The public sector steel major reported a net profit of Rs 132.99 crore, hammered by interest cost of Rs 1,553.76 crore among others. For some time now, SAIL's management has been pushing the idea of converting its SDF borrowings into either equity or capital reserve.

Sources in different layers of the government said the steel ministry is not against the proposal, but the Planning Commission and the finance ministry are not in favour of it. At the last meeting of the SDF committee, representatives of the Planning Commission and the finance ministry had argued that the SDF's constitution does not permit such conversion.

To allow SAIL to convert its SDF loan into equity, the SDF constitution has to bechanged, and this will not be easy. The SDF is funded by a cess on steel consumers, and was set up to fund the development of the steel industry with soft loans with an interest rate of only eight per cent.

SAIL sources evaded questions about the company's strategy if the conversion proposal is ruled out. "We have no such information," said a SAIL source.

SAIL's plans for the conversion were backed by the disinvestment commission last year. Its top brass found a ray of hope in improving the debt-equity ratio of 2.3:1, which has already crossed the maximum permissible level of 2:1. "This conversion will help us mobilise the Rs 12,000 crore required during the Ninth Plan period," SAIL chairman Arvind Pande has been arguing for quite some time.

On March 31, 1998, SAIL had a paid-up equity share capital of Rs 4,130.40 crore, and reserves and surplus of Rs 4,427.58 crore. The SAIL board has not revealed the latest loan position. On March 31, 1997, it had total loan funds of Rs 17,421.21 crore, with securedloans at Rs 6,783.00 crore and unsecured loans at Rs 10,638.21 crore.

During 1997-98, SAIL's interest burden rose to Rs 1,553.76 crore from an already high Rs 1,179.48 crore the previous year. SAIL feels it can ease the interest costs by nearly Rs 400 crore if it is allowed to convert its SDF loan into equity. Finance ministry officials as well as experts have doubts whether SDF loan conversion will ultimately benefit SAIL. They feel that such a conversion will lead to a big drop in earnings per share (EPS), which will make it difficult for the company to go in for new public issues as investors may not find it attractive.

The government holds an 85 per cent stake in SAIL, having offloaded the rest in 1994-95.

They feel SAIL can improve its bottomline and debt-equity ratio only by improving its performance. For example, if SAIL cuts inventories to one month's production from the current two months, the debt-equity ratio will improve to 1.7:1. Then it can go for further borrowings during the NinthPlan.

This is exactly what the other steel companies are doing, they say. SAIL's argument of a dull market situation is valid for all steel companies, but none of them has reported such a battered bottomline as they managed to keep inventories below one-month levels. For example, Tata Iron & Steel Co has also reported falling profits, but its inventory of finished products was Rs 477 crore on net sales of Rs 6,041.06 crore as on April 1, 1998.

Although the net profit earned by Tisco and Ispat Industries declined by 31 per cent and 33 per cent, respectively, compared to the previous fiscal, Essar Steel could increase it by 157 per cent.