13889209 Risk Analysis of TATA Steel
-
Upload
ashok-kumar -
Category
Documents
-
view
220 -
download
0
Transcript of 13889209 Risk Analysis of TATA Steel
-
8/2/2019 13889209 Risk Analysis of TATA Steel
1/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 1
FINANCIAL MANAGEMENT I
A RISK ANALYSIS OF
Under the Aegis of:
PGDM 2008-10
SUBMITTED TO:
PROF.A.K.MALHOTRA
SUBMITTED BY:
PIYUSH KEJRIWAL(065) RAVI AGARWAL(084)
SAUMIL SINGH(094) SUBHADEEP BAGCHI(103)
SUDIPTO DAS(105) TARUN GOEL(108)
-
8/2/2019 13889209 Risk Analysis of TATA Steel
2/21
-
8/2/2019 13889209 Risk Analysis of TATA Steel
3/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 3
INDIAN STEEL INDUSTRY
The Indian steel industry is 100 years old. Till 1990, the Indian steel industry operated under
a regulated environment with insulated markets and large scale capacities reserved for thepublic sector. Production and prices were determined and regulated by the Government.
With capital investments of over $23.3bn, the Indian steel industry currently provides
direct/indirect employment to over 2 million people.
The target steel production in India for 2011 is 66 MT. With massive scale of infrastructural development happening all across the country,
Indian steel Industry has a large scope for development.
The India steel industry has further plans of development. Plans are being chalkedout for setting up of 3 pig iron manufacturing units of a combined capacity of 6 lakh
tons per year and a steel manufacturing unit of the capacity of producing 1 million
ton yearly in West Bengal, with the technical and financial support of China.
The Government of India continues to be supportive towards the industry. TheMinistry of Steel has set a target output of 110 MT of steel by 2020 at CAGR of 7.1%
from 2004-05.
Steel industry still continues to be unattractive for investors and a recent study byCRIS INFAC suggests that any new projects with target price below $270/MT will be
economically unattractive.
COMPANY OVERVIEW
Established in 1907, Tata Iron and Steel Company Ltd (Tata Steel), after it had acquired
Corus became the worlds sixth largest steel Company, with proforma crude steel
production of 27 mn tones in FY07.
Corus acquisition, which was concluded on April 2, 2007, propelled the Company onto the
global platform. The combined entity has a diverse presence in both emerging and
developed economies.
Tata Steel's product range includes hot and cold rolled coils and sheets, galvanised sheets,
tubes, wire rods, construction rebars, rings and bearings. The Company is trying to de-
commoditise steel by launching specific brands like Tata Steelium (Cold Rolled Steel), Tata
Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico
(hand tools and implements), Tata Wiron (galvanised wire products), Tata Pipes (pipes for
construction) and Tata Structura (a contemporary construction material).
Corus, now Tata Steels subsidiary, was established on October 6, 1999 as a result of the
-
8/2/2019 13889209 Risk Analysis of TATA Steel
4/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 4
merger of British Steel with Koninklijke Hoogovens. It is Europes second largest and the
worlds ninth largest steel producer, having a crude steel capacity of 21.2 mn tonnes in the
UK and the Netherlands. It has four business segments: Strip Products, Long Products,
Distribution & Building Systems, and Aluminium. The Strip Products division manufactures
hot rolled steel strip, cold rolled steel, tubes and pre-finished steels. The Long Products
division manufactures plates, sections, wire rods, slabs and billets. The Distribution &Building division offers further material processing, building systems, tailored solutions and
consultancy services to the steel industry.
The Company has developed a presence in south-east Asia through the acquisitions of
NatSteel Asia Pte. Ltd and Tata Steel (Thailand) Public Co. Ltd. (formerly Millenium Steel) in
2005 and 2006 respectively. Of late Tata Steel expanded its presence into Vietnam, entering
into MoU with Vietnam Steel Corporation for proposed steel and mining projects in
Vietnam.
Future Direction:
Tata Steel plans to grow and globalize through organic and inorganic routes. The Company
intends to be a 15 million ton Company by 2010 through organic growth and acquisitions in
India and overseas. Its 5 million tonnes per annum (MTPA) Jamshedpur Works plans to
double its capacity by 2010. The Company also has three greenfield steel projects in the
states of Jharkhand, Orissa and Chhattisgarh and proposed steel making facilities in Vietnam
and Bangladesh.
Recent Achievements:
Tata Steel received the Company of The Year awarded by ET in 2008 for the fiscalyear 2007-08.
Tata Steel, through its joint venture with Tata BlueScope Steel Limited, has alsoentered the steel building and construction applications market.
Tata Steel is one of the few steel companies in the world that is Economic ValueAdded (EVA) positive.
It was ranked the "World's Best Steel Maker", for the third time by World SteelDynamics in its annual listing in February, 2006.
Tata Steel has been conferred the Prime Minister of India's Trophy for the BestIntegrated Steel Plant five times.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
5/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 5
FINANCIALS
There has been an increase in sales of 15.3% from FY06. EBTDA has increased 18% over last
year. There has been a marginal increase in depreciation; interest expense has almostdoubled. Reported profit for FY07 is USD 0.98.
EPS stands good at USD 1.7; P/E ratio for the CY is 7.72. Investments and inventory have
grown at 35% and 13%, (as a percentage of sales) over previous year, respectively. Secured
loans/ sales has come down drastically to 39%, from 87.1% last year. Assets have also
increased compared to equity share capital, thus bringing the equity share capital/ total
assets down to 2.5%, compared to 4.5% in FY06.
Cash flow has again shown a huge difference over last year. It is in negative currently. This is
expected to improve in the next two years, with the highest being in FY09. Overall, it hasbeen a good year for TATA Steel.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
6/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 6
Ratio Analysis
Profitability & Return Ratios:
ROCEand ROEwill both fall because of a large increase in asset base in the next two years.
We can break the ROCE into two sub ratios: Profit margin and Asset turnover. Operating
expenses are expected to increase marginally, resulting in an EBITDA margin of 38.7%,
which is below that of last year. Depreciation, interest expenses are estimated to reduce
from last year, resulting in a net profit margin of 26.6%, an increase of almost 10%. There
has been an increase in sales by 8.4%, but that has been more than offset by increase infixed assets of 15%. This has resulted in fixed asset turnover reducing from last year. This
will continue into FY08. This is because of the fact that new assets need to be given more
time to start generating revenue. TATA Steel would reap benefits from the new machinery
from FY09. EV/ EBITDA would also show an increase over previous years.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
7/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 7
Debt and Gearing Ratios:
Debt-equity ratio remains constant at 0.69. The interest cover will increase to 28.1 for FY08
and 29.0 in FY09, from 27.19 last year. This is due to an increase in EBITDA in the future
years that would offset the marginal increase in interest charges.
Liquidity Ratios:
We peg the current ratio at almost 1.5 times prior year ratio. This is because of an increase
in inventory holdings and investments. Though there is a outflow for this year, the cash flow
ratio will improve over the next two years.
Stock Market Ratios:
EPS is the reported profit over the number of shareholders in the year. This year, it willincrease to 87, a rise of over 19% from last year, and is expected to touch 104 by FY09. The
P/E ratio is expected to double in FY 08. This could due to anticipation of increased profits
and dividend payouts in FY08 and FY09.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
8/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 8
RISK ASSESSMENT
Tata Steel has been on a path of accelerated growth with foray into several geographies.
Associated with such growth is the resultant change in the risk profile. The Company today
faces greater complexities/challenges and even greater expectations from its stakeholders.
The Company, therefore, needs to evaluate how much risk the company is taking in light of
its growth initiatives. In other terms, the residual risk in the expected return needs to be
formally recognised and disclosed. Thus, the following are the risk associated with the
company and their related suggestions:
1. Corus Acquisition Financing
During FY 2007-08, the financing structure of the Corus transaction has been reorganised
to achieve fiscal unity in the Netherlands and consequent tax efficiencies. The Corus
businesses in UK and Netherlands are now organised under fully owned subsidiaries of Tata
Steel Netherlands B.V., which in turn is an indirectly fully owned subsidiary of Tata Steel
Limited.
By the close of April 2008, the financing for the Corus acquisition has been completed
with all the recourse bridge funding contracted for the acquisition having been paid off
through a mix of debt, equity and internal accruals and the non-recourse funding syndicated
during the year.
In September 2007, the Company issued USD 0.875 billion of 1% Foreign Currency
Convertible Alternative Reference Securities (CARS). Between September 4, 2011 and
August 6, 2012, each security is convertible at the option of holder of the security, at a
conversion price of Rs. 758.10 into a Qualifying Security issued by the Company. The
Company must redeem all outstanding CARS at 123.349% of their principal amount together
with accrued and unpaid interest no later than September 5, 2012. The Company raised an
amount of Rs. 9121 crores through a Rights and Cumulative Compulsorily Convertible
Preference Share Issue and Rs. 25 billion through a long term loan. The syndication of the
GBP 3.67 billion senior facility consisting of multiple tranches of term loans and a GBP 0.5
Billion five year revolving credit facility, secured by the assets of Corus was successfully
closed in December 2007 by which time, a large number of banks as well as institutions had
come into the transaction. The deal was widely recognised as a landmark deal and won
numerous awards and recognition from financial journals.
Tata Steel also privately placed Non-Convertible Debentures totalling up to Rs. 2,000
-
8/2/2019 13889209 Risk Analysis of TATA Steel
9/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 9
crores in May 2008. The deemed date of allotment of these debentures was 7th May, 2008
and they consist of 3 series: 3 year floating (MIBOR-linked) notes (Rs. 1,090 crores), 7 year
fixed rate notes (Rs. 620 crores) and 3 year fixed 83 rate notes (Rs. 290 crores). These funds
may be used by the company for various corporate needs.
The Company hedged the foreign currency risk on repayment of the major part of
the USD 1.65 billion of external commercial borrowings drawn in FY 2006-07. The foreign
currency repayment risk on the CARS remains unhedged since they may be converted to
underlying securities in FY 2012 and FY 2013. Tata Steel Netherlands, the entity in whose
books the nonrecourse debt has been taken was successful in encouraging a high proportion
of investors to voluntarily convert their debt to Euro via the re-denomination route. The
majority of the balance debt was then swapped to Euro from GBP so that foreign currency
risk could be minimised. Tata Steel Netherlands also hedged the majority of its Euro interest
rate risk.
Rights Issues
During the year under review, the Company allotted the Cumulative Convertible Preference
Shares (CCPS) and Ordinary Shares on a Rights basis to the shareholders of the Company as
under:
121,611,464 Ordinary Shares of Rs.10 each at a premium of Rs.290 per share in theratio of 1:5, aggregating to Rs. 3,648 crores.
547,251,605 2% Convertible Cumulative Preference Shares (CCPS) of Rs. 100 each atan issue price of Rs. 100 each, in the ratio of 9:10, aggregating to Rs. 5,473 crores. As
per the terms of the issue, six CCPS of Rs.100 each are compulsorily and
automatically convertible on 1st September, 2009, into one Ordinary Share of Rs. 10
each, at a premium of Rs. 590 per share. The proceeds of the Rights Issue have been
utilised to repay the short term Bridge Loan availed by the Company from the State
Bank of India.
Company initiative
In order to finance their planned capital expenditure, the Tata Steel Group continues to
follow prudent financial practices of focusing on higher generation and conservation of
internal capital, improvement in the working capital management and allocation of capital
to value creating projects. Their Brownfield expansions in India and the ongoing capital
expenditure programmes globally are on track and the financing of the same are
-
8/2/2019 13889209 Risk Analysis of TATA Steel
10/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 10
fundamentally premised on internal generations of the Group. The Company will consider
raising external capital for the other growth projects as and when required based on the
Companys long term financing strategy which focuses on ensuring that the capital structure
remains robust in the long term, the financing plan provides flexibility to the balance sheet
for future needs and is earnings accretive in the long term.
The Tata Steel Group has set itself an ambitious target to improve the return on
invested capital of its existing assets to 30% from the current 19% over the next 5 years. The
Group will pursue the optimisation of its European assets, dispose and restructure assets
that are of low profitability and pursue differentiation of products and services. It will also
continue towards achieving benefits through continuous improvement of processes and
products; from the synergies from the acquisition of Corus. Plans are in place to meet the
initial synergy target of USD 450 million per annum.
The Tata Steel Group has already begun converting this strategy into action. For
example, in April 2008, the Tata Steel Group disclosed a programme to restore the long
term competitiveness of its packaging assets in Europe with the closure of its Bergen site
(Norway), and the restructuring of its Trostre operation (United Kingdom). Other examples
are the major investments that are currently being implemented at its plants in Ijmuiden,
Port Talbot and Scunthorpe which will drive the Group towards product differentiation and
improve operational efficiency to reinforce its existing competitive position.
The Tata Steel Group will pursue strategic growth through capacity expansions and
securing access to raw materials. The Group is expanding its capacity in India through theexpansion of its operations in Jamshedpur to 10 million tonnes per annum and through the
construction of a 6 million tonnes per annum Greenfield site in Orissa. Other Greenfield
opportunities in India and across Asia are being assessed.
2. THE MITTAL FEAR
Tata Group has a holding of approximately 34 % in Tata Steels, which exposes it to the fear
of being taken over by any global steel producer. We all know what has happened in the
past (refer to Mittal Arcelor story) and there is a great chance that there can be a hostile
bid by Mittal-Arcelor or some other company like Nippon, Posco etc.
Hostile bids are a new trend nowadays which makes it a even bigger threat, one of the most
recent hostile takeover bid has been that ofBHP (The worlds biggest Mining Company) for
Rio Tinto which stood at $147 billion.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
11/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 11
Company Initiatives
Steel industry is highly fragmented and considerably vulnerable. The only safeguard is to
increase the founding family's stake over time," Mr. Tata told the shareholders of Tata Steel.
In 2006 Tatas stake was 27.48%. Currently it has risen to 33.94% achieved by the issue of preferential shares.
3. Land acquisition problem
Due to its ongoing Greenfield and Brownfield in states like Orissa, Chhattisgarh and
Jharkhand, Tata steel requires huge chunk of land. Sudden spree of other big corporate
houses for grabbing land makes the situation even more competitive some reports also
suggests that there is a vicious circle working intentionally delaying the project. In this
regard it can be compared with Singur, drama as mentioned by some top Tata executives.
Police firing in Kalinganagar in Orissa and subsequent death of protestors make thesituation complex.
Unstable Jharkhand government and Tribal protestors at an increase worsening thesituation.
Representatives of environmental activist group Greenpeace stormed into the AGMin the guise of shareholders of Tata Steel, got on to the podium and alleged that theproposed port at Dhamra on the Orissa coast will kill the migratory Olive Ridley
turtles there.
Company initiative
Tata steel is undergoing a project for human skill development programme throughadoption of ITI and various steel development programmes among villagers near
project sites.
Attractive remuneration package and job assurance for land losers. Purchase of land directly by company without involving government agencies.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
12/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 12
4. Cyclical nature of the steel industry
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.
Company initiative
Taking into account of Mittal,s way of business of global consolidation Tata steel first
adopted string of pearls acquisition policy while acquiring assets of less than five million
tonnes through NatSteel, Singapore and Millennium steel in Thailand. After acquiring small
scale firms in south East Asia Tata steel acquired iconic British Dutch steel steelmaker Corusand became the sixth largest steelmaker in the world. Just like crude oil this consolidation
can help to sustain a player stable price for steel avoiding the cyclical nature of the business.
Suggestion
By acquiring Corus, though Tata steel attained a global size its assets are mainly based in
developed market with limited growth opportunity. To remain competitive in global steel
arena it has to expand its footprint throughout highly fragmented steel industry of china.
5. Raw material price fluctuations
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.
Company initiative
Your Company is self-sufficient in iron ore for 100% and 60%for coking coal i.e. an average
of 80% raw material security for its Indian operations. After the acquisition of Corus the
extent
of captive raw material for the combined entity stands at around 22%. Having a reasonable
level of raw material security is imperative for long term sustainability especially during
-
8/2/2019 13889209 Risk Analysis of TATA Steel
13/21
-
8/2/2019 13889209 Risk Analysis of TATA Steel
14/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 14
6. Increasing energy costs
Steel production processes are energy dependent and price movements in the energy
market would accordingly affect Tata Steels bottom line, and thus affecting our rating.
Company initiatives
Particulars Required under the Companies (Disclosure of Particulars in the Report of the
Board of Directors) Rules, 1988.
Conservation of Energy -
a) Energy Conservation Measures Taken :
Conversion of boiler no. 7 & 8 stoker coal fired boilers at Power House No. 3 into by-product gas fired boilers.
Electrical energy saved through installation of V/F drives at LD Shop and Hot StripMill.
b) Additional Investments and Proposal for Reduction of Consumption of Energy:
Installation of Top Recovery Turbine (TRT) at G & H Blast Furnace. Recovery of sensible heat of coke by installation of Coke Dry Quenching system in
Batteries 5, 6, 7, 8 & 9 at Coke Plant.
Enhancing waste heat recovery at Sinter Plants to reduce energy consumption andreduce CO2 emission.
BF Gas fired re-heating furnace at Hot Strip Mill. Elimination of heat not recovered due to parallel blow to improve LD Gas recovery,
so as to reduce coal consumption in boilers.
Impact of the above measures:
Energy Conservation measures during 2007-2008 has resulted in achieving:
Lowest ever Plant Specific Energy Consumption of 6.655 Gcal/tcs.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
15/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 15
Lowest ever boiler coal consumption of 38.97 kg/tss. Higher LD Gas Recovery of 66.80 Nm3/tcs. Higher combine boiler efficiency of 83.67%.
One most notable move for energy conservation is NatSteel, across its operations in
Australia, China, Vietnam, Thailand and Singapore has also undertaken several initiatives
toward environment care. Harvesting rainwater on a large scale, ensuring that 90% of the
steel is recycled, instituting green buildings with energy saving solutions, various waste
management programmes, purifying emissions through treatments these are among the
various initiatives being taken on a continuous basis by the NatSteels various operations
across the globe.
7. High Capacity expansion from the competition
All the major domestic competitors like SAIL, ESSAR, JSW, JSPL have announced massive
expansion plans recently:
SAIL has announced that it will achieve production capacity of40 Million Tons by 2020.
JSW plans to expand its production to 32 Million Tons by 2020
Other players such as JSPL, ESSAR have similar production expansion plans which will
contribute in overall achievement of200 Million Tons steel production by the year 2020.
Companies Initiative:
Company has responded with its own domestic expansion plans along with its global
production plans.
They plan to reach production capacity of around 35 Million Tons by 2020.
Suggestion
Company should try to see that so much of production doesnt create over supply of steel in
the market as it will drive down the prices, rather it can aim at making Specialty Steels
products like stainless steels, Tool Steels, Die Steels, Valve Steels etc.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
16/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 16
8. Cost of Integration of Corus:
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 such
as which will add to overall integration costs such as:
Cross Cultural Integration Employer-Employee Relationship General tendency of Human Beings to resist change in the environment around them
Company initiative
Our aim for the future is to be ranked among the top preferred employers across all
industries and we will continue to invest in both our people and Human Resources
processes as we strive to achieve this goal. As part of this, we have adopted four pillars for
our Performance Culture across Tata Steel and Corus : Aspirational Targets to stretch
business potential and achieve value-added growth; Safety and Social Responsibility,
providing a safe workplace that respects the environment and local community; Continuous
Improvement, enhancing performance at all levels; and Openness and Transparency,
creating an environment of trust which encourages debate and respects individual opinion.
9. GLOBAL POLITICAL SCENARIO:
Tata committed a huge amount of investment in politically unstable country like
Bangladesh, Iran, Mozambique and Thailand. The entire process of setting up plans getting
delayed in question of gas supply (in Bangladesh) , Iron or mine lease in Iran is escalating the
project cost.
Suggestions:
In future Company should pay attention in choosing the project site preferably in less
troublesome areas. Resource reach Latin America could be good option so company should
try to make acquisition especially in Brazil, Bolivia believe to have accessible deposit of
titanium elements.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
17/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 17
10.SLOWING ECONOMY OF EUROPE
Due To Subprime Crisis in USA an subsequent tremor all along the world, specially in
developed market in Western Europe make the vulnerable position of Corus even more
riskier. UK, Germany, Netherland the main market for Corus products are facing the fear for
recession on negative growth.
Company Initiatives :
As historic available data shows that Corus is a high cost producer of Steel and its margin
been dragged by long term contract with various automotive and aeronautical industries.
Though company is trying hard to allure buyers by selling their quality products but with
little hope for dramatical improvement in future.
Suggestions :
To shift the gravity of market from developed to developing world (like in case of
aeronautical industry next hub for aircraft manufacturing would be Brazil and China). In that
market the specialty steel is a premium commodity. Corus should give emphasis to
penetrate in that high potential market.
11.TATA Ethically Wrong?
Tata, the world over is respected for its ethical practices, CSR (not just for the name sake)
but in true sense. It is very difficult to find any issues in TATAs hundred year old history
regarding unethical practices or behavior.
One of the many examples of TATA being socially responsible is the deployment of
Companys mobile medical unit (Hospital on Wheels) and treating more than 145600
habitats in urban slums and remote rural areas.
But of late the Company is suffering from Land Acquisition problem in Singur, West Bengal.
Although its not a problem directly related to TATA STEEL but the dilution in brand TATA
has a significant effect on the share prices of Tata Steel.
Company Initiatives:
Tata group is trying its best to give the farmers of Singur, the best deal which suites both the
parties and it has tried to strike a balance between financial losses and people sentiments.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
18/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 18
Suggestions:
In future before venturing into any state proper due-diligence should be conducted to avoid
such controversies which affects TATAs image in any manner. It should consider the leader
of the opposition along with the party in power of the concerned state.
12.High interest cost
Corus acquisition is being financed by a substantial amount of debt. This puts pressure on
the Companys 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 Companys inorganic growth options.
Company initiative
The Company actively monitors Foreign Exchange and Interest Rate exposure. Basedon an informed view and assessment of these risks, it has developed a Risk
Management Policy. The Risk Management policy of the Company operates to
achieve greater predictability of earnings and provides a stable planning
environment. Coruss main financial risks are related to the availability of funds to
meet its business needs and movements in interest and currency exchange rates as
well as commodity costs.
The Company hedged the foreign currency risk (in Japanese Yen and US Dollar) onrepayment of the major part of the USD 1.65 billion of external commercial
borrowings drawn in FY 2006-07. The Company also drew down USD 875 million
through a convertible bond issue (CARS), which may be converted to the underlying
securities in FY 2011-12 and FY 2012-13. The repayment of this liability is uncertain
and accordingly the foreign currency exposure remains unhedged.
The Company also actively and selectively hedged its export receivables and importpayables during the last financial year.
13.Exchange Rate Fluctuations
Corus derives the significant amount of its revenue from Europe (including the UK) with
81% of the groups total turnover coming from Europe in 2006. Steel prices in Europe,
including the UK, are set in Euros, where as the bulk of Coruss costs in the UK are not
-
8/2/2019 13889209 Risk Analysis of TATA Steel
19/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 19
influenced by the GBP-EUR exchange rate. Thus fluctuations in the GBP-EUR exchange
rate impact Corus UK earnings considerably.
Corus derives most of its revenue in the EU, but has substantial assets and sales in the
UK, which is not a member of the euro-zone. Major raw material supplies purchases are,
however, denominated mainly in US dollars. As a result, Corus is impacted by therelationship between the Sterling, the Euro and the US dollar. Corus operates a hedging
policy to minimise the volatility of rapid and significant movements in these exchange
rates.
14.Post Acquisition Integration Risk
Post Acquisition, Tata Steel recognises that there could be considerable risk emanating
from a possible lack of adequate alignment of management on strategic issues and in
common functional areas.
Company Initiatives
The Tata Steel Group has therefore taken some substantive measures to mitigate the
above risks:
a) An Operating Model has been instituted to govern management collaboration and
decision making in areas such as Finance, Strategy, IT, HR, Continuous Improvement. A
Joint Executive Committee, comprising executive leadership of both entities, provides
high level direction and guidance.
b) To ensure that synergies in operations are identified and implemented for pre-defi
ned bottom line impact, the following enabling mechanisms have been set up soon after
the acquisition transaction was completed:
Focused integration teams Setting up of a Strategy and Integration Committee Setting up an Integration Programme Office to facilitate synergy identification
and enable smooth working of integration teams
An external independent party has been engaged to audit implementation plansand to track synergy realisation.
Review of synergy implementation and realisationThe above approaches are expected to mitigate risks associated with realisation of
synergies
-
8/2/2019 13889209 Risk Analysis of TATA Steel
20/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 20
15.Technology Risks:
Tata Steel with its modernisation plans has ensured that it deploys the best
technologies to ensure quality, cost-efficiency and environment friendly processes. Throughacquisition of Corus and with new Greenfield ventures, Tata Steel has ensured that it has
diversified the concentration risk in single technology of Iron & Steel making. Moreover the
Research & Development team of Corus addresses the need for greater R&D capability of
the company.
16.Regulatory & Compliance Risks:
The Government plays a key role in the economics of a Steel industry. It has a role as
a resource allocator (the mining policies of the Government), as Competitor (the publicsector steel companies) and as Regulator. In volatile times the regulatory risk rises with
measures like reduction in import duties, levy of export duties and withdrawal of DEPB
benefits, threats of price curbs etc. Tata Steel counters this risk by being a role-model
corporate citizen and playing an important role in contributing to the Nation building.
Tata Steel is the second largest steel producer in terms of Geographical spread of its
facilities. The Company recognises that this spread across various countries increases the
compliance risk and hence the Company has set up a focused team headed by a Group Head
for Corporate Assurance and Compliances to proactively deal with and mitigate all such
potential concerns and issues.
-
8/2/2019 13889209 Risk Analysis of TATA Steel
21/21
September 30, 2008 [TATA STEEL A RISK ANALYSIS]
PGDM BATCH 2008-10 | 21
CONCLUSION
While doing our analysis of Tata Steels Annual report, it was found that due to its
inception as a huge Brand all across the Globe, it has certain standards to maintain and
along with it, it also has to keep ahead of its competitors and also provide premium class
and quality product to its customers. For this it maintains certain Models of Excellence.
Tata Steel has been on a path of accelerated growth with foray into several
geographies. Associated with such growth is the resultant change in the risk profile. The
Company today faces greater complexities/challenges and even greater expectations from
its stakeholders. The Company, therefore, needs to evaluate how much risk the company is
taking in light of its growth initiatives. In other terms, the residual risk in the expected
return needs to be formally recognised and disclosed.
In the past, the Companys Risk Management framework was based on the TataBusiness Excellence Model (TBEM). This framework has served us very well as the
Company modernised, pursued the goal of being one of the lowest cost producers of steel
and adopted an approach of Value Based Management in order to maximise the
shareholders value. Given the pace and complexity of the current growth with its
associated risks, Tata Steel now is in the process of implementing a more structured
approach in the form of Enterprise Risk Management (ERM).
Thus, we would rate Tata Steel at medium risk.