Tata Steel Project

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Submitted to: Shantanu Gokhle Sir

VISION

Managing a global workforce and setting global benchmarks is primarily about managing diversity. The ability to maximise business opportunities and meet challenges so that value can be created for stakeholders is something that can be achieved through a process of inclusive growth, one in which every person contributes to the blueprint for the future and is truly committed to the stated objectives. And one of the key 2

requisites for successful diversity management is a shared vision. The Vision 2012 for the Tata Steel Group was co-created by its people across its various locations – from Jamshedpur in India, to the United Kingdom, to South East Asia, to the Netherlands. Driven as much by its commitment to society as by its performance and profits, the Tata Steel Vision aspires to make the Group the global industry benchmark for both Value Creation and Corporate Citizenship. The key drivers of the Group Vision will manifest themselves in the goals and objectives the Group sets for itself in the coming years. This shared Vision is a call to action for Tata Steel’s people, to work together to a future that holds a promise of tremendous growth for all its constituents and the world at large.

GOAL 2012 Consolidated Financial Highlights 2007-08* After Tax

Net Turnover

Operating Profit

(Rs. in crores)

crores)

150000

(Rs. in crores)

15000

Profit (Rs. in

15000 13,856

132,110

12,350

120000

12000

12000

90000

9000

9000 3

60000

6000 6,439

6000

30000 25,650

3000

3000

0

0

4,177

0 2006-07 2007-08

2006-07 2007-08

Net Turnover= Sales - Excise Duty + Other Income

2006-07 2007-08

Operating Profit after Depreciation

*2006-07 figures exclude Corus

Geographical Distribution of Revenue UK EU excluding UK 37% 32%

Rest of World

5%

India 15%

Asia excluding India 12%

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BUSINESS REVIEW Established in 1907, Tata Steel completed 100 years in the financial year 2007-08. On 2nd April, 2007, the Company completed the acquisition of Corus Group plc, Steel Company headquartered at UK for an Enterprise Value of USD 14.7 billion. Post the acquisition of Corus, Tata Steel Group is now the world’s 6th largest steel company with current steel deliveries of 32 million tonnes. Set up as Asia’s first integrated steel plant and India’s largest integrated private sector steel company, a century ago, it is now the world’s second most geographically diversified steel producer, with operations in 24 countries and commercial presence in over 50 countries. The Jamshedpur operations in India is increasing its capacity from 5 mtpa to 10 mtpa by end 2010 and the Company has also signed MoUs to set up four greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh in India and one in Vietnam. Few years back, Tata Steel embarked on a journey to pursue Growth and Globalisation through organic and inorganic strategy to increase its capacity in excess of 50 mtpa by 2015. bonds and equities has been dampened by reduced The Company identified several strategic levers including confidence in both the liquidity of and the returns on building a stronger base in India, acquisitions in both growing such assets, weakening of US growth prospects and and developed markets, strategic investments in raw material interest rate cuts. The main counterpart to the decline of assets and focus on branding.

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AWARDS AND RECOGNISATIONS

Finance function @ TATA Steel

The primary responsibility of a world class finance function is to achieve a meaningful balance of its trusteeship role in the oversight and implementation of effective controls as also to act as a steward of the company’s capital towards efficient asset allocation for the long term growth of the organisation. As the centres of economic activity become more distributed around the globe for an emerging market multinational like the Tata Steel Group, the organization reorients its priorities taking into account the diversity across borders, cultures, regulatory environments and time zones. To meet these challenges, the finance function in the Tata Steel Group focuses on a value centered strategy to align its capabilities and resources most effectively with the needs of the business. This alignment is critical to enable the Company to pursue the path set by the Tata Steel Group Vision 2012 which aims to deliver significantly higher Return on Invested Capital (ROIC) to its shareholders over the next 5 years. The incremental ROIC would be generated from better margins from the existing assets through the performance improvement Programmes that are currently underway, sweating of the existing capital employed in the business and efficient asset deployment in the new growth projects across the Group. The year 2007-08 has been a historic year for Tata Steel in many ways. It was 7

the centenary year of the company which marks a very important milestone in the company’s history and we are very proud to be part of this great institution. The year also marked the completion of the Corus acquisition process on April 2, 2007 which till date is the largest transaction by an Indian company. During the year, the Company completed the long term financing Programme for the Corus acquisition. Of the total Enterprise Value of USD 14.2 billion, at the close of the Corus acquisition process on April 2, 2007, the financing included around USD 10.5 billion as bridge funding, the balance being applied out of Tata Steel’s own cash and borrowings. Despite very volatile credit markets globally, the company raised around USD 6.2 billion of term debt with an average life of around 5 years at very competitive terms. This debt being non - recourse in nature was determined based on the cash flow servicing capability of our European operations and will be serviced by the Tata Steel UK (Corus) cash flows. The syndication of the above debt was completed during the year with more than 25 banks and institutions participating in the process. On the equity side, Tata Steel raised around USD 2.27 billion (Rs. 9,120 Crores) of equity and

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convertible preference shares on a rights basis. The Company further raised around USD 875 million in Convertible Alternate Reference Securities (CARS) which is a 5 years convertible instrument with a coupon of 1% and a conversion premium of 35% to the prevailing market price in August 2007. As a result of the above, this Company raised around USD 10 billion during the year and completed the long term financing for the Corus acquisition. As recognition of the above, this Company won several international awards during the year for the Corus acquisition financing including the International Financing Review (IFR) Awards for the Asia Pacific Loan of the year and the Asia Pacific Leverage Loan of the year, Finance Asia award for the Best Deal of the year, AAA Asset Magazine’s award for the Best Corporate Issuer effective Performance amongst others. 9

For the finance function of the Tata Steel Group, effective Performance Management and Capital Stewardship are efficient Capital Stewardship are the key enablers towards building a sustainable value centric the key enablers towards culture. Several initiatives are currently on towards enhancing the technology effectiveness of building a sustainable the function of which the SAP implementation in Corus UK and South East Asia and the Hyperion value centric culture. Financial systems across the Group are prominent. These projects will improve the performance management process of the Company very significantly in the future.

CALCULATION ON LIQUIDITY AND TURNOVER RATIO Whole calculations are in crores* 1.

CURRENT RATIO = (current assets-advance against equity)/current liability. = (36962.44-(30326.12+570.04))/6768.78 = .896 = .90

2.

LIQUIDITY RATIO = (6066.28-(2047.31+557.67))/6768.78 = 3434.3/6768.78 = .507

3.

NET DEBT TO EQUTY= Net debt/Equity Where,

Debt = secured loan unsecured loan-cash and bank balance-current investment 10

Equity = shareholder’s fund-miscellaneous expenses Debt= 3520.58+14501.11 (18021.69-465.04) =16519.85

Equity= 27300.73-155.11= 27145.62 Net debt/Equity= 16519.85/27145.62= .608=.61 4.

CAPITAL TURNOVER RATIO= earnings before interest and tax/average capital Employed.

= 6845.23/29318.58 =.23 5.

WORKING CAPITAL TURNOVER RATIO= net sales/working capital Where, Working capital= current assets-current liabilities = 36962.44-6768.78 = 30193.66 Net sales= 19693 WCTR= 19693/30193.66 11

=.652

6.

AVERAGE DEBTOR TO TURNOVER= Average debtors/Gross sales = 543-48/19693.28 =.0275 = 2.75%

7.

AVERAGE INVENTORY TURNOVER RATIO = Average inventory/Gross sales =average inventory/543.48

8.

ASSET TURNOVER RATIO= (Net sales +other income-investment income)/(Net Fixed assets+ current assets+ advance against Equity +loans and advances) =132110.09/(41963.12+36962.44+30326.12 +15485.46 = 132110.09/124737.14 = 105.9% = 106% 12

CALCULATION ON GROSS & NET OPERATING CYCLE 9.GROSS OPERATING PERIOD= Raw material storage period + Work in progress + Conversion period finished goods storage + Period debtor’s collection period 10.RMSP= AVG RM VALUE/DAILY CONSUMPTION

AVG STOCK= (720.52+901.56)2 = 811.04 TOTAL RAW MATERIAL CONSUMED= 3429.52/360 = 9.52 RMSP= 811.04/9.52 = 85.19 DAYS 11.WIPCP =

AVG WIP/ DAILY WIP CONSUMPTION

AVG WIP= (28.94+71.48)/2 = 50.21 ANNUAL WIP CONSUMPTION= 28.94+3429.52+6217.73-71.48 = 9604.71 WIPCP= 50.21/9604.71 13

= 5.23 12.FGSP=Average finished good/Daily sales of FG AVERAGE FINISHED GOOD= (1078.08+ 1074,27)/2 =1076.17 ANNUAL COST OF SALE= OPENING STOCK OF F.G+COST OF PRODUCTAION+ SELLING ADMINISTRATION AND FINANTIAL+CUSTOM AND EXCISE DUTIES-CLOSING STOCK OF F.G. =1078.08+13183.05-1074.27 = 13186.86 SO, Daily cost of Sales= 13186.86 /360= 36.63

FGSP= 1076.17/36.63= 29.37

DEBTORS CONVERSION PERIOD=( 631.63+543.48)/2 =587.55(AVG BOOK DEBT) ANNUAL SALES= 131535.88 DAILY= 131535.88/360 = 365.37 14

587.55/365.37= 1.60 DAYS

GROSS PERIOD= RMSP+WIPCP+FGSP+DCP = 85.19 DAYS+5.23+29.37+1.60 = 121.39 DAYS

INDUSTRY ANALYSIS

Barriers to entry: We believe that the barriers to entry are medium. Following are the factors that vindicate our view.

1. Capital Requirement: Steel industry is a capital intensive business. It is estimated that to set up 1 mtpa capacity of integrated steel plant, it requires between Rs 25 bn to Rs 30 bn depending upon the location of the plant and technology used.

2. Economies of scale: As far as the sector forces go, scale of operation does matter. Benefits of economies of scale are derived in the form of lower costs, R& D expenses and better bargaining power

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while sourcing raw materials. It may be noted that those steel companies, which are integrated, have their own mines for key raw materials such as iron ore and coal and this protects them for the potential threat for new entrants to a significant extent.

3. Government Policy: The government has a favorable policy for steel manufacturers. However, there are certain discrepancies involved in allocation of iron ore mines and land acquisitions. Furthermore, the regulatory clearances and other issues are some of the major problems for the new entrants.

4. Product differentiation: Steel has very low barriers in terms of product differentiation as it doesn’t fall into the luxury or specialty goods and thus does not have any substantial price difference. However, certain companies like Tata Steel still enjoy a premium for their products because of its quality and its brand value created more than 100 years back. Bargaining power of buyers: Unlike the FMCG or retail sectors, the buyers have a low bargaining power. However, the government may curb or put a ceiling on prices if it feels the need to do so. The steel companies either sell the steel directly to the user industries or through their own distribution networks. Some companies also do exports. Bargaining power of suppliers: The bargaining power of suppliers is low for the fully integrated steel plants as they have their own mines of key raw material like iron ore coal for example Tata Steel. However, those who are non-integrated or semi integrated has to depend on suppliers. An example could be SAIL, which imports coking coal. Competition: It is medium in the domestic steel industry as demand still exceeds the supply. India is a net importer of steel. However, a threat from dumping of cheaper products does exist. Threat of substitutes: It is medium to low. Although usage of aluminum has been rising continuously in the automobile and consumer durables sectors, it still does not pose any significant threat to steel as the latter cannot be replaced completely and the cost differential is also very high.

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