benefits, selling price of the product along with the Net Sales Realization and the quantities with quality / size that the market can absorb should be vetted by Central Marketing Organisation only for New Products in writing which shall form a part of the Proposal. Concession benefits include Section 80 I (A), and all other assumptions for calculating benefits.

The Techno-economics should be done on realistic basis and should be calculated based on:

• Considering Technical Parameters of previous year if the Investment Proposal (IP) is prepared during the period April-September and considering technical parameters of first Half Year (H1), if FR/ IP is prepared during the period October-March.
• Standard Cost for the current year should be considered for working out the Production Cost/ Manufacturing Cost/ Additional Expenditure.
• Simple average of Net Sales Realization (NSR) of last 3 years as per CMO price circulars OR as supplied by the Plants or current NSR whichever is lower.
• Salvage/ Residual value of the Project should be considered at 5% at the end of economic life of Project.
• In the Cash Flow Statement, Depreciation, in general, to be calculated on WDV basis and Capital Cost on net of CENVAT basis for green field/brown field units of SAIL. However, in case of Projects executed under new Joint Venture and Projects with 80 I benefits Depreciation under straight line method also needs to be calculated to arrive at Book Profit to determine applicability of MAT (Minimum Alternate Tax) flows in the Cash Flow Statement.
• CENVAT Benefit should be considered while calculating the Techno-Economics.

Table 5 outlines the financial indices that should be given along with the proposal.

Table 5. Financial Indices

Sensitivity of Financial Indices for selected parameters should be indicated which are given in Table 6.

Table 6. Sensitivity Analysis - Format

Durgapur Steel Plant (DSP) has embarked upon expansion plan to achieve hot metal production of 3.3 MT p.a. in 2016-17. To take care of the hot metal production, Battery No. 2 is being rebuilt which is scheduled for commissioning in November 2012. Battery No.4 is the oldest battery which is more than 24 years old followed by Battery No.1 which is more than 20 years old. Next in line for rebuilding is Battery No.3 which is also more than 15 years old. Bunching of rebuilding is foreseen if timely action for rebuilding is not taken. This will lead to coke shortages in future. To meet the future demand of BF coke, DSP gave an assignment to CET (Civil Engineering Technician) for rebuilding of Coke Oven Battery No. 4.

As per present Repair/Rebuilding plan, Battery No.5 will be taken up for construction first followed by rebuilding of Battery No.4, which will be taken up for rebuilding after Battery No.2 is commissioned. With commissioning of Battery No.5, Battery No.1 will be taken down for rebuilding. With rebuilding of Battery No.4, DSP will have three healthy batteries with pollution control facilities in operation i.e. Batteries Nos. 2, 4 & 5 which will also avoid bunching of rebuilding of batteries. Therefore, immediate action for rebuilding of Battery No.4 is being taken for obtaining approval of SAIL Board Sub-Committee. (Data retrieved from http://www.sail.co.in/pnu.php?tag= durgapur)

The capital cost of the project “Rebuilding of Coke Oven Battery # 4, DSP” is estimated at .304.87 crore net of CENVAT of . 25.39 crore including IDC of .18.76 crore. There is no FE component in it.

The total capital requirement of the project is proposed to be provided from debt equity in the ratio of 1:1 with an interest rate @ 11% per annum on loan.

The total capital required for the project is 330.26 which includes plant cost of 311.50 and IDC of 18.76, out of which 50%, that is 155.75, will be financed by equity and the rest 155.75 from market loan at 11%.

Debt-equity ratio = 1:1, which is said to be a good measure as it shows a balance between debt and equity.

Gross margin calculation for the project is based on the assumption that, in case the Coke Oven Battery is not rebuilt, the entire requirement of coke (456887t) would be met from purchased coke. Considering DSP average price of purchased coke at .23,300/t, savings on account of purchased coke works out to be Rs. 1064.55 crore per annum. Other operational benefits in the form of Coke Oven Gas as well as other by products have also been considered. The total benefit on account of rebuilt battery works out to be Rs. 1194.37 crore per annum. Production cost of equivalent coke considering at Rs.24,046/t (Standard cost 2011-12 H-1, DSP) works out to be Rs.1089.03 crore per annum. Based on the above, Gross Margin works out to be Rs.104.78 crore per annum.

Cash flow analysis is simply the process of identifying the categories of cash flows associated with a project or proposed course of action, and making estimates of their values.

In the research work, cash flow has been calculated for the period of 20 years.

Table 7 summarises the cash flow statement of the project and this shows that the project will generate surplus cash for almost all the years expect the first 2 beginning years of the life of the project.

Table 7. Cash-Flow Statement

Table 8 shows the Net Present Value (NPV) and Internal Rate of Return (IRR) for both pre-tax and post-tax of the proposal. The proposal, as can be seen, is a clear go for the financial part as NPV is very high and the IRR is well above the hurdle rate.

Table 8. NPV & IRR

Sensitivity analysis involves evaluating proposals over a range of assumptions about key factors (e.g. prices, costs, interest rates on any borrowed funds). If an option yields acceptable results only with particular combinations of circumstances, and the results are very sensitive to variations in these circumstances, then it should probably not be undertaken. If the relative merits of options change with variations in the assumed values of variables, those values should be examined to see whether they can be made more reliable.

The following factors have been taken into account for measuring the sensitivity of the profitability of the project:

• Increase in Capital Cost by 10 percent;
• Fall in Operating Margin by 10 percent;
• Combined Effect of above two factors;
• Debt Equity ratio changes to 1:1 from 3:2;
• Project is all Debt Financed;
• Project is all Equity Financed

Table 9 shows the effect of various changes on the NPV and IRR of the proposal and as can be seen, none of the alternates have an adverse effect on the proposal. Thus, we can say the proposal is not at all sensitive.

Table 9. Sensitivity Analyses

• If the Capital Cost increases by 10% (due to any reason like increase in the cost of equipment or structure etc.) then both NPV and IRR decreases, but IRR is still greater than 10% and NPV is still positive. Thus, the project, though sensitive to the increase in Capital Cost, is still acceptable.
• If the gross margin decreases by 10% (due to any reason like increase in the cost of production), then both NPV and IRR decreases, but are still within the acceptable range and the proposal can be accepted.
• The combined effect of increase in capital cost by 10% and decrease in gross margin by 10%, yields greater decrease in NPV and IRR values, but still doesn't produce a significant change in NPV and IRR values.
• If the debt-equity mix is changed from 1:1 to3:2, the NPV and IRR values do not change significantly and the proposal is still acceptable.
• As the leverage decreases, the post tax IRR and NPV values decreases, thus giving lower returns. Hence, the project should not be 100% equity financed.
• As the leverage increases, the post tax IRR and NPV values increase due to tax deductibility of interest cost thus giving higher returns.

Steel Authority of India (SAIL) is a very well established company and holds a strong position in the industry. The financial position of SAIL is very strong. It had turnover of 49,350 crores in the last financial year. Though it has seen a continuous decline in its profits, but they are only due to the various expansion and modernization plans taken up by the company. Findings made during the appraisal of the givenproject “Rebuilding of Coke Oven Battery # 4 at Durgapur Steel Plant” are as follows:

• Plant cost estimation is 330.26 cr. including Interest During Construction (IDC) of Rs. 18.76 cr., which is calculated by taking care of all the necessary equipments and tools required.
• Gross margin is found out to be Rs.104.78 crs.
• Phasing of expenditure is considered in three years which is divided in a certain ratio of 12%, 48%, 30% and 10% respectively. (10% is considered for the post commission)
• Cenvat credit is considered to be Rs. 25.39 cr.
• NPV and IRR both satisfy their acceptance criteria, hence the proposal is acceptable.
• The project is not very sensitive to environmental changes.

Steel Authority of India (SAIL) is a well established company and is a very strong pillar of the Indian economy. SAIL has a bright future ahead, as both the Global and Domestic Steel Industry have shown signs of high growth in future and the market promised a rise in the demand for steel.

SAIL achieved a turnover of Rs.49,350 crore during the Financial Year 2012-13 and the profit after tax was Rs.2170.35 crore compared to Rs. 3542.72 crore in the previous Financial Year. Net profit was down largely due to many modernization projects going throughout the company and higher usage of external inputs like BF Coke & pellets are other key factors impacting profitability.

Having analyzed the project dynamics in details and keeping in view the technical/ technological/ commercial parameters assumed by Durgapur Steel Plant, SAIL, it is clear that SAIL follows a well developed procedure for investment appraisal. It has predefined rules and procedure for handing various parameters and the process follows a set of series of steps.

• Steel Authority of India (SAIL) can even rise to new heights if it adopts new and latest technology and exploits the export market by increasing its operations in the global market.
• During the financial analysis of investment plan, some grey areas have been encountered. It is seen that, while estimating the gross margin and capital costs, current prices are used and there is no provision for any escalation in prices of the raw material or capital costs. In the light of an inflation prone country like India, this can be a major setback on profitability in later years of operation. Hence for a more pragmatic estimation, it is recommended that the effect of inflation be accounted on the prices by applying appropriate models.