Security Analysis of TATA STEEL

8/9/2019 Security Analysis of TATA STEEL

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Security Analysis of

Submitted To:- Prof Satya Acharya

Prepared By:- Pranav J Chokshi

AMA PGP-IBM

(2008-2010)



AMA-PGPIBM (2008-2010)

Security Analysis of TATA Steel

Indian Economy Overview

The Indian economy is set to grow between 7 per cent and 7.5 per cent in the current fiscal,according to Dr C Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council(PMEAC). The mid-year review has projected a growth rate of 7.75 per cent for the fiscal.

India's gross domestic product (GDP) grew by 7.9 per cent during July-September 2009, up from6.1 per cent in the previous quarter, as per data released by the Central Statistical Organisation(CSO). According to the latest estimates available on the Index of Industrial Production (IIP), theindex of mining, manufacturing and electricity, registered growth rates of 9.5 per cent, 9.2 per cent and 7.5 per cent, respectively in Q2 of 2009-10, as compared to the growth rates of 3.8 per cent,4.9 per cent and 3.2 per cent in these industries in Q2 of 2008-09. The key indicators of

construction sector, namely, cement and finished steel registered growth rates of 12.6 per cent and2.1 per cent, respectively in Q2 of 2009-10, as against the growth rates of 5.2 per cent and 3.8 percent, respectively in Q2 of 2008-09.

The Economic scenario

Overseas investors have infused US$ 816.69 million into the stock market in the first trading week of 2010, reflecting a positive start for the year after record inflows in the last year. FIIs were net investors of US$ 973.22 million in debt instruments in the first trading week of the year, according to the data released by Securities and Exchange Board of India (SEBI). The wealth of foreigninstitutional investors (FIIs) in leading Indian companies now stands at more than double the levela year ago, vindicating India’s image of being a safe and lucrative investment destination.

Consumers in India continued to be optimistic slightly more than what they were six months ago,as per a latest MasterCard Worldwide Index of Consumer Confidence survey. "In India consumers are more optimistic than six months ago (68.0) and a year ago (63.9)," said the study.

Additionally, India ranks second with 117 points in consumer confidence in the fourth quarter of 2009, according to the Nielsen Global Consumer Confidence survey. The survey results indicatethat the recovery from the global economic downturn is faster in India as compared with othercountries in the world.

Global ratings firm Moody's has upgraded long-term foreign currency (FC) deposit ratings of 14Indian banks, including the country's largest bank. State Bank of India (SBI), by one notch to Ba1from Ba2 with a stable outlook. This reflects a slight improvement in the credit quality of the ratedentities. This move has come in wake of the revision in India’s sovereign outlook by the ratingsfirm. Among the banks which would be benefited by the ratings decision include Axis Bank, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Export-Import Bank of India,HDFC Bank, ICICI Bank, IDBI Bank, Oriental Bank of Commerce, Punjab National Bank,State Bank of India, Syndicate Bank and Union Bank of India.





Indian companies have raised about US$ 2.6 billion from the international market throughexternal commercial borrowings and foreign currency convertible bonds (FCCBs) in

October to fund overseas acquisitions and import capital goods and modernisation andlending. This is highest amount raised in a month by Indian companies throughECB\FCCB route after the financial crisis intensified on collapse of Lehman Brothers inSeptember 2008.

Exports from India are estimated at US$ 14.6 billion in December 2009, 9.4 per cent higher than the level in November 2009, according to Mr Anand Sharma, UnionCommerce and Industry Minister. Export growth in December was driven by sectors suchas pharmaceuticals, engineering and auto components he added.

In November 2009, India’s containerised volume reported a double-digit growth of 15 percent year-on-year, according to a report by the domestic brokerage India Capital MarketsPvt. Ltd.

India's logistics sector is witnessing increased activity—the country's major ports have posteda 12.8 percent year-on-year (y-o-y) rise in cargo volumes in November 2009. The PublicPrivate Partnership Appraisal Committee (PPAC) has approved four projects worth overUS$ 897.7 million to be developed through the public-private partnership (PPP) mode in a move to boost capacity at the major ports in the country.

Foreign tourist arrivals in India in the peak tourism season of 2009-10 is set to witness a growth of 25 per cent over the same period of 2008-09, according to Mr Vijay Thakur,President, Indian Association of Tour Operators (IATO).

The recovery of the Indian economy, as was broadly expected, worked well for theadvance tax figures for the third installment that was payable by December 15, 2009. Theall India direct tax collection between April and December 2009, which includes corporate

and personal taxes, increased 8.1 per cent to US$ 48.39 billion, according to figures that are currently with the income-tax (I-T) department.

The domestic mutual fund (MF) sector registered positive growth in November 2009. According to the latest statistics from the Association of Mutual Funds in India (AMFI), theassets under management (AUM) of top fund houses have increased by two to 10 per cent.

Independent investment bank Rothschild sees potential for M&A activity in banking,telecom and aviation in India driven by consolidation in these sectors.

India is likely to emerge as a major hub for production of quality steel products, as perRatan Jindal, vice-chairman, managing director and CEO of Jindal Stainless Steel (JSL).The International Steel Exhibition ‘Indinox’, to be held at Ahmedabad in January, willportray India as a major destination for manufacturing steel products.

The Indian drug retail market grew by a 29.24 per cent in value terms in October 2009over the year ago period, more than double the average monthly revenue growth rate of 13-14 per cent in the recent past, as per market research firm ORG IMS.

The country's IT exports under the Software Technology Parks of India (STPI) schemelogged an estimated US$ 46.25 billion in the first half of the current financial year, withBangalore accounting for over 30 per cent of the total export basket.

India's iron ore exports more than doubled to 9.3 million tonne in October 2009 ascompared to 4.4 million tonne in the same month a year ago on the back of increase indemand from Chinese steel producers, as per a joint study by a group of iron oreexporters.





India's pharmaceutical industry is the third largest in terms of volume. The Indian US$ 20billion pharmaceutical industry has shown tremendous progress in terms of infrastructure

development, technology base creation and a wide range of products, as per the Ministry of Chemicals and Fertilisers.

India has joined an elite group of six countries which have successfully decoded the humangenome indigenously. The discovery, which was announced by the Council of Scientificand Industrial Research (CSIR), will bring pharmaceutical companies a step closer todesigning drugs accounting for the specific characteristics of the Indian physiology.

India leads the top real estate investment markets in Asia for 2010, according to a study by PricewaterhouseCoopers (PwC) and Urban Land Institute, a global non-profit educationand research institute.

A new survey undertaken by Manpower Inc, a world leader in the employment servicesindustry, found that Indian employers are most optimistic about adding staff.

India’s life insurance sector is expected to grow by almost 15 per cent in the current financial year and touch a total premium income of US$ 50 billion, according to LifeInsurance Council secretary general S B Mathur.

India which retained its numero uno position in world milk production this year as well, isestimated to have produced 110 million tonnes of milk in 2008-09.

The mobile subscriber base in the country crossed the 500-million mark to touch 506million in November 2009, according to the figures released by the Telecom Regulatory

Authority of India (TRAI).

The country’s infrastructure sector accelerated by 5.3 per cent in November 2009, backedprimarily by growth in steel and cement production in the month. The six core sectors,

which contribute 26.7 per cent to the overall Index for Industrial Production (IIP), had

grown 0.8 per cent in the corresponding month of 2008. According to data released by Society of Indian Automobile Manufacturers, car sales in

November stood at 1.33 lakh units in the domestic market, up from 83,121 in the samemonth last year.

According to the Gem and Jeweler Export Promotion Council, the exports of gems and jewellery from India, the world’s largest supplier, rose 45 per cent over December 2008 totouch US$ 1.89 billion in December 2009.

Merger and acquisition (M&A) volumes have touched US$ 74.5 billion till January 13,2010—the next highest Year To Date (YTD) level in ten years since 2000.

The Rural India growth story Estimated at close to 350 million, the bottom-of-pyramid (BOP) consumer segment is the

biggest and perhaps the fastest growing in the country with about 40 million familiesmaking the jump from poverty to the BOP club every year. Consumer product makerssuch as GlaxoSmithKline, Nestle, Coca-Cola, PepsiCo, Hindustan Unilever, Marico,Godrej and Dabur are rushing to the bottom-of-the-pyramid market with custom-madeproducts six years after management guru CK Prahalad said consumers with incomes lessthan $2 a day can be a profitable segment for marketers.





Major fast moving consumer goods (FMCG) companies like Hindustan Unilever (HUL),Marico, Godrej Consumer Products, Dabur and even brewers like Sab Miller have stepped

up hiring in small towns and rural India—primarily appointing sales staff to increase visibility and connect, and simultaneously boost sales.

Growth potential story

A report from the Automotive Component Manufacturers Association of India (ACMA)estimates the turnover of the auto component industry in India will touch US$ 40 billion by 2015-16. By then India’s share in the global auto component market is likely to grow fromthe current per cent to nearly per cent.

Ernst and Young has forecast the passenger car market in India to grow by 12 per cent annually over the next five years from the present figure of 1.89 million units to reach 3.75

million units by 2014. Small and medium enterprises (SMEs) are expected to contribute 22 per cent to India's

Gross Domestic Product (GDP) by 2012, up from about 17 per cent at present, according to a survey by the Associated Chambers of Commerce and Industry of India (ASSOCHAM).

The healthcare industry in the country, which comprises hospital and allied sectors, isprojected to grow 23 per cent per annum to touch US$ 77-billion mark by 2012 from thecurrent estimated size of US$ 35 billion, according to a Yes Bank and ASSOCHAMreport.

India’s domestic business processing outsourcing (BPO) market, that has close to 500players, will grow at a compound annual growth rate (CAGR) of 33.3 per cent, to reach

revenues of US$ 6.82 billion by 2013, up from US$ 1.62 billion in 2008, according to a report by information technology research firm IDC India.

India is targeting annual foreign direct investments worth US$ 50 billion by 2012 and would double the inflows by 2017.

As per a study conducted by the Indian Council for Research on International EconomicRelations (ICRIER), the retail sector is expected to contribute to 22 per cent of India'sGDP by 2010.





GDP GROWTH

The India GDP is a combination of all the differential factors, contributing to the welfare of theIndia economy. India GDP gives us a combined report of the performance of the Indianeconomy. 'Cost factor' or 'Actual price' method - these are the two methods to calculate IndianGross Domestic Product. The main factor that contributed to the growth of India GDP post 1990s

was the opening-up of the Indian economy.

The balance-of-payments crisis of 80s of the Indian economy led to the paradigm shift of theIndian Economy. The markets were opened up, the Government leveraged the entry of privateinvestments. As a result of this, more investments flowed into the markets. More so by the Foreigndirect investments (FDIs) and foreign institutional investors (FIIs), the India GDP growth saw a

phenomenal increase. Bulk of the Government undertakings were divested into lots of privatebusiness houses.

Gauging the health of the India economy - India GDP is the best tool! Going by figures, India GDP has already crossed the trillion-dollar mark, other peers in this sphere being US, Japan,Germany, China, UK, France, Italy, Spain, Canada, Brazil and Russia.

After the liberalization era of the India economy, the growth story of the India GDP was driven by the following sectors of Indian industry -

Information Technology

Information Technology Enabled Services Telecommunications Electronics and hardware Automobiles Pharmaceuticals and biotechnology Consumer durables Retail Textiles Infrastructure Construction Airlines

Hospitality Power Oil and natural gas Fertilizers and chemical

The GDP of India, even after the opening up of the economy and other relaxed norms couldn't survive the aftermath of the global financial crisis. The GDP of India over the past two fiscals(2008-09 and 2009-10) experienced considerable slowdown.

This moderate growth of the India economy has given rise to moderate expectations withrespect of India GDP. Though various rating agencies, economists, business houses predict a





Unemployment Rate:-

The government expected to remain steady with the GDP growth figure, but economic factors andexternal situations didn’t help to maintain the figure. As of now, the GDP forecasted figure by theGovernment is hovering around 9% - that is to be achieved by 2012. Does that sound a bit of anover-estimation? Or will it be easily achieved, taking into consideration the improvement in termsof the IIP figures, business confidence index, inflation and other allied factors?

Few snapshots of the India GDP statistics –

1. The growth rate of Indian GDP fell from 7.35% in 2008-09 to 5.36% till the end of 3rdquarter of the 2009-10.

2. The cumulative FDI Equity inflows (from August 1991 – August 2009) stood at Rs.5,20,589 crore.

3. Budgetary support for National Highway Development Programme (NHDP) has gone by 23% on y-o-y basis for 2009-10.

4. Expenses for the Commonwealth Games 2010, went up from Rs.2,112 crore in InterimBudget to Rs.3,472 crore for 2009-10 fiscal.

5. Allocation to railways have gone up from Rs.10,800 crore in interim budget toRs.15,800crore for FY 2009-10.

6. Allocation under National Rural Health Mission (NRHM) has gone up by Rs.2,057 croreover Interim Budget estimate in 2009-10 of Rs.12,070 crore.

7. Rs.2,113 crore has been allocated for IITs and NITs, comprising of a provision of Rs.450crore for new upcoming IITs and NITs.

8. Minimum Alternate Tax (MAT) to go up to 15% from 10%.





STEEL INDUSTRY

Sector structure/Market size

The steel industry in India has been moving from strength to strength and according to the year-end review by the Press Information Bureau, India has emerged as the fourth largest producer osteel in the world and the second largest producer of crude steel.

Significantly, state-owned steel maker, Steel Authority of India (SAIL), which reported a net profit of US$ 571 million in January-June 2009, has become the most profitable steel company globally,beating steel majors such as ArcelorMittal, Posco, Bao Steel and Nippon in the half yearly profits.

Production

Steel production reached 28.49 million tonne (MT) in April-September 2009.

The National Steel Policy has a target for taking steel production up to 110 MT by 2019–20.Nonetheless, with the current rate of ongoing greenfield and brownfield projects, the Ministry oSteel has projected India's steel capacity is expected to touch 124.06 MT by 2011–12. In fact,based on the status of memoranda of understanding (MoUs) signed by the private producers withthe various state governments, India's steel capacity is likely to be 293 MT by 2020.

Consumption

India accounts for around 5 per cent of the global steel consumption. Almost 70 per cent of thetotal steel used is for kitchenware. However, its use in railway coaches, wagons, airports, hotels andretail stores is growing immensely.

India's steel consumption rose by 6.8 per cent during April-November 2009 over the same perioda year ago on account of improved demand from sectors like automobile and consumer durables.

A Credit Suisse Group study states that India's steel consumption will continue to grow by 16 percent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion.

The scope for raising the total consumption of steel is huge, given that per capita steelconsumption is only 35 kg – compared to 150 kg across the world and 250 kg in China.

Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retailoutlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retailoutlets called JSW Shoppe and is targeting to increase it to 200 by March 2010. They expect at least 10-15 per cent of their total production to be sold by their retail outlets.

Essar Steel which currently has over 300 retail outlets across the country, plans to set up 5,000





outlets of various formats soon. It expects to sell 3MT of steel through the retail route in two years.

Exports

Out of India's annual iron ore production of more than 200 MT, about 50 per cent is exported.

India's iron ore exports more than doubled to 9.3 million tonne in October 2009 as compared to4.4 million tonne in the same month a year ago on the back of increase in demand from Chinesesteel producers, as per a joint study by a group of iron ore exporters.

Iron ore is a key input in steel making. The country’s iron ore exports during April-October 2009period grew 20 per cent over the year ago period to 53 million tonne, as per the study.

Investments

A host of steel companies have lined up major investment proposals. Furthermore, with anexpanding consumer market, the Indian steel industry is likely to receive huge domestic andforeign investments.

The domestic steel sector has attracted a staggering investment of about US$ 236 billion, accordinto the Minister of State for Steel A Sai Prathap.

GLOBAL STEEL INDUSTRY

The biggest boom in history of steel industry is that of the 1950s and 1960s, when the steel

industry was driven by the post-War boom in the developed world. Whereas the current boom is

being led by growth in the developing world, particularly China, India and Brazil. China is clearly

the engine that has driven steel consumption in the Asian region.. Steel prices, primarily buoyed by

the Chinese boom, hit their peak between 2002 and 2004. This ensured high profits from

investments in steel. Despite the moves towards consolidation, steel capacities are still fragmented.

The gap between Arcelor-Mittal and Nippon Steel, the second biggest producer, highlights this.

Nippon produced 32 million tons of steel in 2005 - less than one- third that of the industry leader.

More significantly, although the Tata-Corus combine will be placed at number five in the global

steel pecking order.





The point about consolidation is that it is only happening at the top. The top 10 companies

produce about 25 per cent of the global steel output. The rest of the steel - about 75 per cent of

the global capacity - is still widely dispersed over 62 countries around the world, in plants with

much smaller capacities. Industry sources say that consolidation needs to happen at the bottom

end of the steel.

In the year 2004, the global steel production has made a record level by crossing the 1000 milliontons. Among the top producers in the steel production, China ranked 1 in the world. Production

of steel in the 25 European Union countries was at 16.3 mmt in January 2005. Production in Italy

increased by 11.5 per cent in comparison to the same month in 2004. Italy produced 2.5 mmt of

crude steel in January 2005. Austria produced 646,000 metric tons. In Russia it increased by 4.0

per cent to reach at 5.5 mmt in January. In case of the North America region particularly in

Mexico it was 1.5 mmt of crude steel in January 2005, up by 8.0 per cent compared to the same

month in 2004.

489

12097.2

72.253.1 51.4 48.5 42.8 33.8 32

0

100

200

300

400

500

600

China Japan US Russia India South

Korea

Germany Ukraine Brazil Italy

Production in MTPA





TATA Steel- Company Analysis

Introduction:

Tata Steel, formerly known as TISCO and Tata Iron and Steel Company Limited, is the world'ssixth largest steel company, with an annual crude steel capacity of 31 million tones. It is the largest private sector steel company in India in terms of domestic production. Ranked 258th on FortuneGlobal 500, it is based in Jamshedpur, Jharkhand, India. It is part of Tata Group of companies.Tata Steel is also India's second-largest and second-most profitable company in private sector withconsolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore during the yearended March 31, 2008.

Backed by 100 glorious years of experience in steel making, Tata Steel is among the top ten steelproducers in the world with an existing annual crude steel production capacity of 30 MillionTonnes Per Annum (MTPA). Established in 1907, it is the first integrated steel plant in Asia and isnow the world`s second most geographically diversified steel producer and a Fortune 500Company.

Its main plant is located in Jamshedpur, Jharkhand, with its recent acquisitions; the company hasbecome a multinational with operations in various countries. The Jamshedpur plant contains theDCS supplied by Honeywell. The registered office of Tata Steel is in Mumbai. The company wasalso recognized as the world's best steel producer by World Steel Dynamics in 2005. The

company is listed on Bombay Stock Exchange and National Stock Exchange of India, and employsabout 82,700 people (as of 2007).

Tata Steel has a balanced global presence in over 50 developed European and fast growing Asianmarkets, with manufacturing units in 26 countries. It was the vision of the founder; JamsetjiNusserwanji Tata., that on 27th February, 1908, the first stake was driven into the soil of Sakchi.His vision helped Tata Steel overcome several periods of adversity and strive to improve against allodds.

Tata Steel`s Jamshedpur (India) Works has a crude steel production capacity of 6.8 MTPA whichis slated to increase to 10 MTPA by 2010. The Company also has proposed three Greenfield steelprojects in the states of Jharkhand, Orissa and Chhattisgarh in India with additional capacity of 23MTPA and a Greenfield project in Vietnam.

The TATA Steel story is a classic example of synergy leveraged through the inorganic route. In2005, Tata Steel acquired NatSteel Asia. This helped the company not only to establish a beachhead in seven countries across the region, namely Singapore, Thailand, China, Malaysia,

Vietnam, the Philippines and Australia, but also provided it with a customer base for close to twomillion tones of steel. As a brand, NatSteel's strong equity in the region was yet another strategicgain for Tata Steel. The company's strong human resources and management effectiveness is alsoan inheritance of immense value. Operationally, NatSteel's finishing facilities across the regionprovided Tata Steel with the necessary support for upstream capacity expansions in India, as well





as access to knowledge and expertise in downstream processing of bars and wire rods. Theacquisition of Millennium Steel in 2005, Thailand's dominant steel producer, still consolidated

Tata Steel's gains from the NatSteel deal. Millennium's three operating units gave the company a cumulative capacity to produce 1.2 million tonnes of steel per annum through the electric arcfurnace route along with a long products rolling capacity of 1.7 million tonnes a year. Gearedtowards the construction and automotive sector, Millennium provided Tata Steel strategic space inthe heart of the ASEAN region, enhancing its market position in South East Asia.

Apart from the existing backward integration with its own iron ore mines and collieries, thecompany has enhanced its competitive advantage in raw materials further, buying a five per cent interest in the Carborough Downs coal project located in Queensland, Australia. Its backward andforward integration plans include the development of a deep-sea port in Orissa. Throughinvestments in Corus, Millennium Steel (renamed Tata Steel Thailand) and NatSteel Holdings,Singapore, Tata Steel has created a manufacturing and marketing network in Europe, South East

Asia and the pacific-rim countries. Corus, which manufactured over 20 MTPA of steel in 2008,has operations in the UK, the Netherlands, Germany, France, Norway and Belgium.

Tata Steel Thailand is the largest producer of long steel products in Thailand, with a manufacturing capacity of 1.7 MTPA. Tata Steel has proposed a 0.5 MTPA mini blast furnaceproject in Thailand. NatSteel Holdings produces about 2 MTPA of steel products across itsregional operations in seven countries. Tata Steel, through its joint venture with Tata BlueScopeSteel Limited, has also entered the steel building and construction applications market.

The iron ore mines and collieries in India give the Company a distinct advantage in raw materialsourcing. Tata Steel is also striving towards raw materials security through joint ventures in

Thailand, Australia, Mozambique, Ivory Coast (West Africa) and Oman. Tata Steel has signed anagreement with Steel Authority of India Limited to establish a 50:50 joint venture company forcoal mining in India. Also, Tata Steel has bought 19.9% stake in New Millennium CapitalCorporation, Canada for iron ore mining.

Exploration of opportunities in titanium dioxide business in Tamil Nadu, ferro-chrome plant inSouth Africa and setting up of a deep-sea port in coastal Orissa are integral to the Growth andGlobalizations objective of Tata Steel. Tata Steel India is the first integrated steel company in the

world, outside Japan, to be awarded the Deming Application Prize 2008 for excellence in TotalQuality Management. The Tata Group made a huge acquisition in 2006 when it acquired theDutch company Corus for more than USD12 billion, making Tata-Corus one of the world's largest

steelmakers.





Weakness Endemic Deficiencies: These are inherent in the quality and availability of some of the

essential raw materials available in India, eg, high ash content of indigenous coking coaladversely affecting the productive efficiency of iron-making and is generally imported.

Advantages of high Fe content of indigenous ore are often neutralized by high basicity index. Besides, certain key ingredients of steel making, eg, nickel, Ferro-molybdenum arealso unavailable indigenously.

India is deficient in raw materials required by the steel industry. Iron ore deposits are finiteand there are problems in mining sufficient amounts of it. India's hard coal deposits are of low quality and the prices of coking and non-coking coal are ever increasing

Raw materials for steel production are rapidly depleting and are nonrenewable; company

has to come up with sustainable methods in steel production.

Steel production in India is also hampered by power shortages.

Insufficient freight capacity and transport infrastructure impediments to hamper the growthof Indian steel industry.

Low Labour Productivity: In India the advantages of cheap labour get offset by low labourproductivity; eg, at comparable capacities labour productivity of SAIL and TISCO are 75t/manyear and 100 t/manyear, for POSCO, Korea and NIPPON, Japan the values are1345 t/man year and 980 t/manyear.

High Cost of Basic Inputs and Services: High administered price of essential inputs likeelectricity puts Indian steel industry at a disadvantage; about 45% of the input costs can beattributed to the administered costs of coal, fuel and electricity, eg, cost of electricity is 3cents in the USA as compared to 10 cents in India; and freight cost from Jamshedpur to

Mumbai is $50/tonne compared to only $34 from Rotterdam to Mumbai .

OPPURTUNITIES

The biggest opportunity before Indian steel sector is that there is enormous scope forincreasing consumption of steel in almost all sectors in India.

Unexplored Rural Market: The Indian rural sector remains fairly unexposed to their multi-faceted use of steel. The rural market was identified as a potential area of significant steelconsumption way back in the year 1976 itself. However, forceful steps were not taken topenetrate this segment. Enhancing applications in rural areas assumes a much greatersignificance now for increasing per capital consumption of steel. The usage of steel in cost effective manner is possible in the area of housing, fencing, structures and other possible





applications where steel can substitute other materials which not only could bring about advantages to users but is also desirable for conservation of forest resources.

Excellent potential exist for enhancing steel consumption in other sectors such asautomobiles, packaging, engineering industries, irrigation and water supply in India. New steel products developed to improve performance simplify manufacturing/installation andreliability is needed to enhance steel consumption in these sectors.

It is estimated that world steel consumption will double in next 25 years. Quality improvement of Indian steel combined with its low cost advantages will definitely help insubstantial gain in export market.

The Tata Steel Group is leveraging the Group’s collective Research and Development

experience in the Group’s various geographies to further enhance the Group’sperformance and also the integration process.

Corus acquisition bring in a tremendous technological advantage by access to best practicesin global steel industry

Global M&A brought in following synergies• Greater productivity leading to increased output and market size.• Greater economies of scale leading to cost reduction through combined buying • Cross fertilization of Research and Development capabilities and operational best practices, leading to greater innovation and operational efficiencies.

Booming infrastructure has opened up high demand for steel worldwide

THREATS

In the developed world, industries have been facing rising environmental costs due to the

increased concerns on Global Warming. It is, therefore, a challenge and responsibility forthe Steel industry to be the trustee in conservation of nature for future generations

It is recognized that the steel and aluminum industries are significant contributors to man-made greenhouse gas emissions as the manufacture of steel produces carbon dioxide(CO2), and the manufacture of primary aluminum generates both CO2 and perfluorocarbons (PFCs).

High raw material input cost and scarcity of nonrenewable raw materials are a threat to theindustry.( eg: Coal, limestone etc)





Threat of Substitutes: Plastics and composites pose a threat to Indian steel in one of its

biggest markets automotive manufacture. For the automobile industry, the other material at present with the potential to upstage steel is aluminum. However, at present the high cost of electricity for extraction and purification of aluminum in India weighs against viable useof aluminum for the automobile industry. Steel has already been replaced in some large

volume applications large diameter water pipes (RCC pipes), small diameter pipes (PVCpipes).

Porter Five Forces Model

Backed by robust volumes as well as realizations, steel Industry has registered a phenomenal

growth across the world over the past few years. The situation in the domestic industry was no

exception. In fact, it enjoyed a double digit growth rate backed by a robust growing economy.

However, the current liquidity crisis seems to have created medium term hiccups. In this case we

have analyzed the domestic steel sector through Michael Porter’s five force model so as to

understand the competitiveness of the sector as well as pointed out the initiatives taken by Tata

Steel to safeguard its position from all the five forces of threats, namely:





Entry barriers: High

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.

Tata Steel has already made sufficient efforts to safeguard itself in this regard. Its has a lineup of

Greenfield projects which it plans to establish not only in domestic markets( Jharkhand, Orissa &

Chhattisgarh but also internationally( Bangladesh , Iran & Vietnam). Besides, it has already

completed its expansion capacity of its existing plant from 5 mtpa to 6.8 mtpa at Jamshedpur with

an investment of Rs 5,000 crore, while it is in the process of expanding the capacity from 6.8 mtpa

to 10 mtpa with an estimated investment of Rs 15,000 crore. The company has invested Rs 8,000crore out it and it expects to achieve 10 mtpa capacity by 2011-12. It would prove to be very

difficult for any new entrant to come up with such huge investment outlays .

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 while sourcing raw materials.

Tata Steel being an integrated steel company has its 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.

Tata Steel owns raw material assets such as coal and limestone mines through joint ventures or

completely, with the assets spread across countries such as Australia, Oman and Mozambique.

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.

Tata Steel being a century old company under the flagship Tata Sons which is known for its

Corporate Social Responsibility already enjoys a respectable position in front of the Indian

Government. The Jharkhand government on May,24th 2009, has granted a prospecting licence

(PL) to Tata Steel for the Ankua iron ore mines. A senior company official said that Tata Steel has

been allocated 1,800 hectares for prospecting in the Ankua area. Another 10,000 acres of land will

be allocated to them for their project in Ranchi .

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, Tata Steel still enjoy a premium for their products because of its quality and its brand

value created more than 100 years back. Tata Steel has introduced brands like Tata Steelium (the

world's first branded Cold Rolled Steel), Tata Shaktee (Galvanized Corrugated Sheets), Tata

Tiscon (re-bars), Tata Bearings, Tata Agrico (hand tools and implements), Tata Wiron (galvanized





wire products), Tata Pipes (pipes for construction) and Tata Structura (contemporary construction

material).Apart from these product brands, the company also has in its folds a service brand called

“steeljunction”.

Currently two Global Steel majors namely Arcelor- Mittal, which is the world’s largest I and

POSCO, are posed to be the biggest threat as they plan to enter the Indian Steel Industry very

soon.

Competition: High

The steel industry is truly global in terms of competition with large producing countries like China significantly influencing global prices through aggressive exports.

Steel, being a commodity it is, branding is not common and there is little differentiation between

competing products.

The 4 major domestic rivals are SAIL, JSW, ISPAT & ESSAR STEEL. Rest are all smallish mills

which together accounts for 30 % of the total market share. The market shares of the 5 major

players in the Indian Steel Industry are :

COMPETITION ANALYSIS

I. Concentration Ratio:

In Economics the concentration ratio of an industry is used as an indicator of the relative size of

firms in relation to the industry as a whole. This may also assist in determining the market form of

the industry. One commonly used concentration ratio is the four-firm concentration ratio, which

consists of the market share, as a percentage, of the four largest firms in the industry. In general,

the N-firm concentration ratio is the percentage of market output generated by the N largest firms

in the industry

The 4 firm concentration ratio of the Iron and Steel Industry is 71%.This implies that there is

oligopoly in the industry as it is dominated my few major players. Major percentage of market output is generated by the 4 Largest firms in the industry.

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 of 40 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 of 200 Million Tons steel production by the year 2020.





Bargaining power of suppliers: High

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.

Since domestic raw material sources are insufficient to supply the Indian steel industry, a

considerable amount of raw materials has to be imported. For example, iron ore deposits

are finite and there are problems in mining sufficient amounts of it. India’s hard coaldeposits are of low quality. For this reason hard coal imports have increased in the last five

years by a total of 40% to nearly 30 million tons. Almost half of this is coking coal (the

remainder is power station coal). India is the world’s sixth biggest coal importer. The rising

output of electric steel is also leading to a sharp increase in demand for steel scrap. Some

3.5 million tons of scrap have already been imported in 2006, compared with just 1 million

tons in 2000. In the coming years imports are likely to continue to increase thanks to

capacity increases.

Globally, the Top three mining giants BHP Billiton, CVRD and Rio Tinto supply nearly

two-thirds of the processed iron ore to steel mills and command very high bargaining

power. In India too, NMDC is a major supplier to standalone and non–integrated steel

mills.

In order to safeguard itself from the high bargaining power of the buyers, Tata Steel has

forayed much earlier into the strategy of ‘Backward Integration’.

Threat of substitutes: Low

Plastics and composites pose a threat to Indian steel in one of its biggest markets —

automotive manufacture. For the automobile industry, the other material at present with

the potential to upstage steel is aluminium. Perhaps the most attractive alternative to

stainless is aluminium. Stainless producers themselves are offering their customers a range

of alternatives in an effort to prevent business being lost to non-ferrous or carbon steel

materials. Such options include lower-nickel duplex grades and ferritic types. In the

meantime, nickel’s fluctuations will continue to create problems for the stainless industry

worldwide.

However, at present in India the high cost of electricity for extraction and purification of





aluminum weighs against viable use of aluminium for the automobile industry. Steel has

already been replaced in some large volume applications: railway sleepers (RCC sleepers),

large diameter water pipes (RCC pipes), small diameter pipes (PVC pipes), and domestic water tanks (PVC tanks). The substitution is more prevalent in the manufacture of

automobiles and consumer durables

Bargaining power of Consumers: Mixed

Some of the major steel consumption sectors like automobiles, oil & gas, shipping,

consumer durables and power generation enjoy high bargaining power and get favorabledeals.

However, small and retail consumers who are scattered and consume a significant part donot enjoy these benefits.





FINANCIAL RATIO ANALYSIS OF TATA

STEEL

Liquidity Ratios:Liquidity Ra tios mea sures the ability of the firm to meet its short t erm oblig a tions. The y a lso reflect

the firm's ability to meet fina ncia l conting encies tha t might a rise.

Current Ratio: - This ratio indicates the firm's ability to meet its current liabilities. This

ratio is of very high importance to the suppliers of short term funds like the bankers and trade

creditors.

As per Balance sheet 31st March 2008-2009 All figures in

crores

Year Current Assets Current Liabilities Current Ratio

2008 3613.70 3855.26 0.94

2009 5707.05 6039.86 0.94

Analysis: The industry norm value of current ratio is 2:1. However it does not mean so that

higher current ratio means good company profile. It may signify higher unused cash, inventory

which again may result in inventory carrying cost.

In both the years the Current ratio for Tata Steel is same. However it does not mean any

increase or decrease in current ratio of any company gives the growth profile of the company .

Quick Ratio: This ra tio is ca lcula t ed on pre a ssumption tha t a ll the current assets are of same

level of liquidity. But this is not the reality. Cash in Hand is more liquid that the same cash

equivalent of inventory. So to get a real picture of liquidity we calculate Liquid Ratio. It is

calculated by (Current Asset-Inventory — Prepaid Expense / Current Liability).






crores

Year

Current Assets-

Inventory-Prepaid

Expenses Current Liabilities Quick Ratio

2008 13570.52 3855.26 3.52

2009 3442.72 6039.86 0.57

Analysis: - As per the industry norms the Quick Ra tio should be 1:1. There is a huge

difference between the Quick Ratios of the company. It also shows the decreasing trend. In

the year 2008 there was high unutilized cash. But for the current year the situation is more

balanced.

Profitability Ratios: - This ratio shows a company's effectiveness on generating profit.

In other words the profitability ratio reflects a company's operating performance.

Gross Profit Ratio: - Gross Profit is defined as Sales/ Cost of Goods Sold.Now the

Gross Profit Ratio is a ratio of Gross Profit to the Sales. We express it in terms of Gross

Profit Margin. It is the amount of each rupee of sale that letf over atfer repaying the Cost of

Goods Sold.


crores

Year Gross Profit Sales

Gross profit

Margin

2008 7515.05 19933.83 37.70

2009 8295.84 24624.04 33.69





Analysis: - It indica t es the Gross Profit o ver sa les of a ny compa ny. This ra tio ca n be cha n ed b y

1. Cha ng e in Sa les V olume. 2. Cha ng es in sa les price 3. Cha ng e incost of production.

According to the da t a of 2007 a nd 2008 there is a decrea se of Ta t a St eel in ea rningthe Gross profit

which w e ca n find out form the abo ve t able.

Operating Profit Margin: - This ra tio signifies the opera tiona l efficienc y of a ny business entity. In

this ca se a low er ra tio indica t es the higher efficienc y .


crores

Year

Operating Profit

(EBIT) Sales

Operating profit

Margin

2008 8306.25 19933.83 41.94%

2009 9278.34 24624.04 37.68%

Analysis: - There is a decrea se in Opera ting Profit Ra tio for Ta t a St eel. According to the sa lesfigure the EBIT va lue in 2009 in compa ra ti vely less tha n tha t of 2008. A s w e know a low er

opera ting profit ra tio indica t es higher efficienc yof the firm. So, on the ba sis of the ca lcula t ed da t a

w e ca n sa y tha t the opera ting efficienc y of Ta t a St eel ha s actua lly increa sed for the current y ea r

with acompa rison betw een 2008 a nd 2009.

Net Profit Ratio: - It rela t es the firms Net Profit a nd the firm's Sa les level. It indicates what

percentage of every rupee of sales the firm was able to transform into the Net Profit. The net profit

margin measures the profit that is available from each rupee of sales after all expenses have been

paid, including cost of goods sold, selling, general and administrative expenses, depreciation, interest

and taxes.






crores

Year PAT Sales Net profit Margin

2008 4670.49 19933.83 23.43%

2009 5193.21 24624.04 21.09%

Analysis:- We ca n see tha t there is a decrea se in the Net Profit Ma rgin. Actua lly it indica t esthe firm's ability to tra nsf er its sa les into the net profit . So, here a na lyzing the consecuti ve two

y ea rs da t a w e ca n see tha tthe profit ability of Ta t a St eel ha s actua lly decrea sed in 2009 tha n of

the y ea r 2008.

Return On Total Assets :- It rela t es the profit of the firm to its t a ngible a ssets.

In other words it indica t es the how much profit the firm ha s g a ined b y utilizing

its resources.


crores

Year PAT Total Assets

Return on Total

Assets

2008 4670.49 47075.52 9.92%

2009 5193.21 58714.77 8.84%

Analysis: - g a in w e ca n see tha t there is reduction in the return to tot a l a sset ra tio. The

retunr Ta t a St eel ea rned o ver their Tot a l A sset in 2008the va lue reduced in the y ea r 2009. It

a lso mea ns to achieve a cert a inamount of revenue Ta t a St eel ha s used more amount of its

capit a l.





LEVERAGE RATIOS:-

Levera g e ra tios indica t e the ext ent to which the firm has financed its assets by borrowing. The use of

debt financing increases the risk of the firm. The leverage ratios reflect the financial risk posture of thefirm. The more extensive the use of debt, the higher would the firm's leverage ratios and more risk

present in the firm. Some of the leverages ratios are explained below .

Debt Equity Ratio:- Though it doesn't signify a nything rela t ed to meeting short t erm liability it

is otf en discussed under this topic. A firm ha s two optionswhen going for expa nsion one is ra ising

debt a nd other going for public issue.Genera lly very high debt is not pref erred b y the in vestors

beca use it signifies therisk a nd high form of equity ha s threa t of hostile bid a nd acquisition.

Year Debt equity Ratio Long Term Debt to Equity Ratio

2008 1.08 1.07

2009 1.34 1.31

Analysis :- - Here w e ca n see tha t in both Debt Equity Ra tio a nd in Long Term Debt Equity

Ra tio ha s increa se for both of the y ea rs. Logica lly spea king tha t when this ra tio for a ny compa ny

increa se it does not show good performa nce of thecompa ny .

Interest Coverage Ratio: - This ra tio is the sum of the net ea rnings before taxes and interest

charge divided by the interest expenditure.

Year Interest Coverage Ratio

2008 8.35

2009 5.71

Analysis: - It actua lly mea sures the firm's ability to meet the int erest oblig a tions. Here in this ca se w e

ca n see tha t the int erest co vera g e ra tio is decrea sing, it mea ns the firm's ability is reducing.





Market Value Ratios

Price Earning Ratio:- - This ra tio highlights the rela tionship betw een the ma rk et price of a sha re

a nd the current ea rnings per sha re. The ma rk et va lue, on theother ha nd is the va lue of equity a s

percei ved b y in vestors.

Year Price Earing Ratio

2008 10.83

2009 2.97

Analysis:- It actua lly denot es the compa ny 's future prospect . A s here w e ca n see tha t there is

decrea se in the price ea rnings ra tio it show 's a decrea se in compa ny 's growth profile.

Earning Per Share :- The sha reholders in vest their mone y with theexpect a tion of g etting

di v idends a nd capit a l apprecia tion on the sha res. . Since theea rnings form the ba sis for di v idend

pa y ments a s w ell a s a ba sis for a ny futureincrea se in the ma rk et price of the sha res, in vestors a re

a lw a ys extremely int erest edin knowing the ea rnings per sha re.

Year Earning Per Share

2008 60.45

2009 66.80

Analysis: -Here it shows tha t for Ta t a St eel the ea rning per sha re increa sing. It is good sy mbol form

the compa ny prospecti ve a s w ell a s from the Sha re Holder's prospecti ve a lso. Seeing more ea rning

there is a cha nce for sha re holders to in vest on the compa ny.





Rs. In

Crore

Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

Net Profit 4,904.03 4,447.90 4,287.88 3,463.25 3,441.17

NP Growth 0.10 0.04 0.24 0.01

Equity Share capital 730.79 730.78 580.67 553.67 553.67

Preference Share Capital 5, 472.66 5,472.52

Reserve and Surplus 23,501.15 21,097.43 13,368.42 9,201.63 6,506.25

Share holder's Equity 29704.6 27300.73 13949.09 9755.3 7059.92ROE 0.17 0.16 0.31 0.36 0.49

Average ROE 0.296

Rs. In

Crore

Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

EPS 69.7 63.85 72.74 63.35 62.77

EPS growth 0.09 -0.12 0.15 0.01

Average EPS Growth 0.03

Market Price 205.9 694.35 449.65 521.75 409.25

P/E ratio 2.95 10.87 6.18 8.24 6.52

Average P/E ratio 6.95

Expected EPS on 31st March 2010 71.910694

Expected Mkt Price on 31st March 2010 500.01269

The Current Market Price of TATA Steel is 673 while our expectationas to be near 500. Hence the stock is overvalued and the investors

should not invest in the stock. And if the investors are having the stock

they should sell it off.

Security Analysis of TATA STEEL

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