Eic Analysis of Tata Steel

Eic Analysis of Tata Steel

LUCKY BHAVINI B. COM(H)III-E ROLL NO. -247 GROUP NO. -E27 EIC ANALYSIS OF TATA STEEL ECONOMIC ANALYSIS: * The Financial market in the last 12 months has been volatile triggered by the subprime mortgage crisis in the US. This has adversely affected the liquidity and the risk perception of the international capital markets. Inflation has increased around the World boosted by mainly increase in food and energy prices.

The real effective exchange rate for the US dollar has declined since mid-2007 as foreign investment in US bonds and equities has been dampened by reduced confidence in both the liquidity of and the returns on such assets, weakening of US growth prospects and interest rate cuts. The main counterpart to the decline of the dollar has been appreciation of the euro, the yen, and other floating currencies such as the Canadian dollar and some emerging economy currencies. Corus acquisition is being financed by a substantial amount of debt.

This puts pressure on Tata Steel’s bottom line, and should the business environment deteriorate, the necessity to service this debt could restrain Tata Steel in its future investment and capacity expansion plans. In addition it could also limit the Company’s inorganic growth options. * Due To Subprime Crisis in USA an subsequent tremor all along the world, especially in developed market in Western Europe make the vulnerable position of Corus even more riskier. UK, Germany, Netherlands the main market for Corus products are facing the fear for recession on negative growth. The steel industry is highly cyclical, receptive to general economic conditions and reliant on the condition of a number of other industries, including the automotive, appliance, construction and energy industries. If these industries experience a downturn, Tata Steel too would too take a hit, thus negatively impacting its rating. * Corus follows the policy of entering into long term supply contracts with raw materials vendors. Thus there can be a huge time gap between variation in prices under purchase contracts and the time when Corus can make a corresponding price change under its sales contacts with its consumers.

Moreover, Corus may not be able to pass on the increased raw materials costs to its customers. Such developments would lead to a downside in our rating. * Steel production processes are energy dependent and price movements in the energy market would accordingly affect Tata Steel’s bottom line. * Tata Steel became 6th biggest Steel Producer in the World after acquiring Corus, but the cost of the integration goes much more beyond the financial aspect. There are other factors which will add to overall integration costs such as * Cross Cultural Integration Employer-Employee Relationship INDUSTRY ANALYSIS: 1. Government Policy on Steel Industry * New Industrial Policy, July 1991 – Iron and Steel industry, removed from the public sector and exempted from the provisions of compulsory licensing. * From 24. 5. 92, Iron and Steel industry has been included in the list of `high priority’industries for automatic approval for foreign equity investment upto 51%. This limit has been recently increased to 74%. 2. International conditions

The steel industry is subject to cyclical swings arising from factors such as excess capacity, regional demand ; supply imbalances and volatile swings in market demand and prices, more recently exacerbated by quarterly pricing for iron ore and metallurgical coal. Global demand surpassed the pre-crisis peak in the financial year 2010-11, driven by strong demand in the developing economies, notably China. Prices for iron ore and metallurgical coal spiked, exacerbated by supply disruptions due to flooding in Queensland, Australia.

The Indian operations benefitted from strong domestic demand and achieved record output at 6. 855 million tonnes. The South East Asian plants also benefitted from good demand and operated close to full capacity. Steel demand has not recovered to pre-crisis levels in the developed countries. Tata Steel Europe continued to calibrate its production at levels consistent with market demand in the UK and Europe. 3. Labour conditions Tata Steel India reached the milestone of 82 years of industrial harmony and peace. During the financial year 2010-11 industrial relations remained normal at all locations.

Market based new wage series (lower than the existing wage series but higher than the market median) was introduced after arriving at a settlement with the Union during FY2010-11. All the new recruitment for the expansion units have been done in the new series of wages. 4. Industry life cycle According to the National Steel Policy announced in November 2005, overall steel production is expected to rise from the current level of 44. 54 million tonnes to 110 million tonnes by fiscal 2020. Domestic steel demand is expected to grow by over 7 per cent on a compounded annual basis over the next 15 years.

The steel industry is passing through a high growth phase. COMPANY ANALYSIS: 1. Financial factors: Profit ; Loss account of Tata Steel| ——————- in Rs. Cr. ——————-| | Mar ’11| Mar ’10| Mar ’09| | | | | | | | | | | | | | | | Income| | | | | | | | | | Sales Turnover| 31,901. 94| 26,757. 60| 26,843. 53| | | | | | | | Excise Duty| 2,594. 59| 1,816. 95| 2,495. 21| | | | | | | | Net Sales| 29,307. 35| 24,940. 65| 24,348. 32| | | | | | | | Other Income| 1,435. 80| 1,241. 08| 603. 07| | | | | | | | Stock Adjustments| 173. 65| -134. 97| 289. 27| | | | | | | | Total Income| 30,916. 80| 26,046. 76| 25,240. 6| | | | | | | | Expenditure| | | | | | | | | | Raw Materials| 9,395. 92| 8,356. 45| 8,568. 71| | | | | | | | Power & Fuel Cost| 1,558. 49| 1,383. 44| 1,222. 48| | | | | | | | Employee Cost| 2,618. 27| 2,361. 48| 2,305. 81| | | | | | | | Other Manufacturing Expenses| 2,905. 16| 2,419. 89| 2,127. 48| | | | | | | | Selling and Admin Expenses| 501. 96| 417. 90| 400. 24| | | | | | | | Miscellaneous Expenses| 1,529. 73| 1,287. 04| 1,180. 08| | | | | | | | Preoperative Exp Capitalised| -198. 78| -326. 11| -343. 65| | | | | | | | Total Expenses| 18,310. 75| 15,900. 09| 15,461. 15| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Profit| 11,170. 25| 8,905. 59| 9,176. 44| | | | | | | | PBDIT| 12,606. 05| 10,146. 67| 9,779. 51| | | | | | | | Interest| 1,686. 27| 1,848. 19| 1,489. 50| | | | | | | | PBDT| 10,919. 78| 8,298. 48| 8,290. 01| | | | | | | | Depreciation| 1,146. 19| 1,083. 18| 973. 40| | | | | | | | Other Written Off| 0. 00| 0. 00| 0. 00| | | | | | | | Profit Before Tax| 9,773. 59| 7,215. 30| 7,316. 61| | | | | | | | Extra-ordinary items| 0. 00| 0. 00| 0. 00| | | | | | | | PBT (Post Extra-ord Items)| 9,773. 59| 7,215. 30| 7,316. 61| | | | | | | | Tax| 2,912. 44| 2,168. 50| 2,114. 7| | | | | | | | Reported Net Profit| 6,865. 69| 5,046. 80| 5,201. 74| | | | | | | | Total Value Addition| 8,914. 83| 7,543. 64| 6,892. 44| | | | | | | | Preference Dividend| 0. 00| 45. 88| 109. 45| | | | | | | | Equity Dividend| 1,151. 06| 709. 77| 1,168. 95| | | | | | | | Corporate Dividend Tax| 156. 71| 122. 80| 214. 10| | | | | | | | Per share data (annualised)| | | | | | | | | | Shares in issue (lakhs)| 9,592. 14| 8,872. 14| 7,305. 92| | | | | | | | Earning Per Share (Rs)| 71. 58| 56. 37| 69. 70| | | | | | | | Equity Dividend (%)| 120. 00| 80. 00| 160. 00| | | | | | | | Book Value (Rs)| 503. 19| 418. 4| 331. 68| | | | | | | | | | | | | | | | | | | Balance Sheet of Tata Steel ——————- in Rs. Cr. ——————- | Mar ’11| Mar ’10| Mar ’09| | | | | | | | | | | | | | | | Sources Of Funds| | | | | | | | | | Total Share Capital| 959. 41| 887. 41| 6,203. 45| | | | | | | | Equity Share Capital| 959. 41| 887. 41| 730. 79| | | | | | | | Share Application Money| 178. 20| 0. 00| 0. 00| | | | | | | | Preference Share Capital| 0. 00| 0. 00| 5,472. 66| | | | | | | | Reserves| 47,307. 02| 36,281. 34| 23,501. 15| | | | | | | | Revaluation Reserves| 0. 00| 0. 0| 0. 00| | | | | | | | Networth| 48,444. 63| 37,168. 75| 29,704. 60| | | | | | | | Secured Loans| 2,009. 20| 2,259. 32| 3,913. 05| | | | | | | | Unsecured Loans| 26,291. 94| 22,979. 88| 23,033. 13| | | | | | | | Total Debt| 28,301. 14| 25,239. 20| 26,946. 18| | | | | | | | Total Liabilities| 76,745. 77| 62,407. 95| 56,650. 78| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Application Of Funds| | | | | | | | | | Gross Block| 22,846. 26| 22,306. 07| 20,057. 01| | | | | | | | Less: Accumulated Depreciation| 11,041. 16| 10,143. 63| 9,062. 47| | | | | | | | Net Block| 11,805. 10| 12,162. 4| 10,994. 54| | | | | | | | Capital Work in Progress| 6,969. 38| 3,843. 59| 3,487. 68| | | | | | | | Investments| 46,564. 94| 44,979. 67| 42,371. 78| | | | | | | | Inventories| 3,953. 76| 3,077. 75| 3,480. 47| | | | | | | | Sundry Debtors| 428. 03| 434. 83| 635. 98| | | | | | | | Cash and Bank Balance| 512. 76| 500. 30| 463. 58| | | | | | | | Total Current Assets| 4,894. 55| 4,012. 88| 4,580. 03| | | | | | | | Loans and Advances| 16,814. 04| 6,678. 55| 5,884. 61| | | | | | | | Fixed Deposits| 3,628. 78| 2,733. 84| 1,127. 02| | | | | | | | Total CA, Loans & Advances| 25,337. 37| 13,425. 27| 11,591. 6| | | | | | | | Deferred Credit| 0. 00| 0. 00| 0. 00| | | | | | | | Current Liabilities| 10,383. 04| 8,699. 34| 8,965. 76| | | | | | | | Provisions| 3,547. 98| 3,303. 68| 2,934. 19| | | | | | | | Total CL & Provisions| 13,931. 02| 12,003. 02| 11,899. 95| | | | | | | | Net Current Assets| 11,406. 35| 1,422. 25| -308. 29| | | | | | | | Miscellaneous Expenses| 0. 00| 0. 00| 105. 07| | | | | | | | Total Assets| 76,745. 77| 62,407. 95| 56,650. 78| | | | | | | | | Contingent Liabilities| 12,582. 24| 13,184. 61| 12,188. 55| | | | | | | | Book Value (Rs)| 503. 19| 418. 94| 331. 68| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Key Financial Ratios of Tata Steel| | | | | Mar’11| Mar ’10| Mar ’09| | | | | | | | | Investment Valuation Ratios| | | | | | | | | | Face Value| 10. 00| 10. 00| 10. 00| | | | | | | | Dividend Per Share| 12. 00| 8. 00| 16. 00| | | | | | | | Operating Profit Per Share (Rs)| 116. 45| 100. 38| 125. 60| | | | | | | | Net Operating Profit Per Share (Rs)| 305. 53| 281. 11| 333. 27| | | | | | | | Free Reserves Per Share (Rs)| 454. 52| 392. 98| 309. 18| | | | | | | | Bonus in Equity Capital| 26. 36| 28. 50| 34. 61| | | | | | | | Profitability Ratios| | | | | | | | | | Operating Profit Margin(%)| 38. 1| 35. 70| 37. 68| | | | | | | | Profit Before Interest And Tax Margin(%)| 33. 82| 30. 95| 33. 27| | | | | | | | Gross Profit Margin(%)| 34. 20| 31. 36| 33. 69| | | | | | | | Cash Profit Margin(%)| 23. 28| 20. 65| 23. 83| | | | | | | | Adjusted Cash Margin(%)| 23. 28| 20. 65| 23. 83| | | | | | | | Net Profit Margin(%)| 23. 16| 19. 96| 21. 09| | | | | | | | Adjusted Net Profit Margin(%)| 23. 16| 19. 96| 21. 09| | | | | | | | Return On Capital Employed(%)| 13. 48| 13. 06| 15. 01| | | | | | | | Return On Net Worth(%)| 14. 22| 13. 45| 21. 10| | | | | | | | Adjusted Return on Net Worth(%)| 11. 91| 11. 0| 19. 87| | | | | | | | Return on Assets Excluding Revaluations| 503. 19| 418. 94| 330. 24| | | | | | | | Return on Assets Including Revaluations| 503. 19| 418. 94| 330. 24| | | | | | | | Return on Long Term Funds(%)| 13. 54| 13. 06| 15. 21| | | | | | | | Liquidity And Solvency Ratios| | | | | | | | | | Current Ratio| 1. 78| 1. 12| 0. 91| | | | | | | | Quick Ratio| 1. 45| 0. 76| 0. 57| | | | | | | | Debt Equity Ratio| 0. 59| 0. 68| 1. 34| | | | | | | | Long Term Debt Equity Ratio| 0. 58| 0. 68| 1. 31| | | | | | | | Debt Coverage Ratios| | | | | | | | | | Interest Cover| 6. 14| 4. 41| 5. 71| | | | | | | |

Total Debt to Owners Fund| 0. 59| 0. 68| 1. 34| | | | | | | | Financial Charges Coverage Ratio| 6. 82| 5. 00| 6. 37| | | | | | | | Financial Charges Coverage Ratio Post Tax| 5. 75| 4. 32| 5. 15| | | | | | | | Management Efficiency Ratios| | | | | | | | | | Inventory Turnover Ratio| 9. 85| 10. 90| 9. 36| | | | | | | | Debtors Turnover Ratio| 67. 93| 46. 58| 41. 29| | | | | | | | Investments Turnover Ratio| 9. 85| 10. 90| 9. 36| | | | | | | | Fixed Assets Turnover Ratio| 1. 29| 1. 12| 1. 22| | | | | | | | Total Assets Turnover Ratio| 0. 38| 0. 40| 0. 43| | | | | | | | Asset Turnover Ratio| 1. 9| 1. 12| 1. 22| | | | | | | | | | | | | | | | | | | Average Raw Material Holding| 81. 57| 60. 63| 74. 12| | | | | | | | Average Finished Goods Held| 24. 02| 21. 78| 27. 88| | | | | | | | Number of Days In Working Capital| 140. 11| 20. 53| -4. 56| | | | | | | | Profit ; Loss Account Ratios| | | | | | | | | | Material Cost Composition| 32. 05| 33. 50| 35. 19| | | | | | | | Imported Composition of Raw Materials Consumed| 60. 95| 59. 69| 68. 85| | | | | | | | Selling Distribution Cost Composition| 0. 37| 0. 32| 0. 25| | | | | | | | Expenses as Composition of Total Sales| 8. 10| 8. 41| 13. 5| | | | | | | | Cash Flow Indicator Ratios| | | | | | | | | | Dividend Payout Ratio Net Profit| 19. 04| 16. 64| 27. 15| | | | | | | | Dividend Payout Ratio Cash Profit| 16. 32| 13. 68| 22. 80| | | | | | | | Earning Retention Ratio| 77. 27| 79. 66| 71. 16| | | | | | | | Cash Earning Retention Ratio| 81. 05| 83. 92| 76. 03| | | | | | | | Adjusted Cash Flow Times| 4. 10| 4. 83| 4. 58| | | | | | | | | | | | | | | | | | | | | | Earnings Per Share| 71. 58| 56. 37| 69. 70| | | | | | | | Book Value| 503. 19| 418. 94| 331. 68| | | | | | | | Turnover at Tata Steel India of Rs13,658 crore ($3. 4 billion) in the first half was 21 per cent up from the Rs11,308 crore ($2. 52 billion) in H1 FY10. Q2 sales of Rs7,107 crore ($1. 58 billion) were 25 per cent up from the Rs5,692 crore ($1. 27 billion) of Q2 FY10 and eight per cent up from the Rs6,551 crore ($1. 46 billion) of Q1 FY11. Tata Steel India posted an EBITDA of Rs6,327 crores ($1. 41 billion) in the first half, 67 per cent up from the Rs3,787 crore ($843 million) in H1 FY10. Q2 EBITDA of Rs3,362 crore ($748 million) was 68 per cent up from the Rs1,998 crore ($445 million) of Q2 FY10 and 13 per cent up from the Rs2,965 crore ($660 million) of Q1 FY11.

Financing ; Liquidity Strategy: During the financial crisis, the Company had focused on raising additional debt in order to maintain a liquidity buffer given the uncertain nature of the steel markets. However, given the lower level of earnings and increased debt, the leverage position of the Company had become sub-optimal. Therefore in FY 11, the Company continued on its journey of deleveraging. It repaid Rs. 4,258 crores of borrowings during the year. For the global financial crisis, the company responded very quickly on many fronts and financing was certainly one of them.

Recognising the uncertain financing environment and the fragile state of the global banking industry, company has focussed on both internal and external levers. Primary importance is placed on conserving liquidity through reduced spend management and sharp reduction in working capital levels. Also focus is given on improvement in the productivity levels and reduction in overheads. On capital expenditure, company has re-prioritised on the most value creating and critical projects and reworked the capital planning strategy. On the external front, long term capital are raised which acts as a liquidity buffer in the current circumstance.

The above actions ensured that the Tata Steel Group had adequate liquidity and also financial flexibility for growth and exigencies. 2. Non financial factors: 1. Management The operations and successes of the Tata Steel Group are taken care of by its capable management and Board of Directors. It is under the leadership of Mr. Ratan Tata that the company has scaled new heights and established a presence as one of the leading steel conglomerates in the world. 2. Future prospects * Tata Steel is expected to complete its 2. 9mn tonne steel capacity expansion of its Jamshedpur plant by end of FY12E.

The expansion will take Tata Steel’s domestic steel capacity to 9. 7mnt pa. Tata Steel’s India operations enjoy the highest operating margins on account of high raw material integration (100% in iron ore and ~50% of coking coal). * The refinancing of the long term loan of $5. 4bn for Corus’ acquisition has also eased investor concerns on Tata Steel’s leveraged balance sheet. The FPO proceeds will further de-leverage Tata Steel’s balance sheet and help it to smoothly fund its high return expansion projects. 3. Policies (i) Quality Policy

Tata Steel is committed to creating value for all our stakeholders by continually improving our systems and processes through innovation, involving all our employees. This policy shall form the basis of establishing and reviewing the Quality Objectives and shall be communicated across the organization. The policy will be reviewed to align with business direction and to comply with all the requirements of the Quality Management Standard. (ii) Corporate Social Responsibility Policy Tata Steel believes that the primary purpose of a business is to improve the quality of life of people.

So it is committed to improve the quality of the life of the people in the areas where it operates. (iii)Environmental, Occupational Health & Safety Policy Tata Steel reaffirms its commitment to provide safe working place and clean environment to its employees and other stakeholders as an integral part of its business philosophy and values under which it will continually enhance its Environmental, Occupational Health & Safety (EHS) performance in its activities,products and services through a structured EHS management framework. (iv) Research Policy

Tata Steel nurtures and encourages innovative research in a creative ambience to ensure that the competitive advantage in its overall business is retained and surpassed. Towards this goal, the Company commits itself to providing all necessary resources and facilities for use by motivated researchers of the highest caliber. 4. Strategies and technical competence With regard to Value Creation, the Tata Steel Group set itself a target of increasing the return on invested capital of its existing assets to 30% by 2012-13 and to generate selective growth.

In order to meet this target, the Group has developed a two-fold strategy: * In order to increase the quality of earnings of its existing assets, the Group will pursue the optimisation of its European assets, restructure low profitability assets and continue to derive benefits through continuous improvement and synergies across the Group. * In order to generate selective growth, the Group will pursue capacity expansions and securing access to raw materials.

The Group is increasing its capacity in India, through expansion of its current operations in Jamshedpur and through the construction of a greenfield site in Orissa, and assessment of raw material investment opportunities as and when they arise. 5. Inputs used and its availability One of the major problems faced in the steel sector is the availability of raw material. Tata Steel in India is an integrated player, for the majority of its raw material requirements.

However, raw material self-sufficiency for the consolidated entity is at 25% post the Corus acquisition. It has been the stated objective of the company to increase self-sufficiency of raw materials to 50% in the medium to long term. Therefore company is acquiring new virgin sites with significant resource potential & stocks or in terms of smaller existing ventures which can be quickly aligned to the requirements in Europe.

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