"Working Capital Management at Tata Steel"

“Working Capital Management at Tata Steel”
A Report submitted to INDIAN BUSINESS ACADEMY On 27th June 2005 In Partial Fulfi
llment of Requirements for the Post Graduate Diploma in Business Management
By Priyanka Agarwal FP46/129
This is to certify, that Miss Priyanka Agarwal is a bonafide student of Indian B
usiness Academy, Bangalore and is presently pursuing a Post Graduate Diploma in
Business Management. Under my guidance, she has submitted her project report tit
led “Working Capital Management at Tata Steel” in partial fulfillment of the require
ment for the summer internship project during the Post Graduate Diploma in Busin
ess Management. This report has not been previously submitted as part of another
degree or diploma of another Business School or University.
Mr. Manish Jain, CEO, Indian Business Academy INDIAN BUSINESS ACADEMY
Lakshmipura, Thataguni Post Kanakpura Main Road, Bangalore – 560 062 INDIA Tel: +9
1-80-28435931/32/33/34 Fax: +91-80-28435935
Prof. Ramesh G Tagat, Dean, Indian Business Academy INDIAN BUSINESS ACADEMY
1-80-28435931/32/33/34 Fax: +91-80-28435935
Prof. George Thomas, Internal Mentor, Indian Business Academy
1-80-28435931/32/33/34 Fax: +91-80-28435935
INDIAN BUSINESS ACADEMY
I, Miss Priyanka Agarwal, the undersigned, a student of Indian Business Academy,
Bangalore, declare that this project report titled “Working Capital Management at
Tata Steel” submitted in partial fulfillment of the requirement for the summer in
ternship project during the Post Graduate Diploma in Business Management, a pres
tigious Post Graduate Diploma awarded by Indian Business Academy, Bangalore. Thi
s is my original work and has not been previously submitted as a part of another
degree or diploma of another Business school or University. The findings and co
nclusions of this report are based on my personal study and experience, during t
he tenure of my summer internship.
Miss Priyanka Agarwal, B.Sc (Economics), PGDBM 2004-06.
INDIAN BUSINESS ACADEMY Lakshmipura, Thataguni Post Kanakpura Main Road, Bangalo
re – 560 062 INDIA Tel: +91-80-28435931/32/33/34 Fax: +91-80-28435935
ACKNOWLEDGEMENT I take this opportunity to thank various people who all have mad
e me sail through successfully my internship programme with a project at Tata Ir
on and Steel Company Ltd. I would like to express my gratitude towards thanking
the following people: Mr. Manish Jain, CEO, Indian Business Academy, Bangalore,
for providing me the opportunity to have such a good experience of an internship
program. Mr. Ramesh Tagat, Dean, Indian Business Academy, Bangalore, for the mo
tivation given at the beginning of the project. Mr. George Thomas, Internal Ment
or, Indian Business Academy, Bangalore, for extending support during the entire
internship program. Mr. S.N.Banerjee, Head – Marketing and Finance, Kolkata, who s
upported and helped me whenever needed. Mr. Shankarnarayanan – Head of Finance, Ba
ngalore, who made it possible for me to pursue my intership at Tata Steel. Mrs.
Banashree Mitra – Manager Accounts, Kolkata, who showed the greatest confidence in
me which would always act as a motivator in my life. Mrs. Debjani Dasgupta – Mana
ger Accounts, Kolkata, who actually helped me out immensely in my project. Mr. A
bhijit Bose – Manager Accounts, Kolkata, who was always behind me for any kind of
guidance.
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Mr. Vinod Tiwari – Senior Credit Manager, Flat Product, Kolkata, who also helped m
e to carry out my project work. Mr. Sanjay Agarwal – Senior Credit Manager, Long P
roduct, Kolkata, who provided me with the required materials. Mr. Ashwini Lal – Fe
rro Alloy and Minerals Division, Kolkata, who helped me by explaining the entire
operations of the department. Apart from these, I would like to thank all the o
ther officers and staff of all the floors of Tata Center where I had received im
mense support in carrying out my internship programme. This is inclusive of the
Finance & Accounts Department, 13th Floor, Tata Centre. I would like to thank al
l other people who are in some way or the other involved with my internship. The
se include my friends and other colleagues. Finally, I am highly thankful to my
parents and my entire family, who have shown all kinds of support and at all poi
nts of time.
Priyanka Agarwal Indian Business Academy PGDBM 04-06
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Table of Content
Executive Summary …………………………………………………………………...... i 1) Mission..………………………………………………………………………
d Steel Company………………………………………………………..11 13) Landmarks of Tata Steel…….……………………..…………………………
lication………………………………………………..21 16) Strategic Challenges faced by Tata Steel….………………………..………
Capital Management…………………………………..………………......30 19) Credit Management Module………………………………………
d Bill Discounting……….…………..……...................................50 24) Overdraft Managemen
outstanding for Flat Product..……………………………...57 26) Predictions for 2010…………………………………………………
27) Steel Industry-World…………………………………………………...………….73 28) Steel Industry-China..……………………………
t of China…………………………………………………….…………..79 31) BCG Matrix…………………………………………….………….……………….80 32)
EXECUTIVE SUMMARY Tata Steel, a steel manufacturing company in India, was rated
amongst top 3 best steel companies in the world by World Steel Dynamics in the y
ear 2004. It is one of the few companies that adopts the concept of Economic Val
ue Add and thereby achieved an incremental EVA of Rs. 516 crores in the year 200
4. The operations of the company have also increased in terms of turnover of its
branded products by 84%. Thus, for a company having a high Networth of Rs. 4360
crores, it is very essential to possess a safe liquidity position. It should en
sure that its money doesn’t remain blocked in the market and there is constant flo
w of funds for operational, investment and financial activities. A company of a
turnover of Rs. 12070 Crores is expected to have a good management of its Workin
g Capital. Working Capital of a company is the difference between its current as
sets and the current liabilities. It includes the company’s debtors, bank/cash, cr
editors, inventory, outstanding and other miscellaneous expenses. Each of these
needs to be managed separately so as to have a control over the liquidity of bus
iness. Management of Working Capital includes various sub-components at the oper
ational level of the company which directly affect the level of Working Capital.
These include study of Letter of Credit, Bill Discounting, Factoring through Re
ceivable Purchases and O.E.Finance, Channel Financing, Overdraft management. Pro
per Working Capital Management depends on how well these sub-components are hand
led. The company needs to overcome the shortcomings in this respect. The custome
r base of Tata Steel is found in the construction, auto and auto ancillary, whit
e good appliance and the general engineering sector. Thus, in order to control t
he Working Capital of the company, they need to control their exposure in terms
of extending credit to its customers. They need to reduce the customer’s day’s sales
oustandings and manage the overdue that accrues to them.
i
Over the years, it has been observed that Tata Steel has shown a positive trend
in its Working Capital. Tata Steel is known for its human resource policies and
it also has a well maintained and very efficient IT infrastructure. The entire f
unctions of the company are well coordinated on a national scale. The objective
of the company now is to increase the scale of its business by increasing its pr
ofits and the turnover and also by venturing into new line of business. It is no
w targeting to be the World Class Industrial Enterprise from a World Class Steel
Company. It is striving to have a huge global base.
ii
TATA STEEL MISSION
Consistent with the vision and values of the Founder Jamshedji Tata, Tata Steel
strives to strengthen India’s industrial base through the effective utilization of
men and material. The means envisaged to achieve this are high technology and p
roductivity, consistent with modern management practices. Tata Steel recognizes
that while honesty and integrity are essential ingredients of a strong and stabl
e enterprise, profitability provides the main spark for economic activity. Overa
ll, the company seeks to scale heights of excellence in all that it does in an a
tmosphere free from fear, and one which encourages innovativeness and creativity
.
1
2
TATA STEEL STRATEGIC GOALS
• • • • Create a culture of continuous learning and change. Achieve world class status i
n services and products Reach the position of the most cost competitive steel pr
oducer. Establish industry leadership.
TATA STEEL VALUES
• • • • • Trusteeship Integrity Respect for the individual Credibility Excellence
TATA STEEL CORPORATE SOCIAL RESPONSIBILITY
Tata Steel believes that the primary purpose of a business is to improve the qua
lity of life of people. Tata Steel will volunteer its resources, to the extent i
t can reasonably afford, to sustain and improve healthy and prosperous environme
nt and to improve the quality of life of the people of the areas in which it ope
rates.
3
TATA STEEL QUALITY POLICY
Consistent with the group purpose, Tata Steel shall constantly strive to improve
the quality of life of the communities it serves through excellence in all face
ts of its activities. We are committed to create value for all our stakeholders
by continually improving our systems and processes through innovation, involving
all our employees. This policy shall for the basis of establishing and reviewin
g the Quality Objectives and shall be communicated across the organization. The
policy will be reviewed with business direction and to comply with all the requi
rements of the Quality Management Standard.
TATA STEEL RESEARCH POLICY
Tata Steel believes that research provides the foundation for sustained, long-te
rm, stakeholder delight. Tata Steel shall nurture and encourage innovative resea
rch in a creative ambience to ensure that the competitive advantage in its overa
ll business is retained and surpassed. Towards this goal, the Company commits it
self to providing all necessary resources and facilities for use by motivated re
searchers of the highest caliber. Research at Tata Steel shall be aligned to the
technological initiatives necessary to evolve and fulfill the overall business
objectives of the Company.
4
TATA STEEL ENVIRONMENTAL, OCCUPATIONAL, HEALTH AND SAFETY POLICY
Tata Steel reaffirms its commitment to provide safe work place and clean environ
ment to its employees and other stakeholders as an integral part of its philosop
hy and values. We will continually enhance our Environmental, Occupational Healt
h & Safety (EHS) performance in our activities, products and services through a
structured EHS management framework. Towards this commitment, we shall: • • • • Establis
h and achieve EHS objectives and targets Ensure compliance with applicable EHS l
egislation and other requirement and go beyond Conserve natural resources and en
ergy by constantly seeking to reduce consumption and promoting waste avoidance a
nd recycling measures Eliminate, minimize and/ or control adverse environmental
impacts and occupational health and safety risks by adopting appropriate ‘state-of
-art’ technology and the best EHS management practices at all levels and functions
. • Enhance awareness, skill and competence of our employees and contractors so as
to enable them to demonstrate their involvement, responsibility and accountabil
ity for sound EHS performance.
5
TATA STEEL HUMAN RESOURCE POLICY
Tata Steel recognizes that its people are the primary source of its competitiven
ess. It is committed to equal employment opportunities for attracting the best a
vailable talent and ensuring a cosmopolitan workforce. It will pursue management
practices designed to enrich the quality of life of its employees, develop thei
r potential and maximize their productivity. It will aim at ensuring transparenc
y, fairness and equity in all its dealings with its employees. Tata Steel will s
trive continuously to foster a climate of openness, mutual trust and team work.
6
THE STEEL INDUSTRY IN INDIA
The steel industry is generally a stable industry except for the cyclical moveme
nts of prices due to its commodity nature. But the last one and half years prove
d otherwise for the Indian steel makers. It has been a rollercoaster ride for th
e Indian steel industry with fortunes fluctuating drastically, both positively a
nd negatively. First was the boom in domestic steel market. It was followed by r
apid growth in exports to China. The same Chinese demand resulted in shortage of
raw material forcing many Indian steel makers to cut the level of production wh
en the demand was peaking. Then was the news of Chinese slowdown, which effectiv
ely curtailed the expectations on steel exports to China. It was followed by the
unrest among the domestic steel users about steel prices, which resulted in the
steel minister talking about steel regulator.
INDUSTRY STRUCTURE: INDIA Four Major Strategic Groups1 1) The Integrated Steel P
roducers: • • SAIL, TISCO, RINL Approximately 45% market share.
2) Secondary Majors: • • Jindal, ESSAR, LLYODS, Ispat Approximately 20% market share
.
3) Mini Steel plants 4) Rerollers
1
The Iron And Steel Review, January 2005 issue
7
The Indian steel industry was in doldrums in the late nineties. The steel demand
growth rate was stagnated below 4 percent. Almost all the majors steel makers i
n India with the exception of TISCO were making losses because of excess capacit
y and low price levels. Analysts have even written off some of the major steel m
akers. But things changed with the boom in the domestic steel demand in early 20
02. The Infrastructure initiative taken by the government like the Golden Quadri
lateral highways project, an increase in housing activity and an improvement in
the off take of consumer durables and passenger cars were the main reasons behin
d the demand pickup. This demand growth helped steel makers to raise prices. The
steel prices of Cold Rolled steel and the Hot Rolled steel were almost doubled
at the end of 2003 compared with the 2001 price levels. The result, the steel ma
jors were out of red and the steel stocks were showing a sharp upswing. Added to
the domestic boom was the upsurge in Chinese steel demand. The steel demand in
China was growing at a rate of more than 10 percent per year and accounted for a
round 90 percent of the growth in global steel demand in 2002 and 2003. This pro
ved to be a good export opportunity for Indian steel makers. In the first six mo
nths of 2003 alone, Indian steel makers exported steel worth $621 million, which
is 137 per cent more than the total exports worth $262 million during the whole
of 2002. For a moment it looked there was no stopping for the Indian steel make
rs. But fortunes of Indian steel makers changed dramatically by the end of 2003.
The same upsurge in steel demand in China which helped the Indian steel makers
to boost exports played the spoilsport. Coking coal (coke) and Iron ore are the
main raw materials for integrated steel producers (ISP) which account for more t
han forty percent of the steel output in India. As around 900 kg of coking coal
is required to make one tonnes of steel, coke is among the high-value inputs for
steel making. Among the ISPs, TISCO has captive coalmines to satisfy its input
needs. But the government owned integrated steel makers SAIL and RINL (Rashtriya
Ispat Nigam Ltd-which owns Vizag Steel Plant) depend on imported coke. They imp
ort around 15 million tonnes of coke every year. China is one of the main suppli
ers of coke along with Australia, New Zealand and Canada. Due to the strong dome
stic demand, China has more or less stopped the export of the coke. The stoppage
of coke exports from China has created supply vacuum. As a 8
result the coking coal prices quadrupled in one-year, from around US $ 100 per t
onne in early 2003 to US $ 400 in March 2004. This shortage forced SAIL and RINL
to cut their production at the peak of steel demand. For example, SAIL Rourkel
a Steel plant s reduced the daily hot metal production from 5000 tonnes to 4100
tonnes in early 2004. The Durgapur Steel plant cut average daily production of h
ot metal from 6000 tonnes to 5000 tonnes. If the integrated steel makers faced t
he problem of coke shortage, the secondary producers faced the problem of steel
scrap shortage. Typically, the secondary steel makers use steel scrap as the raw
material. The booming steel demand in China resulted in a supply shortage for s
teel scrap in Asia. The rising prices of steel raw materials have increased the
cost of production by 30 to 40 percent for the Indian steel makers in early 2004
compared with 2002 levels. This has severely affected the bottom line steel mak
ers as they were not able harvest on the rising steel demand and prices in the d
omestic market. Some of the steel companies seem to be awakening to the reality.
Jindal group recently announced that it is merging two of its steel companies J
indal Iron and Steel Company (JISCO) and Jindal Vijaya Nagar Steel (JVSL). JISCO
is the manufacturer of valueadded steel products and JVSL is making steel from
iron. Media reports speculate that TISCO and Ispat Industries are looking for ac
quisitions. But these activities are negligible compared with pace of consolidat
ions happening in the rest of the world. The biggies have to come together to fo
rm steel giants, who can challenge the global stars like Arcelor or Ispat Intern
ational. The industry has miles to go in this regard.
9
INDIAN STEEL INDUSTRY – A SWOT ANALYSIS
Strengths: • • • • Abundance of Iron-Ore and other minerals for steel Skilled manpower a
nd low unit labor costs High ash content of domestic coking coal Low labor produ
ctivity
Weaknesses: • • • • • • High costs of some basic inputs like power, coal, fuel, etc. High s
cial costs Poor quality of basic infrastructure Distribution network Low IT usag
e in efficiency enhancement Fragmentation
Opportunities: • • • Low per capita consumption Unexplored rural market Low export mar
ket penetration
Threats: • • • Substitution by aluminum, plastic and composites one of the most remune
rative markets – Automobiles Poor R&D and threat of technological obsolescence in
a large part of the market Availability of imported low ash coking coal.
10
TATA IRON AND STEEL COMPANY
Established in 1907, Tata Steel is Asia first and India largest integrated pri
vate sector s s steel company. With its captive iron ore and coal mines and one
of the world most s modern steel making and finishing facilities at Jamshedpur
in eastern India, which includes a state-of- the art Cold Rolling Mill complex,
Tata Steel is among the lowest cost producer of steel in the world. Since incept
ion in 1907, Tata steel has pioneered the steel industry in India to occupy a le
ading position in the global steel industry today. The steel business unit, whic
h forms 86% of Tata Steel turnover, manufactures and markets steel products bro
adly, s categorized into Flat Products and Long Products. Considering India is a
developing country and is expected to grow @ 6 to 7 % per year, infrastructure
and construction industry is expected to continue to grow at a healthy rate. Dev
elopment of infrastructure viz. roads, bridges, dams, ports, etc is a key enable
r to achieve vision 2020 laid by the government. In 2001-02, in order to create
focus, the steel business was restructured into profit centers & cost centers.2
The 4 million tonnes Jamshedpur plant, which produces both flat and long product
s, is undergoing a million tonnes capacity expansion to be completed by Septembe
r 2005. The company intends to raise its capacity to 15 million tonnes per annum
by 2010 through organic growth and acquisitions. The Jamshedpur capacity will p
roduce 7.4 million tonnes and the balance capacity will be put up or acquired el
sewhere in India and overseas. Tata Steel recently announced its first major ove
rseas investment in NatSteel, Singapore, which will give it a manufacturing foot
print in six countries in the Asia Pacific region and China. Tata Steel is also
exploring opportunities in the Ferro-chrome and titanium businesses in South Afr
ica and the southern Indian state of Tamil Nadu, India respectively. Tata Steel
s relentless quest for excellence through initiatives like ASPIRE, which combin
es TPM, Six Sigma, Total Operational Performance, Suggestion Management and Qual
ity Circles,
2
Tata Steel Intranet Web Site
11
has reaped rich benefits. The company has been conferred the prime Minister Tro
phy s for the Best Integrated Steel Plant five times from the Indian Ministry of
Steel. It was the first Tata Company to win the JRD Quality Value Award, catego
rizing its operations as "world class" under the Tata Business Excellence Model.
It has been ranked among the top four world class steel companies by World Stee
l Dynamics, USA, for the past four s years. It was also awarded Asia Most Admir
ed Knowledge Enterprise Award-2003 by Teleos, an independent Knowledge Managemen
t company of South Korea. Products Tata Steel products include hot and cold rol
led coils and sheets, galvanized sheets, s tubes, wire rods, construction re-bar
s, rings and bearings. In an attempt to discommoditise steel, the company has
introduced brands like Tata Steelium (the world s first branded Cold Rolled St
eel), Tata Shaktee (Galvanized Corrugated Sheets), Tata Tiscon (re-bars), Tata P
ipes, Tata Bearings, Tata Agrico (hand tools an implements) and Tata Wiron (galv
anized wire products). The Construction Solution Group explores new avenues for
steel utilization by techniques that are economical, use less natural resources
and energy. Tata Steel has also developed "galvannealed" cold rolled steel with
technical assistance from Nippon steel & Arcelor for high-end auto applications.
Strategic Business Units Apart from the main steel division, Tata Steel operat
ions are grouped under the s fallowing strategic business units.
•
Bearings Divisions: Manufactures ball bearings, double row self-aligning bearing
s, clutch release bearings and tapped roller bearing for two wheelers, fans, wat
er pumps, etc.
•
Ferro Alloys and Minerals Division: Operates chrome mines and has unit for makin
g Ferro chrome and Ferro manganese. It is one of the largest players in the glob
al Ferro chrome market.
12
•
Rings and Agrico Division: The ring plants manufactures forged and rolled rings
for bearings and automotive components .Tata Agrico is the first organized manuf
acturer in India of hand tools and implements for application in agriculture.
•
Tata Growth Shop (TGS): Has designed, developed, manufacture, erected and commis
sioned thousands of tones of equipments ranging from overhead cranes to high pre
cision components, including a rocket launch pad for the Indian Space and Resear
ch Organization.
•
Tubes Division: The biggest steel tube manufacturer with the largest market shar
e in the country, it aspires to strengthen its market presence by expanding and
modernizing its commercial and precision tube manufacturing capacity.
•
Wire Division: A pioneer in the manufacture of steel wires in India, it produces
coated and uncoated wires, branded as Tata Wiron. The division also operates a
wholly owned subsidiary in Sri Lanka.
TIS GROUP – ASSOCIATE COMPANIES and % STAKE OF TATA STEEL 1. Tata Refractories Lim
ited (TRL)………………………………………………51% 2. The Tinplate Company of India Limited (TCIL)…………………………..
Iron Limited (TSIL)…………………………………………..39.74% 5. Tata Pigments Limited (TPL)……………………………………………
(S&L)………………………………99.99% 8. Tata Metaliks Limited (TML)……………………………………………...46.66% 9. Jamshe
Ryerson Limited (TRYL)………………………………………………..50% 11. TM International Logistics Limited (TMILL
Limited…………………………………………...50%
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SUBSIDIARY / ASSOCIATES / JVS Tinplate Company of India Limited (TCIL): With a m
arket share of over 35%, it is the industry leader in India. It has the capabili
ty to supply all tinning line product including electrolytic tinplate / tin-free
steel and cold-rolled products. Tayo Rolls Limited: The country leading roll m
anufacturer and supplier, the company s produces rolls which find application in
integrated steel plants, the paper, textile and food processing sectors, and th
e government mint. It also produces special castings for use in power plants. Ta
ta Ryerson Limited (TRYL): Is in the business of steel processing and distributi
on. It offers hot and cold rolled flat steel products in customized sizes and qu
antities through processing services. It also provides materials management serv
ices. Tata Refractories Limited (TRL): Produces High Alumina Refractory, Basic R
efractory, Dolomite Refractory, Silica and Monolithic Refractories. It is one of
the few companies worldwide to produce silica refractory for coke ovens and the
glass industry. TRL offers Total Refractory Solutions, which include design, pr
ocurement, re-lining applications etc. (www.tataeref.com) Tata Sponge Iron Limit
ed (TSIL): Has the first Indian sponge iron plant based on indigenously develope
d Direct Reduction Technology. Its major product lines are sponge iron lumps and
fines.(www.tatasponge.com) Tata Metaliks: Is among the top wealth creating comp
anies (measured in terms of EVA) in the country. Tata Metaliks is engaged in the
business of manufacturing and selling foundry grade pig iron (www.tatametaliks.
com) Tata Pigments Limited: Its range of products includes synthetic iron oxide
pigments used to lend colour to paints, emulsions, cement floors, plastics etc.
Its three main products Tata Red, Tata Yellow and Cemplus enjoy premium position
ing.
14
Jamshedpur Injection Powder Limited (Jamipol): Manufactures carbide and magnesiu
m-based de-sulphurising compounds which are used for de-sulphurising hot metal f
or the production of low-sulphur, high-quality steel. TM International Logistics
Limited (TMILL): Provides material handling and port operation services at Hald
ia and Paradip Ports in addition to freight forwarding and chartering services t
o Tata Group companies and other enterprises. MetalJunction.com Private Limited
(MJ): A joint venture company between SAIL and Tata Steel, it is in the business
of providing e-business services and solutions to Indian industry. MJ has two d
ivisions--metaljunction.com (e-selling business unit) and commercejunction.com (
e-procurement business unit). It also offers complete e-sourcing services TRF Li
mited: It is one of India leading companies in the business of design, s manufa
cture, supply, installation and commissioning of engineered-to-order equipment a
nd systems in the areas of bulk material handling, loading and unloading, proces
sing, reclaiming and blending of bulk materials. With world-class technical asso
ciates, TRF has also made its mark in the fields of coke oven equipment, coal du
st injection systems for blast furnace and coal beneficiation systems. Jamshedpu
r Utility and Service Company Limited (JUSCO): Re-engineered out of Tata Steel
town services, JUSCO a wholly owned subsidiary of Tata Steel and is the s countr
y first enterprise that provides municipal and civic services for townships. s
JUSCO is the only EMS 14001 civic services provider in the country. The Indian S
teel and Wire Products Limited (ISWP): Recently acquired by Tata Steel, ISWP has
two units-a wire unit comprising wire drawing mills, wire rod mills and fastene
r division and a steel roll manufacturing unit named Jamshedpur Engineering and
Machining Company (JEMCO). Lanka Special Steel Limited: The only unit in Sri Lan
ka manufacturing galvanized wires.
15
Sila Easten Company Limited: Established to develop limestone mines in Thailand,
mainly for the captive use of Tata Steel. Environment Management: Jamshedpur wa
s India first planned industrial township. s In more recent times, Tata Steel h
as received ISO 14000 certification for environment management for its steel wor
ks. Most of its other, mines and collieries also have been accredited with ISO c
ertification. Corporate Social Responsibility The welfare of its employees and t
he upliftment of the s communities in which it operates are critical part of Tat
a Steel guiding values and principles, inextricably interlocked with productivi
ty at the steel plant .This belief has resulted in a mammoth social outreach pro
gramme covering the town of Jamshedpur (population 0.65 million) and over 600 vi
llages in and around its manufacturing and raw materials operations. The company
-run town of Jamshedpur has India only ISO 14001 s certified municipal services
and is also amongst the six participating cities of the UN Global Compact Citie
s Pilot programme for addressing intractable social, economic and environmental
issues in the urban context. The company has dedicated agencies for community we
lfare work in diverse areas such as education, community health and HIV/AIDS awa
reness, income generation for economic well-being, environment management, relie
f, sports, art and culture, etc. Regarded globally as a benchmark in corporate s
ocial responsibility coupled with its record of 75 years of industrial harmony,
Tata Steel commitment to its employees and the community remains the bedrock of
s continued sustainability.
16
LANDMARKS OF TATA STEEL3
1882 – At the age of 43 Jamshetji Nusserwanji Tata read a report by a German Geolo
gist, Ritter Von Schwartz on the availability of iron ore in Chanda District in
the Central Provinces, which gave him the idea of giving India a steel plant. 14
November 1900 – Jamshetji was in England seeing the Secretary of State for India,
Lord George Hamilton. He decided to build a steel plant in India. 24 February 1
904 – P N Bose, an Indian Geologist who discovered the Gorumahisani hills with its
input storehouse of iron ore, informed J N Tata about his findings. 1907 – CM Wel
d and Srinivasa Roa discovered the village of Sakchi at the confluence of two ri
vers; Subernarekha and Kharkai and the Railway Station of Sakchi. 26 August 1907
– Tata Iron and Steel Company was floated. 16 February 1912 – First Steel was made.
31 October 1912 – The Bar Mills commenced rolling. 2 January 1919 – Visit of Lord C
helmsford to rename Sakchi as Jamshedpur and Kalimati Railway Station as Tatanag
ar Railway Station. 5 March 1920 – Jamshedpur Labour Association formed. The princ
iple of Joint Consultation introduced for the first time in India. 8 August 1925
– Mahatma Gandhi, Chittaranjan Das and CF Andrews visited Jamshedpur to discuss l
abour problem with RD Tata.
3
Facts about Tata Steel, 2003
17
14 September 1937 – Research and Control Laboratory opened. 26 July 1938 – JRD Tata
succeeded Sir N B Saklatvala as the Chairman of the Company. 20 December 1955 – Ag
reement signed with Kaiser Engineers for two million tones expansion programme.
1 April 1973 – Amalgamation with West Bokaro Limited for coal mines operation. 19
April 1993 – Mr. Ratan Tata took over as the Chairman. 16 September 1997 – Received
Prime Minister’s Trophy for the best integrated steel plant for the year 1995-96.
24 April 2000 – Inauguration of the Cold Rolling Mill Complex. 27 September 2002 – W
on the Golden Peacock Award for Corporate Social Responsibility & Excellence in
Corporate Governance. 3 December 2003 – Placed second in Leadership Development am
ong companies in Asia Pacific in a study conducted by Hewitt Associates.
18
ORGANISATIONAL STRUCTURE OF TATA STEEL
The entire structure of the organization of Tata Steel can be broadly divided in
to 3 levels, each level having separate roles and responsibilities. These 3 leve
ls are upper management, senior management and the middle management. Each of th
ese lower levels is responsible to perform its functions and thereby report to t
he next higher level in the organization on a periodic basis. Overall, we can sa
y that the company has a flat structure, beginning from the top management to th
e lowest level of management. The Upper Management of the company has designatio
n like the Managing Director of the entire company and the Group Executive offic
er. The Senior Management has the various Vice Presidents of the different depar
tments which come directly under the Managing Director. Under the Vice President
s we have the Chiefs of the various functions who coordinate the activities of i
ts function along with the other departments. There can be more than one chief i
n a department depending upon the number of line of the products. This is seen i
n the Long Products Departments. The Chiefs are also accompanied by the Heads in
some of the departments. Under these Chiefs and Heads, we have the various Sect
ional Heads who are the Unit Leaders, the Managers or the Officers. This structu
re is prevalent in the entire organization on a national scale. In the Finance a
nd Accounts Department of Tata Center, Kolkata, the functions are handled by the
Head of Marketing and Finance. Then, there are the various Manager Accounts who
handle the different aspects of the department. Under these Managers are the of
ficers who carry out the actual accounting work of the department. The following
is the organizational chart of Tata Steel:
19
20
PRODUCT and SEGMENT OF APPLICATION
1) FLAT PRODUCT • • • • HR – LPG / Tubes / Cold Rolling / pipes CR – Auto/ Appliances / Pan
ls / Furniture Galvanized – Roofing / Auto / Appliances Galvannealed – Auto
With a stretched capacity of 2.5 million MT of Hot Rolled, Cold rolled & Coated
Products, Flat Products business group produces approx. 65% of total saleable st
eel. A constant pursuit to increase customer focus, enrich product mix, energy e
fficient technologies & optimum utilization of raw materials have resulted in a
long term competitive advantage.4 Products
• • • • •
2) LONG PRODUCT • • • • • • • SBQ – Auto HC / WR – Auto / Construction / Railways / Power L
Electrode / General Engineering MSWR – Construction / General Engineering Rebars – C
onstruction Semis Others
4
Tata Steel Intranet Web Site
21
The Long Products Department was created in the year 1999-2000. It is the outcom
e of Tata Steel’s relentless trust towards customer-oriented organization. The dep
artment generates around 35% of work’s saleable steel in the company. Half of the
division s product mix is value-added finished product comprising of Wire rods
and merchant bars. The other half is semis in the form of c.c. billets.5
FEW KEY CUSTOMERS IN TARGETED SEGMENTS KEY SEGMENT PRODUCT MARKET HR for LM / CM
HR for MC / HC HR for CF CR for high end (Auto, Appliance) CR for distribution
Galvanized Corrugated (GC) HCWR LCWR TISCON (Re-bars) KEY CUSTOMERS Tata Motors,
Ashok Leyland ASIL, Hero, TPI, ITW Wheels India, Kalyani Lemmerz, Toyota Tata M
otors, Ashok Leyland, Maruti, Mahindra & Mahindra, Hyundai Authorized Distributo
r Authorized Distributor Bansal, Ramswarup, Miki Wires, Arti Steel ESAB, Advani
Oerlikon, Feero Wires Gammon, DLF, Chevron Authorized Distributors
CAPACITY OF FLAT PRODUCT IN THE MARKET6 SAIL TATA STEEL ESSAR LIOYDS ISPAT JVSL
OTHERS 41% 20% 14% 4% 9% 10% 6%
5
6
Tata Steel Intranet Web Site TBEM 2003, ‘Building Sustainability’ by Tata Steel
22
CAPACITY - FLAT PRODUCTS SAIL TATA STEEL 41% ESSAR LIOYDS ISPAT JVSL OTHERS
10% 9% 4% 14%
6%
20%
CAPACITY OF LONG PRODUCT IN THE MARKET7 SAIL + IISCO TATA STEEL RINL OTHERS 10%
3% 10% 77%
CAPACITY - LONG PRODUCTS
10% 3%
10%
SAIL + IISCO TATA STEEL RINL OTHERS
77%
KEY ENTERPRISE PROCESSES • • • Leadership Strategic planning and risk management Marke
t development
7
TBEM 2003, ‘Building Sustainability’ by Tata Steel
23
• • • • • • • • •
Investment management Human Resource Improvement and Change management Order gen
eration Operation and fulfillment Supply management Research and Development Inf
ormation management Social responsibility and corporate services.
POSITIVE REFERRALS FROM CUSTOMERS Customers giving positive referrals for Tata S
teel’s products: • • • • • • • TELCO MARUTI FORD Wheels India / Brakes India Wheel and Axle
t ESAB L&T
Customers having purchasing intention from Tata Steel due to this positive refer
ral: • • • • • • • All ancillaries Major ancillaries KRUPP JBM TVS Group buy All auto manuf
urers All electrode manufacturers All construction sub contractors / Major proje
ct customers of L&T
24
CUSTOMER SATISFACTION DETERMINATION TYPE OF DATA Opinion Data PARAMETERS Feedbac
k, Survey, Complaints, Call Reports, Customer meets, Top executive customer meet
s Repeat Business, Market Share TOOLS Customer satisfaction Index measurement, C
omplaint analysis, Visit reports Repeat Business, market share in key markets
Behavior Data
PROCESS FOR FOLLOW UP WITH CUSTOMERS ON PRODUCTS/SERVICES
Concept of dedicated CAMs Maintain adequate sales person per key customer FEEDBA
CK
Planned customers visits by sales personnel Customer visits by application engin
eers/plant personnel Call centers
Close proximity of sales offices Distributor monthly reports
Customer champions/ RVM workshops
25
DETERMINATION OF CUSTOMER CONTACT REQUIREMENTS
CUSTOMER GROUP Distribution Channel
Enterprise Accounts / Key Commercial Channel / Original Equipment Customers
PROCESS FOR CAPTURING REQUIREMENTS 1. Distributor / Retailer meets feedback 2. R
etail Value Management workshop 3. Fabricators/architects meets 4. Distributor/r
etailers visits 5. Call centers 1. Customer value management workshop 2. Custome
r page 3. Customer visits by CAMs, application engineers, plant personnel 4. Vis
its by customer champions 5. Customer forum/ customer visits feedbacks
CUSTOMER SATISFACTION DETERMINATION
TYPE OF DATA Opinion Data
Behavior Data
PARAMETERS Feedback, Survey, Complaints, Call Reports, Customer meets, Top execu
tive customer meets Repeat Business, Market Share
TOOLS Customer satisfaction Index measurement, Complaint analysis, Visit reports
Repeat Business, market share in key markets
26
STRATEGIC CHALLENGES FACED BY TATA STEEL
1. Operational: Operational challenges includes some of the following i.e. incre
asing service level expectation of customers, commodity nature of steel, balanci
ng the economies of scale in manufacturing and simultaneously servicing a fragme
nted domestic market, innovation as a substitute to investment. 2. Human Resourc
e: Human Resource challenges are attracting and retaining talent, managing risin
g employee costs, empowering employees at lowest levels, developing employees fo
r the future and improving the quality of life in the locations of operations. 3
. Business: Business challenges includes shareholders and promoters expectation
of returns on par or better than equivalent opportunities, balancing needs of al
l stakeholders, upholding the ethical standards in current environment. 4. Globa
l: Consolidation in steel industry, emerging dominance of China, reducing trade
barriers, driven by WTO, likely appreciation of rupee against dollar. 5. Societa
l: Lack of understanding of industry and business, law and order situation in th
e local areas and increasing expectations of the community in an underdeveloped
state, witnessing the successful financial performance of the company.
27
STRATEGIC PLANNING PROCESS LEVEL Corporate KEY PARTICIPANTS Business Review Comm
ittee of Tata Steel Top management (MD, DMD, VP’s) Key senior leaders Chief of Bus
iness Unit / VP’s Key senior leadership of business unit Chief of functional unit
Key senior leadership of functional unit Key senior leadership Key Operating Sta
ff TIME HORIZON Short term: Up to within a year Long term: Over a year, up to 5
years Short term: Up to within a year Long term: Over a year, up to 5 years Shor
t term: Up to within a year Long term: Over a year, up to 5 years Short term: Up
to a quarter Long term: Up to a year, once a quarter COMMONLY USED STRATEGIC PL
ANNING TOOLS Long Term Cash Flow Forecasting Growth Horizon Framework Project Ba
sed Analyses Product Portfolio Matrix
Business Unit (profit center/cost center) Functional Unit
Focus Group Discussion: Scenario Analysis
Department
Decision Tree Analysis
28
RISKS OF THE COMPANY
Like all other companies Tata Steel also faces certain risks at the strategic, o
perational and the governance level. These risks vary according to the level in
the organization. At the departmental level, there are risks related to audit mo
nitoring and others which are dealt with by the Strategic planning process. At t
he business unit level, risks related to credit policy extended to customers, th
eir rating, etc. are targeted for mitigating it. At the corporate level, risks f
aced are broader in nature based on the overall assessment of the business oppor
tunities and projects. Types of Risks faced by Tata Steel • Financial Risk: Any fi
nancial strategy has to pass a series of scrutiny so as to minimize the financia
l risks which is known as the Investment Management Process. The proposal is fir
st analyzed by the Study Group technically, financially, and for the environment
and regulatory aspects. After the proposal being sanctioned by them it is sent
to the Investment Management Committee (IMC). This sensitivity analysis helps to
reduce the risk for the organization. • Price Risk: Price forecast is done throug
h a price ladder mechanism and a pricing model (developed in-house) for linking
the global prices to domestic price movements. The basic price ladders, forecast
ing model and the forecast values are continuously evaluated and improved. Strat
egic development also addresses the factor of dumping risk. • Societal Risk
29
WORKING CAPITAL MANAGEMENT
INTRODUCTION Firms need money to pay for their day to day activities. They have
to pay salaries, bills, suppliers & so on. The funds available to do this, is kn
own as the firms working capital. Managing the working capital needs of the orga
nization is important, because shortage of funds could disrupt the day to day op
erations where as by holding excess funds the interest burden of the firm starts
mounting & eating into its profits.
There are two concepts of Working Capital, Gross Working Capital & Net Working C
apital. Gross working capital is the sum total of all Current Assets, Inventorie
s, Debtors, Loans & Advances & Cash & Bank balances. Net Working Capital is the
difference between Current Assets & Current Liabilities & therefore represents t
he funds which the firm has to finance through Borrowings. A firm needs to inves
t in Current assets to ensure Smooth and Uninterrupted Operations. How much the
firm invests will depend on its operating cycle.
Cash flows in a cycle into, around and out of a business. It is the life blood o
f the business and it is the primary responsibility of the management to keep it
flowing to generate profits. A profitable business generates cash surpluses, wh
ich is used to expand the business. The faster the Business Expands, the more fu
nds it will require for meeting its working capital needs. Good management of wo
rking capital will generate cash, help to improve profits and reduce risks. The
two most important elements in the business cycle that absorbs cash are inventor
y (Stocks of Raw Materials and Spares, Work in Progress and Finished Goods) and
Debtors (Money to Be Collected from Customers). Tata Steel endeavor to shorten t
he cycle by (i) collecting money from debtors’ quicker and (ii) reducing inventory
levels relative to sales, so that they have to borrow less money
30
to meet their working capital needs. As a consequence, the aim is to reduce the
interest burden and free additional funds to support growth in its Operations an
d Sales. Working Capital Management includes the following at Tata Steel: • • • Debtor
s Management Bank / Cash Management Inventory Management
In order to analyze these, we need to go to the nitty-gritty’s of mode of financin
g by Tata Steel. These can be explained by the following: 1) O.E. Finance 2) Rec
eivable Purchase 3) Channel Financing 4) L/C and Bill Discounting 5) Overdraft M
anagement The art of managing credit risk is becoming more challenging than ever
. Even a single event of default of a customer carries huge implications on the
bottom line. The closure of a transaction from Customer Order to Payment realisa
tion is becoming more and more important in the context of strategic benefits an
d achieving effective customer satisfaction. Thus, there is growing need for new
tools in order to better understand, quantify and manage credit risk. Thus, it
becomes very important for a corporate to decide how it shall be satisfying its
customers along with managing its impact on the bottom line.
31
CALCULATION OF CUSTOMER PROFITABILITY AT TATA STEEL Gross Realization – Excise – Fre
ight = Net Realization - Cost to serve (calculated on the basis of per tonne of
sales) • • • • • • Sales Commission (paid to the agents) Handling Charges (consignment agen
charges) Cost of Rejection (quality complaints) Cost of Credit ( from point of
view of inventory raising, charged at the bank rate, the average rate being 13%
approximately) Establishment cost of Marketing Division (salaries, administratio
n) Inventory carrying costs (even for the consignment agents/conversion agents,
charged at the bank rate) = Net of Net Realization - Cost of production (costs i
ncurred in Jamshedpur, the costs are standardized per tonne of sales, which is r
evised from time to time) = Net Profitability of the customer The above calculat
ion is done on a monthly basis for each customer. This profitability statement f
orms the basis for deciding whether the company should continue with the custome
r or not. advertisements,
32
Credit Worthiness of the customers is assessed on the following parameters: a. A
bility to Pay: Ability to pay is applicable to the organised sector only. It inc
ludes the following: Solvency, Financial Viability, Technological Soundness and
Commercial Feasibility. b. Willingness to Pay: It is based on judgement of exper
ts and is applicable to both organised and unorganised sector. It includes the f
ollowing: Quality of Management, Credibility, Past Performance and Health of the
group Company. Birth of the Credit Management Department at Tata Steel Prior to
1999, there was no separate department to look after the receivables. Initially
people were happy that the plant is producing; there was no focus on sales of t
he produced materials. Hence there was a problem of large inventory. Gradually,
people started realizing this and then the started focusing on sales, which lead
to huge piling of receivables or collections. There was hardly any collection d
one on a regular basis. Since 1999 the entire scenario has again changed. The co
mpany started having a separate department which would look after the collection
s on a daily basis. Credit Management Process Tata Steel has to continuously dec
ide as to how much credit should be given to its customers and also the credit l
imit i.e. their maximum exposure. Prior to given credit, the credit department a
nalyses the credit worthiness of the customers based on their financial paramete
rs. This is done with the help of a form in Lotus Notes. At the first place, the
customer puts forward a request for credit to the CAM since they have a direct
access to the CAMs only. Each customer is handled by a separate CAM (Customer Ac
count Manager). They collect all the required information about the customers an
d fill the Lotus Notes form or the CMG Module which has a predefined template. T
hen the credit limit is fixed based on their credit evaluation. This credit eval
uation also includes factors like the goodwill of the customer in the market and
with their banks, the future prospects of the company in terms of expansion, et
c. While extending credit to the customers it is communicated to them that their
credit limit shall not cross the allotted limit. However, in certain cases wher
e the customer needs an extension of the limit, they might be granted on certain
special grounds. 33
The company has a wide variety of customers. These are from different categories
of business. They can be either public undertaking or government department or
Tata Group Company or private limited companies or traders or distributors. For
credit appraisal and risk assessment, customers are broadly classified into thre
e groups: • Organised Sector Private & public ltd companies in the private sector,
public sector companies including government undertaking • • Unorganised Sector Tra
ders, partnership firms, SSI units etc. Government Departments Defence, irrigati
on, Power, Railways, PWD and CPWD Supporting Sections for CMG Co-ordination • • • • • • • •
unts (Marketing & Sales-Kolkata, Jamshedpur) Customer Service Department CRM and
HSM, WRM Despatch Financial Controller – Flat and Long Product Finance Managers T
ata Ryerson Despatch Metal Junction CMIE Debtor Task force Legal Bankers
Internal Customers of CMG • Vice President, Flat and Long products • • COMS, Flat and
Long Products CSM, Flat and Long Product
34
PROCESS OF EXTENDING CREDIT TO THE CUSTOMERS Whatever be the form of company, in
the first place CAMs proceed by obtaining two copies of their previous years Ba
lance Sheet. Since these companies are listed hence their Balance Sheet can be r
elied upon in the process of giving credit. It can tell us about the value of th
e company and the amount of working capital the company has. CAMs are responsibl
e for entering the non-financial information of the company into Lotus Notes suc
h as the products to be sold, credit period and the nature of the credit, etc. A
ll these are then send to the Regional Finance Manager (RFM) via an electronic m
ail, along with the Balance Sheet of the company, who updates the Lotus Notes wi
th the financials of the company. The RFM acts as a peer in judging whether the
credit should be extended or not. Thus, they can also reject the credit proposal
. Once this is done, it is forwarded to the Credit Management Group of Kolkata f
or the final approval. They have the right to accept, reject or suggests changes
for the proposal even if the RFM does not possess any objection in extending th
e credit. The CMG assigns and approves the credit limit based on the recommendat
ions made by the RFM. In case RFM/CMG rejects a credit request, CAM can appeal d
irectly to COS/COMS for sanction of credit giving justifications. Once a credit
limit is approved, it is saved into the customer database and would form the bas
is for future credit transactions with the customer. In case of Government Depar
tments like Railways, PWD, etc. credit is extended on the basis of the past trac
k record of the business transaction. These companies do not have a published Ba
lance Sheet. For such enterprises RFM automatically gives his consent for the pr
oposal. RFM can reject the same if he has any prior information of the customer
market outstanding or poor payment record or existing dues in other branch. The
Tata Group Companies shall also be considered at par with the Government Departm
ents and no financials shall be required to approve credit limit for them. A Pri
vate Limited Company or Partnership has a Balance Sheet which cannot be complete
ly relied upon. Hence they require many more information apart from it. It inclu
des Credit Limit desired and the payment terms with the customer, monthly liftin
g 35
of the Customer, Future expected monthly business potential, Price negotiated, C
redit NR, Cash NR, Any comfort letter from the customer’s banker / sister company
already dealing with Tata Steel, Past data (max 6 previous months) on Credit, Ov
erdue >6 month, Sales & collection of the customers, Turnover, PAT for the last
three years, etc. In case of traders, transactions are made on the basis of the
availability of the desired materials. It can also be on temporary basis. The de
alings are finalized with those Traders who offer highest prices. Their credit w
orthiness cannot be judged on the basis of their Balance Sheet or any other fina
ncial statement. Credit to a trader is given for a specific sale and a period. A
fter the sales are complete, the credit continues for the allotted period and th
ereafter it is reversed. Distributors are authorized customers by the Company ha
ving a long-term relationship. They are required to lift a minimum fixed tonnage
of materials every month. The credit limit for them remains valid for the whole
financial year. The COM&S or the VP is responsible for sanctioning of the credi
t to the distributors. Debtors Control After the credit is extended to a custome
r, the CMG keeps a regular track of the status of outstanding and overdue. At th
e beginning of each month, for each customer, Manager-Marketing sends an Account
s Statement indicating the receivables and overdue status of the party. In case
overdue reaches 50% (and 25% in case of chronic defaulters) of the total outstan
ding, system stops any further delivery orders thereby stopping further sales. I
n case where customer’s total outstanding has become overdue > 2 months, while rel
easing Delivery Order – COM&S will decide on the applicable ratio on the basis of
which supplies will be effected (70:30, 80:20, 90:10 etc.). Collection under 70:
30 rules, means, for every 100 rupees received in advance, material worth Rs.70/
- will be supplied to customer and balance will be adjusted against old dues. Ma
rket Information on customers
36
Along with the control of debtors, their accounts needs to be continuously recon
ciled and confirmation should be obtained from the customer at regular intervals
as regards of amount due to him. At the beginning of each month the Marketing M
anager sends the Account Statement to all the customers for confirmation of bala
nces. Interest Collection for Delayed Payments Tata Steel charges an interest to
its customers if the payment made is late after the due date. The details on in
terest payment are mentioned at the time of credit sales in the Sales Order or t
he MOU. However, these need to be accepted by the customer. All the transactions
are recorded in the SAP system which acts as a database and which is kept updat
ed very instant. Thus, when the credit sales are made, all information like invo
ice date, interest free credit period, money receipt date, etc. are all recorded
in SAP with respect to separate transaction. Thus, SAP automatically calculates
the interest that has to be charged to each customer for every delay in payment
. The CAM takes the SAP report of interest outstanding for each customer and sen
ds it on a monthly basis to the customer for collection and follow-up. When the
interest amount is received the customer’s account is set-off against the balance.
CAMs review the status of interest accrual, its collection and reasons for non-
recovery quarterly.
37
CREDIT MANAGEMENT MODULE (BASED ON LOTUS NOTES)
The Credit Management Module of Tata Steel is maintained in the Lotus Notes. Thi
s module is very exhaustive because it captures all the information about the cu
stomer to whom credit is being given. It begins by capturing the essential infor
mation relating to sales like: • • • • • • • • • Products to be purchased by the customer T
on cash Tonnage on credit Invoice price (Rs. / MT) Credit period (Days) Proposed
credit (Rs. Lacs) Total tonnage Share of spend (%) Future expected Monthly lift
ing potential (MT)
A customer might already have an account with Tata Steel. In such cases the acco
unts status of the customer as on the date when credit sales is being made are a
lso entered into Lotus Notes. These includes the amounts of outstanding and over
due as on a particular date, Cheque payment history, existing credit limit, inte
rest free credit period, Guarantee provided, if any, level of secured and unsecu
red credit. It also mentions whether the customer’s company has been rated by a cr
edit rating agency or not, how is its relationship with Tata Steel and what is i
ts level of Management Quality. This module also asks whether the customer’s compa
ny has been referred to the BIFR. All details of relevant financial figures of t
he current financial year and the past two years are recorded in Lotus Notes. So
me of such figures are Working Capital, Retained Earnings, EBIT, Net Worth, Tota
l Assets, Total Liabilities, Debt, Interest on Debt, Equity, Inventory, Receivab
les, Sales, PAT, etc. Apart from these absolute figures certain ratios are also
recorded, such as Structural Ratios (Debt-Equity Ratio and Interest Coverage Rat
io), Liquidity Ratios (Current Ratio and Acid Test Ratio), Turnover Ratios (Asse
t 38
Turnover Ratio, Inventory Turnover Ratio and Receivable Turnover ratio) and Prof
itability Ratios (Gross Profit Margin Ratio and Net Profit Margin Ratio). On the
basis of these financial figures the credit management group calculates the Z-s
core of the customer which forms the Corporate Bankruptcy Prediction. The Z-scor
e formula It is very essential to know when a company is at risk of corporate co
llapse. To detect the signs of looming bankruptcy, investors calculate and analy
ze all kinds of financial ratios: working capital, profitability, debt levels an
d liquidity. However, each of these ratios gives different implications which mi
ght turn out to be contradictory also. Thus, NYU Professor Edward Altman introdu
ced the Z-score formula in the late 1960s which is weighted of the five key perf
ormance ratios into a single score. This gives a very good overview of the corpo
rate financial health of a manufacturing company. The formula8 is as follows: Z
= 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where Z = score A = Working capital / Total A
ssets B = Retained earnings / Total Assets C = Earnings before interest & tax /
Total Assets D = Market Value of Equity / Total Liabilities E = Sales / Total As
sets The lower the Z-score, the higher are the odds of bankruptcy. A Z-score of
lower than 1.8 indicates that the company is heading for bankruptcy. Companies w
ith scores above 3 are unlikely to enter bankruptcy. Scores between 1.8 and 3 li
e in a moderate area.
8
Credit Management Module, Tata Steel
39
The Z-score for a company can vary from quarter to quarter. To keep an eye on th
eir investments, investors should consider checking their companies’ Z-score on a
regular basis. In above figures related to the Z-score is according to the indus
try as a whole. However, in Tata Steel the following are used: Above 4 is consid
ered to be low risk, between 4 and 2.6 is considered to be medium risk, less tha
n 2.6 is considered to be high risk and less than 1.1 is a sign of Bankruptcy. I
n the credit management module the following are also included: 1) Technology po
ssessed by the customer: • • • • • • • • • • • • • • • • • Product Quality Product Mix Tech
ailability Process Suitability Plant / Equipment condition Product Salability Ra
w-Material Availability: Debtors Quality Labour Relations Insulation from change
in import / local tariff Compliance with legal / Regulatory Authorities Track R
ecord Market Reputation Experience in field Ownership Disputes (absence of) Tech
nical Competence Ethical in business dealings 40
2) Economic / Commercial factor of the customer:
3) Quality of Management of the customer:
4) Credibility of Management of the customer:
• • • • • • • • • • • • • • • •
Commitment Level Relationship with Creditor Relationship with regulatory authori
ties Relationship with banks Relationship with competitors Length of sound deali
ngs Promptness in payments Honouring commitments Payment patterns and adherence
to credit terms Willingness to furnish information Capacity to hold stocks Abili
ty to absorb supply spikes Avoidance of over-trading Financial soundness of the
group company Possible diversion of funds to new business ventures (unlikely) Ba
nk Ratings
5) Past performance with Tata Steel
6) Health of the group companies
41
FACTORING OR BILL DISCOUNTING
Tata Steel has two types of customers: • • Original Equipment Manufacturers and othe
r manufacturing companies Distributors
Whatever be the size of business of the customers, there is a persistent risk of
failure of the customers to the company. The larger the volume of debtors, the
larger would be the exposure of the company to the market. Thus, any company wou
ld try to convert its debtors to cash. This can be done either by restricting cr
edit sales to cash sales or by selling its debtors to various factoring agencies
most of which are banks. If sales are made on cash basis, then the customer can
pay the money within 7 days of raising the invoice, in which case the customer
would also be given a cash discount. For sales made on credit, the company can s
ell off their debtor which is known as factoring. Factoring helps the company by
providing protection against the bad-debts. Bad-debts result in blocking of fun
ds of the company and leads to non-conversion of debtors. They act as hindrances
in the existing or new or expanding business. Thus, factoring is used to restri
ct the bad-debts and to protect the cash flow of the business. Factoring has the
following advantages: • • • • • • Risk free sales Accelerated cash flow No bad-debt Saves
ime spend by CAM’s following up for payment No legal cost as assignment of Legal R
ights will be on Bank Overdue interest is charged on the Bank’s account.
FACTORING FOR THE MANUFACTURING CUSTOMERS: The factoring facility that has been
designed for customers which are big manufacturers and high-valued customers is
known as OE Finance or Receivable Purchases. Tata Steel enters into an agreement
with a Bank that it would sell off its bills of the debtors. This 42
agreement is known as the Tripartite arrangement which is an arrangement between
Tata Steel, the Bank and the Customer. At the time when the agreement is made,
all the specifications are made clear to Tata Steel and the customer. When an in
voice is raised in the name of a customer, within a day or two it is sent to the
bank for discounting. As per agreement, the Bank entertains these invoices of t
he specified parties and makes an upfront payment to Tata Steel of the correspon
ding amount. For providing the facility of discounting of the bills, the Bank ch
arges certain interest known as the discounting charges. This discounting charge
is borne by Tata Steel. Thus, Tata Steel gets the debtors money and the debtors
have to pay the Bank at a later date, according to the agreement. However, the
debtors shall be paying after the expiry of the credit period. At the end of the
credit period if the customer fails to pay on time, then Tata Steel is not liab
le to pay any overdue interest. This entire arrangement of factoring is without
recourse in nature i.e. if there is any problem from the side of the customer, t
hen Tata Steel will not take the responsibility for compensation. Thus, the Bank
has to deal with the entire process of the transaction thereafter. Calculation
of Discounting Charges: The number of days for which the bill has been discounte
d is the difference between the due date when the bill expires and the discounti
ng date. The amount of discounting charges is calculated on the basis of this al
ong with the rate at which the bank discounts the bill. Discounting Charges = Bi
ll Amount * Days Discounting * Rate of discounting. FACTORING FOR DISTRIBUTORS T
he factoring facility that is extended for the distributors of Tata Steel is kno
wn as CHANNEL FINANCE. It helps in meeting the financing needs of the distributo
rs. This has helped to reduce the capital outlay and improve cash flow position.
It provides the distributors with new sources of funds which help them in carry
ing out their business
43
with instant payment being made in cash. It reduces the interest rates that the
distributors have to bear and also the facility of upfront cash discount. Tata S
teel carries out its channel financing activities with the help of a separate co
mpany named Metaljunction.com. Thus, the entire factoring of distributors has be
en outsourced to an external entity. By doing this, Tata Steel has benefited in
the sense that now they can get the entire payment without the delay due to cred
it limit, thereby reducing the overall exposure to uncertainty and chances of ba
d-debt. The quick receipt of money has now been possible because of the electron
ic transfer of money. The arrangement of Channel Financing is also carried on a
non-recourse basis. In case of default by any of the distributors, Metaljunction
.com shall have to handle it. Thus, Tata Steel can very successfully reduce its
working capital in the form of debtors where the chances of becoming bad if high
. Ultimately all this leads to reduction the cost of capital and specialization
in hedging of financial risk of the company. How does Channel Finance work? 1. D
istributor submits documents to Bank 2. TISCO provides LOR & LOC to Bank 3. Bank
assigns credit limit to distributor 4. Distributor registers on Metaljunction f
or transaction 5. Raises a finance request 6. Bank confirms by giving an MRX no.
Credits Tata Steel’s account & debits Distributor account 7. Finance manager make
s a Money Receipt 8. Distributor pays bank after credit period along with Intere
st.
OE FINANCE
OE Finance is arrangement between Tata Steel and the Bank wherein all the prospe
ctive receivables against invoices issued are sold to the bank. It is invoice ba
cked financing for the purchases made from Tata Steel, on a WITHOUT RECOURSE bas
is to Tata Steel as
44
to principle and overdue interest. The programme size for this is around 150 cro
res. This arrangement does not block both Tata Steel’s and the customer’s line of cr
edit because these are unsecuritized credit given to the party. Currently this t
ype of financing is being done through Citibank and HDFC bank. The other banks t
o whom the proposal has been send are Standard Chartered Bank and Bank of Americ
a. It is a Tripartite agreement wherein the bank finances Tata Steel’s customers s
o as to enable them to pay early i.e. before the due date. OE Finance with HDFC:
Under this scheme with HDFC, the tenor is based on the credit terms that are be
ing offered by Tata Steel which can be upto 90 days. Also the limit which is set
is based on the purchases made from Tata Steel and the internal credit limits s
etup, financials of the OE customers and the Bank’s internal credit guidelines. Th
e OE customers are broadly classified under two categories: • Category A: This inc
ludes factoring for large corporate who has or are targeting corporate banking r
elationships. For such customers, Tata Steel has to make an upfront payment of 6
.5% to 7.5% interest charges for the period from the date of transaction to the
date of maturity of the invoice. The rate 6.5% shall be for those who shall agre
e for direct debit to their account with HDFC Bank. • Category B: These include th
ose customers who are having no banking relationship with HDFC. Hence it is invo
ice backed finance. Here, Tata Steel has to make a monthly payment of interest @
8.00% to 9.50% p.a. In case of default in payment by the customers, an overdue
penal interest @ 4% p.a. is to be charged to the customers. Documents that is re
quired in its operations: The invoice details are electronically sent to Tata St
eel which shall include information like date of invoice, name of customer, due
date of payment, etc. The proof of delivery or the invoice will be kept by Tata
Steel and submitted to the Bank on demand (in case of audit) or in case of dispu
te / default.
45
Operations process flow: 1. In the first place, Tata Steel sends a recommendatio
n of the customers along with credit limits. It also provides other details for
both category A and category B. 2. Then, HDFC does a credit appraisal on the cus
tomers and subject to the customer meeting the Bank’s internal credit guidelines,
they confirm as to which category the customers will fall into – Category A or Cat
egory B along with the limits. In case of customers falling into category A, the
bank does factoring of the invoices raised by Tata Steel on the customers. The
consent of the customers to pay HDFC Bank on due date is obtained by Tata Steel
prior to the commencement of the transaction. In case of customers falling into
Category B, once the documentation is completed, the limits shall be uploaded in
to the system and the transactions can start. For the customers, HDFC Bank will
open a no cheque book current account for receipt of funds on due date. 3. Then,
Tata Steel sends HDFC Bank a soft copy of the invoices with the other details.
The file containing the details is uploaded through E-Net/an e-mail, confirming
the details to be sent only from e-mail ids prior to operationalising the deal.
4. Based on the file upload/email, HDFC Bank credits the amount of Tata Steel. M
IS confirming the transaction is sent to the concerned officials in Tata Steel (
based on the mutually agreed format). 5. The entire invoice value is credited to
Tata Steel. recovered upfront by debit to Tata Steel account. 7. Tata Steel has
to sign an undertaking that they hold the original invoices on the behalf of th
e Bank. The invoices will be made available to the bank at request or for any in
ternal / RBI / statutory inspection requirements. The bank will also be allowed
to do a sample verification of the invoices once a quarter at its discretion. 8.
In case of material rejection / goods not received by the end customers, the tr
ansaction would be reserved and the amount would be debited to Tata Steel’s accoun
t, to the extent of the rejected amount. 6. The interest on the invoice amount f
or the number of days of discounting is
46
9. On the due date, HDFC Bank will receive the payment by debiting the customer’s
account. 10. In case the customer’s account does not have sufficient funds on the
due date, the entire overdue amount will attract overdue penal interest @ 4% p.a
. This interest is to be borne by the customer.
RECEIVABLE PURCHASES
Tata Steel sells its receivables of the debtors which are outstanding to the ban
k on a particular date. It is known as factoring of the receivables. This factor
ing is done on WITHOUT RECOURSE to TISCO as regards the Principle and Overdue In
terest. This arrangement is different from OE Finance in the sense that unlike O
E Finance, here the debts are not sold off prospectively. In this the invoices w
hich are to be factored are issued invoices. The company sells a set of receivab
les to the bank and gets the discounted amount on the date of discounting and al
so debits Tata Steel’s account by the amount of interest charges. The date of disc
ounting is the date on which the agreement is signed between the company and the
bank. When the bank pays the money to the company, the company gives a debit au
thorization for the discount amount to the bank. The bank charges an interest on
discounting @ 7.5% which is borne by Tata Steel which is the same as OE Finance
. The interest shall be calculated from the date of discounting till the Tuesday
following the due date of the said invoices. Currently, Tata Steel is dealing i
ts RPs with HDFC Bank. HDFC Bank shall conduct a due diligence audit of the invo
ices to be sold to the Bank and satisfy itself that the invoices existed on the
day. In order to ease the collection efforts from the customers on the due date,
Tata Steel collects the money from the customers and pays the same to the bank.
The payment for the RP to the bank is made on a weekly basis on very Wednesday.
By every Monday, all 25 branches, from all over the country, are intimated to f
orward the details of the invoices which are paid in a particular week. All invo
ices collected by Tata Steel from its customers throughout the week ended Tuesda
y is to be paid to the bank on Wednesday. These details are compiled at the Tata
Center, Kolkata Office, Head of Marketing and
47
Sales and then the Payment is forwarded to the bank along with a debit authoriza
tion to them. This payment is done through a High Value Cheque so that the bank
can get the credit on the same day. Interest on discounting is charged by the ba
nk on the difference of the number of days of Payment Date and Discounting Date.
Thus, Amount of interest = Invoice amt.* Int. Rate* No. of discounting days The
facility of Receivable Purchase is present for both the Long Product and the Fl
at Product Department of Tata Steel. All the receivables from each of the depart
ment is handled by the Finance & Accounts Department at Tata Centre. The receiva
bles of the following customers in the Long Product Department are treated for r
eceivable purchases: • • • • HCC GAMMON Ramswarup Mahanadi Coal Fields
The receivables of the following customers in the Flat Product Department are tr
eated for receivable purchases: • • • • • • • • Blue Star HMS 1 Hongo LG Electronics Mark A
aruti Udyog Rasandik Toyota Motors Kirloskar
The operating system for Tata Steel is SAP wherein all the invoice transactions
along with credit sales taking place are recorded. Each customer has a unique cu
stomer code in SAP and any invoice raised in the name of a particular customer i
s recorded in SAP itself. 48
This is for both Long and Flat Products. SAP contains a list of all the invoices
of each of the customers as on the said date along with the receipt of money fr
om the customer on a regular basis. This report is downloaded from SAP in an exc
el format. This is known as a master dump of all RPs in the different branches.
This dump is essentially an invoicewise list. The master dump is sorted branch a
llocation-wise and separate excel file is prepared for each branch. These indivi
dual files are then sub-totaled due date wise and sent to the respective branche
s so that the branches can pass the entry for money receipt. The Master Dump loo
ks like the following: CUST. NAME BRANCH DOC. INV. NO. NET DATE INV. INV. DISC.
PAYMENT INT. INT.
DATE DUE
AMT. NO.
DATE DATE
DAYS AMT.
The first 7 columns are downloaded from SAP into excel. This is done for both fl
at product and long product customers. Thereafter, a final master list is prepar
ed by pasting all individual customer invoices into a single file. This is the f
inal list for sale. The payment date is the date when the payment is made to the
bank. Interest days (Payment date – Discounting Date) are the number of days for
which interest is to be charged by the bank on Tata Steel. Every week all the br
anches are intimated to send the receipts for the week to the Tata Centre, Kolka
ta. For this the Finance Managers from all the branches are suggested a colour i
n excel which shall relate to payment received in a particular week. The Finance
Managers fill up the colour in the appropriate invoice row and the same is tran
sferred to bank vendor account. After getting all the payment details, all the f
iles are consolidated and sub-totaled branch allocation-wise and advice for paym
ent is made from Tata Centre. This amount should exactly with the bank vendor in
SAP which acts as a check whether all payments have been transferred to the ban
k vendor.
49
LETTER OF CREDIT (L/C) AND BILL DISCOUNTING
L/C is a document issued by a bank that guarantees the payment, for a specified
time period, of a customer drafts up to a stated amount. It is a commercial ins
trument through s which a bank or other financial institution instructs a corres
pondent institution to advance a specified sum of money to the bearer which can
be an individual or a company. The document is called a circular letter of credi
t when it is not addressed to any particular correspondent. Letter of Credit is
always raised for a particular amount. The institution drawing a L/C from a bank
shall do it for a particular amount. Thus, this L/C can then be used maximum ti
ll that specified amount and cannot exceed it. It is used as an instrument for p
ayment by most of the companies nowadays. Those who issue such letters are usual
ly so well known that any bank will honor the letter upon proper identification.
L/C is of two types: inland payment and foreign payments. It is largely used in
case of international trade. It is considered to be one of the most secured mea
ns of obtaining prompt payment for the sale of goods. In Tata Steel, most of the
payments from customers, in the Ferro Alloys and Manganese Division (FAMD), are
received with the help of L/C. It is a kind of credit payment made to the compa
ny which is secured in nature. The entire procedure of operating through a L/C s
hall be explained with an example. One of the customers in the FAMD department i
s M/S Jindal Stainless Ltd. We take a scenario where Tata Steel has raised 7 inv
oices in the name of Jindals and payment is to be made through L/C. One L/C can
have several invoices but one invoice corresponds to only on L/C. Tata Steel cha
rges a certain amount of interest of the customer, say 8.5% to 10%, because the
payment is a kind of delayed payment. Issuance of L/C and the instructions that
are made for payment by the customer are as follows: • Jindals shall approach its
bank, also known as the opening bank, for the issuance of a letter of credit. Th
is L/C value can be greater than or equal to the value of the sum of invoices ra
ised by Tata Steel. Assume that the opening bank for Jindals is Canara Bank.
50
•
Every L/C has separate specifications such as the name of the beneficiary, advis
ing bank, negotiating bank, L/C number, date and amount, Analysis Test Certifica
te. In this case, the name of the beneficiary is Tata Steel. The advising bank i
s Tata Steel’s bank, to whom the opening bank shall make the payment. Here the adv
ising bank for Tata Steel is HSBC Bank. The negotiating bank as mentioned in the
L/C is any bank in Kolkata. Every L/C has a period of validity after which it b
ecomes expires. At the end of such a period the opening bank shall have to make
the payment to the beneficiary. A part of the validity days of L/C is free of in
terest to the opening party and the remaining is charged a fixed interest. Other
additional conditions that need to be mentioned in the L/C are whether partial
shipment and transshipment is permitted or not, the latest date of dispatch of g
oods to the Jindals and the date of negotiation. Opening bank charges shall be c
harged to the opener’s bank account and the beneficiary bank charges shall be char
ged to the account of the beneficiary. The L/C shall be payable and reimbursable
at Canara Bank.
• •
After the L/C has been made it is sent to Tata Steel along with the entire invoi
ce and other required documents. At the end of the credit period of the letter o
f credit, the opening bank shall have to issue a payment in the name of the bene
ficiary.
When Tata Steel accepts to receive the payment of its bills (several invoices ma
ke up a bill), it sells it off to its bank i.e. the opening bank, HSBC. For such
a transaction HSBC charges Tata Steel certain interest. This interest is charge
d for a duration from the date of drawing of invoices or bill to the date of exp
iry of the L/C. According to the arrangement with Tata Steel in the FAMD departm
ent, the company shall not bear the overdue charges in case of late receipt of p
ayment from the customer’s bank. Thus, HSBC would transfer this burden on the issu
ing bank by charging a certain interest for late payment. Prior to HSBC, Tata St
eel used to discount its bills with State Bank of India based on its competitive
rates. This was started in October 2004 with a few customers. The problem with
SBI was that the MIS system was not up to the mark and it was becoming difficult
51
to track the documents. Thus, Tata Steel was in the need of another bank which c
ould be competitive enough and then in late December 2004, HSBC matched their ra
tes with that of SBI. It was then decided that Tata Steel would discount its bil
ls with HSBC from 1st January, 2005 onwards. According to the agreement, Tata St
eel would be discounting only commercial invoices having 30 days of interest fre
e period. Problem of Interest burden on Tata Steel from HSBC in the FAMD Departm
ent Tata Steel sells of its L/C to HSBC Bank. Payment for the L/C from the custo
mers shall be received at the end of the validity of the same. Thus, this leads
to a blockage of liquidity for which HSBC charges an interest on Tata Steel. At
the end of the period, in case of late receipt of payment, Tata Steel shall not
bear the overdue interest charges. The crux of the problem lies in the fact that
HSBC is claiming the all the parties are failing to pay on time. The payment is
being received much later than the due date. The market interest rate for facto
ring through L/C is found to be 6.5%. However, HSBC is charging 7.25% to Tata St
eel because of the claim. This increases the interest burden on Tata Steel since
it has to pay extra interest charges, when the company is not clear with the fa
ct that whether actually the parties are paying late or not. In case of late rec
eipt of payment by the opening bank, HSBC would charge an interest of 15% p.a. o
n a daily basis to the customer. On an overall basis, HSBC is not losing out but
Tata Steel is. Thus, the objective is to analyze the scenario and search for th
e hidden facts. For this purpose, the primary data, for January 2005 onwards, is
collected from HSBC Bank. This data is in an excel format which consists of the
following columns chronologically: HSBC Reference number for each bill, L/C num
ber and date, issuing bank or the customer’s bank, Name of the Applicant or the cu
stomer, invoice number under each L/C, L/C amount, Bill amount, L/C amount which
remains outstanding (L/C amount – Bill amount), rate of interest charged on the b
ill to the customer, the due date of payment for the L/C, the date of discountin
g of the bills with HSBC, date when the Cheque is issued by the customer’s bank at
the end of the due date, and the date when the Cheque is received by HSBC. Prio
r to the analysis, according to HSBC there is a huge
52
difference in the number of days between the Cheques issuing date and the Cheque
receipt date. The excel sheet is a consolidated one for all the parties of Tata
Steel. But the analysis has been done only on the prime customers of the FAMD d
epartment i.e. Rathi Ispat Ltd., Jindal Stainless Ltd., Shah Alloys, Stainless I
ndia Ltd. Above 90% of the sales come from these customers. What was done? For e
ach of the party, the difference in the days of receipt of Cheque by HSBC and is
sue date of Cheque is calculated. This gives the delays in receipt of Cheque. Th
is should be minimum but according to HSBC’s claim it is very high. According to t
he calculations, for only 11% of the cases for Rathi Ispat the Cheque was receiv
ed within two days of its issuance in 2005, for Shah Alloys it was for only 4% o
f the cases, none in case of Jindal and only for 10% of the cases for Stainless
India. These figures are very low for a company. For about 33% of the cases for
the Rathis’ payment was received after 9 days which is an unfavorable figure. This
is 60% for Shah Alloys, 25% for Jindals and 20% for Stainless India. On an over
all basis, for around 40% of the cases the payment is being received 9 and more
days late. (Refer Exhibit 3 (i), (ii), (iii) and (iv)). These figures make the e
ntire scenario non-competitive. Because of the above facts, HSBC claims the Tata
Steel would not be charged an interest rate of 6.5%, instead it would be charge
d @ 7.25% on the bill for the number of days discounted. Thus, amount of interes
t = Bill Amount * rate of interest * Discounting no. of days. Thus, because of t
he fault of the customers Tata Steel has to bear excess burden of interest expen
ses for every bill that is discounted with HSBC. According to the calculations d
one in this respect, the savings that could be done for each party due to the di
fference in interest rates is as follows: Rathi Ispat – Shah Alloys – Rs. 321041.040
5 Rs. 248139.0777
Jindal Stainless – Rs. 161362.7016 53
Stainless India –
Rs. 40788.32008
Thus, Tata Steel can save a big amount per customer if the management of the com
pany can effectively negotiate with the customers to ensure prompt payment of th
e bill on expiry. On an aggregate, inclusive of Tata Steel’s 4 prime customers, th
e company can save an amount of Rs. 771331.13999 only in a short duration of thr
ee months for 2005 onwards. (Refer Exhibit 3(v)). Thus, the company needs a modi
fication in the terms of business with its customers. This shall great implicati
ons in the years to come. The following are the suggestions which could prove be
neficial for the company: • When the payment is received by the bank, it is record
ed on that date. However, no direct intimation is received by Tata Steel regardi
ng it from the customer’s bank. Thus, there can be chances of wrong information be
ing deliberately imparted and entered by the bank. Thus, in order to avoid any k
ind of such situations from happening or that could happen, Tata Steel should ma
ke an arrangement where it would directly receive a copy of payment made by the
customer’s bank for documentation. • Tata Steel should make all sales on the conditi
on that the customer’s bank would be making the payment by a post dated Cheque for
10 days. When the Cheque is issued 10 days earlier a copy of it should also be
directly send to Tata Steel for records. If such a step is taken then it would b
enefit both the company and the customer. Tata Steel would be able to cut down o
n its interest expenses whereas the customer’ bank will save on the payment of int
erest @ 15% to the beneficiaries bank. This would in turn lower down the interes
t burden on the customer directly. • While negotiating with the customer, Tata Ste
el can specify that the opening bank of the customer should have an electronic m
ode of transmission of payment to HSBC. If this is done then the entire delay in
the receipt of payment due to postal reasons can be controlled. As observed, mo
st of the opening banks are nationalized bank which are likely to be less electr
onically efficient as compared to the foreign banks that are nowadays entertaini
ng discounting of bills.
9
Refer Exhibit 3(v)
54
•
Since the opening bank should ensure that the payment is received on time by HSB
C, HSBC should claim to the opening bank to explain the reasons for the delay. A
s it has become a regular happening, the opening bank should take care of the sa
me by giving all the details to HSBC.
OVERDRAFT MANAGEMENT
Tata Steel carries out its financing activities through various banks. Two of it
s main banks that constitute more than 90% of the operational activities are Sta
te Bank of India and the Central Bank of India. Since years, Tata Steel was inef
ficient in managing its funds with the banks there were large balances of overdr
aft with them. This created a lot of burden upon the company. But this was reali
zed soon and the overdraft was brought into control by the managers of the compa
ny. Money, which is received from Jamshedpur, is put into the current of with th
e banks on a daily basis from which payments shall be made. However, it is made
sure that there is no overdraft limit being reached by the banks. Thus, accordin
g to the bank statement of State Bank of India we can make the following table.
From the table it is clear that for four months there is no overdraft balance on
any day of the month at the end of the day, whereas November has debit balance
for just one day of the month followed the other months. Overdraft days for diff
erent months in State Bank of India10
MONTH Sept. 04 Oct. 04 Nov. 04 Dec. 04 Jan. 05 Feb. 05 Mar. 05 Apr. 05 NO
. OF TIMES 0 0 1 0 0 0 2 3 AMOUNT (IN RS.) 0 0 28937061.97 0 0 0 23065575.95 467
28341.5
10
Bank Statement of State Bank of India
55
OVERDRAFT SCENARIO ON MONTHLY BASIS
3.5 3 NO. OF DAYS 2.5 2 1.5 1 0.5 0 0 0 1 0 0 0 2 3
Sept. 04 Oct. 04 Nov. 04 Dec. 04 Jan. 05 Feb. 05 Mar. 05 Apr. 05 MONTHS
56
REDUCTION OF DAYS SALES OUTSTANDING FOR THE FLAT PRODUCTS The Flat Product Depar
tment has both cash and credit sales. Its customers largely cover several compan
ies from the following industries: • • • • • Construction Sector Automobile Sector Auto An
cillary Sector White Goods Appliance Sector General Engineering
The credit limits, various credit terms and amount of credit given to each of th
e above sector separately depend on the market scenario of the respective sector
. Thus, in order to decide how much exposure Tata Steel should take in respect o
f these sectors we need to analyze each of the sectors separately and exhaustive
ly. This is followed by a SWOT analysis of each one of them. CONSTRUCTION SECTOR
Construction Sector is experiencing a boom in the Indian economy. It is showing
a growth rate of 7% since 2002 onwards. Prior to this also it registered a very
high growth rate upto 10% in 1997. The growth in this sector shows a very smoot
h upward trend. On the basis of this trend, the construction sector would grow a
t a rate of 8% till 2010, approximately.11
11
www.ibef.org
57
GROWTH OF CONSTRUCTION SECTOR
14 12 10 8 6 4 2 0
19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20
03
IN %
YEARS
As predicted by Rupen Patel, managing director of the Rs 750-crore Patel Enginee
ring, it is expected to clock a turnover of over Rs 2,000 crores in civil engine
ering and infrastructural projects in the next three years from 2005. Today, in
2005, we find the infrastructural activities are being undertaken in huge scale
all over the country. This is mainly due to the support from the Government.12 B
uilding up of over-bridges, railway tracks, etc. have increased a lot. Examples
for some of such activities since 2005 onwards are as follows13: • • • • Nagarjuna Const
ructions has bagged an Rs 450 crores order for construction of a 4-lane highway
on NH-58 from National Highways Authority of India (NHAI). Mumbai-based Patel En
gineering bagged orders for two irrigation projects in Andhra Pradesh worth Rs 8
78 crores. Madhucon Projects has also received orders worth over Rs 1,500 crores
for irrigation projects in Andhra Pradesh. Domestic majors like L&T, Hindustan
Construction, Bharat Heavy Electrical, Gammon India and Patel Engineering, meanw
hile, are switching their focus back to the Indian market.
12 13
www.google.com www.ibef.org
58
•
Projects in industries such as surface transport (roads, bridges, railways), ene
rgy and power (nuclear, hydel and thermal), housing (urban and rural), airports,
shipping, irrigation and flood control worth over Rs 115 lakh crores are being
initiated.
Along with this, the Foreign Institutional Investors sees India as an engineerin
g and construction hub. The value of FII holding is increasing at the cost of do
mestic holding. The sharp rise in overseas interest for engineering and construc
tion firms comes on the back of strong order inflows, which have shot up in rece
nt months. At least 10 foreign construction majors have set up shops in the last
6 months. As a result of the surge in order inflows, FII exposure in the bigges
t industry player Larsen & Turbo, which exited its cement business to re-emerge
as a specialized engineering and construction company, has seen a sharp rise fro
m 10% to 17.1% during the past year. With the removal of the restrictions on the
FDI inflows by the Government, we find construction projects being undertaken o
n a very large scale. The SWOT of this sector is as follows: Strength: • • • • • Large pot
ential for expansion in the sector supported by huge investments encouragement b
y the government. Housing industry is being considered as a health barometer of
the economy. Increasing volume of infrastructural activities being undertaking i
n India as well as globally. Increase in the per capita income of the middle-cla
ss families which leads to a boom in the housing sector. The economy is showing
a high overall growth rate.
Weakness: • • Sale of undeveloped plot by the foreign investors is not allowed. Redu
ction in the minimum land area requirement in the residential sector from 100 ac
res to 25 acres. 59
•
Minimum area for commercial development pegged at 50000 sq. meters.
Opportunity: • • • • Liberalization of FDI in the construction sector upto 100%. Loan fo
r infrastructural activities available at a cheaper rate. Raw-material cost is e
xpected to decline over the next 2 years. Outsourcing being introduced in the se
ctor at a larger scale.
Threat: • Threat of competition laying its adverse impacts on the entire industry.
Overall the construction sector can be rated as high in terms of opportunity and
low in terms of risk. On the basis of the current outstanding of the different
sectors the construction sector is having a total exposure of 2.61%. This means
that out of the total credit, the credit to this sector is very low. The constru
ction sector falls in the third quadrant of the growth-exposure matrix. Because
of high opportunities coming up with, new infrastructural activities, Tata Steel
can easily increase its exposure to this sector. AUTOMOBILE SECTOR With a marke
t size of approximately Rs 540 billion and consistent growth figures of nearly 8
% per annum, India automobile sector consists of the passenger cars and utility
s vehicles, commercial vehicle, two wheelers and tractors segment. In the passe
nger car segment the big players are Maruti Udyog Ltd., Tata Motors Ltd. and Hyu
ndai Motor India. In the motorcycle segment, we have Hero Honda Motors Ltd. and
Bajaj Auto Ltd. India automobile sales expanded by 15.9% in the year ended Marc
h 31, 2005 to s 7,896,475 vehicles as against 6,810,537 vehicles sold in the fis
cal year 2003-04. This includes sales of passenger cars, two-wheelers and commer
cial vehicles, including utility vehicles and multi purpose vehicles. Automobile
exports, meanwhile, jumped 31.2% in
60
the year ended March 2005 to 629,887 units with passenger cars and motorcycles c
ontributing to the bulk of exports.14 INFAC is forecasting a 12-15% annual growt
h in the passenger car sales, 6-8% in commercial vehicles and around 10% in two
wheelers. Almost all the major automobile manufacturers such as GM, Ford, Daimle
rChrysler, Honda, Toyota, Hyundai, already have made significant investments in
India. In the next 2-3 years from 2005, the passenger vehicle industry is expect
ed to see investments of more than Rs 30 billion; two wheeler industry is expect
ed to attract investment amounting to Rs 10 billion. Annual growth was 16.0 per
cent in April-December, 2004; the growth rate in 2003-04 was 15.1 percent. The a
utomobile industry grew at a compound annual growth rate (CAGR) of 22 per cent b
etween 1992 and 1997. With investment exceeding Rs. 50,000 crores, the turnover
of the automobile industry exceeded Rs. 59,518 crores in 2002-03. Including turn
over of the auto-component sector, the automotive industry’s turnover, which was a
bove Rs. 84,000 crores in 2002-03, is estimated to have exceeded Rs.1, 00,000 cr
ores in 2003-04.15 Current scenario in the auto sector16 • • • • • Car market leader Marut
i has lined up around Rs 6,000 crores for its new plant and engine facility. Hyu
ndai too has planned a $450m second plant with component makers chipping in anot
her $150m. Tata Motors has lined up Rs 5,000 crores in investments up to ‘07. Hero
Honda and TVS are planning Greenfield facilities (the combined investment of th
e two companies may be around Rs 600 crores) Honda Motorcycle and Scooters India
, which spent Rs 150 crores each in ‘03-04 and ‘04-05, has pledged another Rs 100 cr
ores in ‘05-06.
14 15
www.ibef.org www.steel.nic.in 16 www.google.com
61
• •
Premium carmaker DaimlerChrysler’s spend in the three years is pegged at around Rs
41 crores. In the next 2-3 years, the passenger vehicle industry is expected to
see investments of more than Rs 30 billion; two wheeler industry is expected to
attract investment amounting to Rs 10 billion
•
Between FY04 and FY07, autoville has lined up around Rs 25,000 crores in investm
ents, including money being pumped in by the components sector as OEMs ramp up c
apacity.
The entire auto sector is expected to grow by 15% till 2010. The auto sector com
bined with the auto ancillary sector can be graded as high in terms of opportuni
ty and low in terms of threat. At present Tata Steel is having a total exposure
of 30.63% to the auto sector which has a high growth. Hence it just needs to mai
ntain it. The Auto sector lies in the first quadrant in the growth-exposure matr
ix. AUTO ANCILLARY SECTOR A growth of 30% in automobile sales in ‘04-05 is encoura
ging ancillary majors to invest heavily in capacity expansions. It is spending a
round Rs 1,600 crores in creating new capacities over the next 2-3 years. The la
rger ancillary companies have benefited from strong demand for commercial vehicl
es, passenger cars and two-wheelers, auto components companies have been able to
protect their profitability despite rising metal prices, mainly of steel. The g
rowth in the Indian auto ancillary sector was around 16 percent by the end of th
e 2004-05 fiscal, which is lower than the growth of 22-24% recorded in 2003-04.
India has gradually become a sourcing hub for auto companies worldwide. The grow
th of auto component exports from India has spurred due to availability of skill
ed, low cost labour and the high quality consciousness.17 Among the companies ou
tsourcing from India are General Motors, Ford, Daimler Chrysler, Hyundai, Fiat,
Toyota, Delphi, Navistar, Visteon, Cummins and Caterpillar. A
17
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62
number of Indian companies with global ambitions are gradually moving towards cr
eating a niche in the world market: Bharat Forge Ltd. and Tata Auto Components S
ystem (TACO). Over the past two years, 7 Indian component manufacturers have won
the coveted Deming Prize, one of the highest awards on TQM (Total Quality Manag
ement) in the world. The global auto component industry was expected to touch $1
.9 trillion by 2015, of which around 40% ($700 billion) was potentially expected
to be sourced from low cost countries like India. Exports of auto components ar
e expected to increase by 30-35% which account for 15% of the total output. With
21.5 percent CAGR, the figure is expected to touch $2.6 billion by 2006.18 The
flat product department of Tata Steel is having a total exposure of 52.00% in th
e auto ancillary sector which is quite high. Along with this, the sector is show
ing a low growth rate. In the growth-exposure matrix the auto ancillary sector l
ies in the forth quadrant. So the company needs to reduce its exposure to this s
ector by some extent. This is necessary to ensure that the company would not suf
fer in case of adverse situations. The SWOT analysis of the auto and the auto an
cillary sector is as follows: Strength: • • • • • Diversification in the variety of vehicl
es. Increase in the standard of living of the people leading to rising demand fo
r new vehicles. Reduction in the duty rates in Budget 05-06. Export friendly nor
ms provoking manufacturers to expand their business with better quality. Good ra
te of R&D activities being undertaken.
Opportunity: • Falling steel prices.
18
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63
• • • • •
Foreign player are coming. Innovation is taking place at a high speed due to imp
roving technology, new models of vehicles being introduced. Expansion through se
tting up of factories globally. Cheap and easy availability of car loans to the
housing sector. FTA effect in the auto-ancillary sector, boosting the same.
Threat: • • • Large inventory of vehicles in certain segments. Declining margins with
tremendous pressure due to high input cost and increased competition in the indu
stry. Rising oil prices, forcing the customers to adopt other means.
WHITE GOODS APPLIANCES SECTOR The White Goods Appliance includes the following:
Washing machines, Refrigerators, Air Conditioners, Cookers, Washer Dryers, Dishw
ashers, Electrical Lamps & Tubes, Storage Batteries, Dry Cells, Lead Acid Batter
y, etc. The important players in this sector are: Electrolux, National, Daewoo,
Whirlpool, Godrej, BPL, Videocon, Samsung, LG, Onida and Maharaja. White goods i
ndustry has been growing at an average rate of 10-12% every year for the last fi
ve years. The Industry is focusing smaller goods in the range of 3 to 4 kg capac
ity as compared to larger machines as there are more and more nuclear families r
ather than joint families. The present its capacity is adequate to cater to the
demands of domestic requirements as well as exports. The industry is de-licensed
and also eligible for automatic approval for Foreign Direct Investment. There i
s greater consumer awareness about the quality and safety of these goods, drivin
g the manufacturers to adhere to the quality standards. The state government wil
l encourage producers of refrigerators, washing machines, kitchen appliances, TV
s, furniture and other domestic goods.
64
Refrigerator Industry19 • • The refrigerator industry has become highly competitive
as a number of brands have entered the market and the consumer has a wide choice
. There is a shift in Refrigerator Market in terms of Capacity. Till about 2000-
01, 165 Litres had a larger share and now units of capacity 185-300 Litres are h
aving increasing market share. • Refrigerators form the largest segment of this in
dustry and is estimated at about 3 million appliances, followed by washing machi
nes at about a million appliances and air conditioners, which are about .6 milli
on appliances. • The Refrigerator industry is growing at a rate of 10 to 12 %, Was
hing machines which was growing very fast at about 20 to 25% has slowed down in
the last two years to almost 4 to 5%, and air conditioners are still growing at
20 to 25%. Air Condition Industry Indian air conditioning industry is growing ra
pidly with a growth rate of 20% every year. However, the penetration of this cat
egory is very low. The industry is almost divided 50:50 into room air conditioni
ng and package air conditioning. Example: Whirlpool • • • • •
19
Whirlpool is a mass player with 27% market share in Refrigerators and a 20% mark
et share in washing machines. They are leaders in refrigerators. Due to their gl
obal cost competitiveness, they do not face threats from the Chinese products in
India and also have a high export market. Exports are going to grow at an avera
ge of 70% to 80%. They are the key suppliers in Asia and also countries in Latin
America, Europe and the US. Electrolux is its global competitor
www.google.com
65
The SWOT analysis of the White Goods Industry can be enumerated as follows: Stre
ngth: • • • • • Growth in the service sector. Quality products being demanded by the publi
c forcing the companies to continuously improve their products. Good rate of R&D
activities being undertaken. Increasing per-capita income. Scope for continuous
replacement of its goods in short spans of time.
Opportunity: • • Easy availability and reducing steel prices due to increasing compe
tition. Outsourcing is providing new opportunities for expansion.
Threat: • High rate of precision required, which might lead to high rejection rate
.
On the basis of the SWOT analysis, we can grade the white goods sector as high i
n terms of threat and opportunity. It is showing a very high growth rate of 16.8
2% in the last financial year. From the following graph, we can notice the trend
in growth of the white goods sector.
GROWTH OF WHITE GOODS SECTOR
60 50 40 IN % 30 20 10 0 -10 -20 YEAR 1996 1997 1998 1999 2000 2001 2002 2003 20
04 2005
66
However, the amount of business of Tata Steel with companies in this sector is t
o the extent of only 4.04%. This corresponds to a very small portion of the tota
l outstanding inclusive of all sectors. In the growth-exposure matrix, the white
goods sector lies in the second quadrant. GENERAL ENGINEERING SECTOR The genera
l engineering sector consists of the various industries. A brief on such industr
ies is mentioned as follows: Heavy Industry: Heavy Engineering Industry is one o
f the largest segments of Industrial production. It occupies a whole range of in
dustries such as Heavy Electricity Machinery. Turbines, Generators, Transformers
, Switchgears, Textile Machinery etc. The Index of Industrial Production figures
of 8 of the 16 major industry groups show substantial growth with the rates ran
ging from 6% to 28%. Trends across major sectors show that growth in the two lea
d sectors-capital goods and consumer non-durable goods-have decelerated but stil
l remain at the double-digit levels which have been compensated by the strong re
covery in the intermediate goods segment. Machine Tools Industry: It is the Back
bone of the entire industrial engineering sector. During the last four decades,
the machine tool industry in India has established a sound base and there are ar
ound 125 machine tool manufactures in the organized sector as also around 300 un
its in the small ancillary sector. Mining Equipments: At present there are 32 ma
nufactures in the organized sector both in public and private sector for undergr
ound and surface mining equipment of various types. Out of these 17 units manufa
cture underground mining equipment. The production for 2000-2001 & 2001-2002 was
Rs. 149.52 crores and Rs. 238.86 crores respectively. Heavy Electrical Industry
: Among the Third World countries, India is major exporter of heavy and light en
gineering goods. It also makes construction machinery, equipment for irrigation
projects, diesel engines, tractors, and transport vehicles, cotton textile and s
ugar mill machinery. The heavy electrical industry meets the entire domestic dem
and. BHEL is the largest engineering and manufacturing enterprise in India in th
e energy 67
related/infrastructure sector today. It has been earning profits continually sin
ce 1971-72 and paying dividends since 1976-77. BHEL caters to the core sectors o
f the economy i.e. Power generation & transmission, industry transportation, tel
ecommunication, renewable energy etc. Petroleum Industry: The petroleum industry
in India is undergoing a major change. The industry has been thrown open for pr
ivate sector in all the major areas of exploration, production, refining and mar
keting, resulting in increased demand for the oil field and related equipment. T
he users are ONGC, Oil India Ltd. Sugar Industry: Domestic manufactures of sugar
machinery occupy a predominant position in the global scenario. They are capabl
e of manufacturing sugar plants of latest design for a capacity upto 10,000 TCD.
There are presently 27 units in the organized sector for the manufacture of com
plete sugar plants and components with a current level of production value of Rs
. 136.87 crores against installed capacity of Rs. 200 crores. Textile Industry:
The industry has developed over the last five decades and is one of the oldest i
ndustries catering to the needs of textile sector. The Textile Machinery Industr
y are endeavoring to upgrade the production of sophisticated machines so as to c
ater to the needs of garments and weaving sector. Indian Textile Machinery Manuf
actures are manufacturing textile machinery. After the patent regime, Indian Tex
tile Industry is overheated. The total exposure given by Tata Steel in terms of
outstanding of credit sales in the flat product department to the general engine
ering sector is 10.72%. This figure is very competitive and should be maintained
. The general engineering sector had shown a decent growth over the years. Howev
er, it had a negative growth in 2005 at -5.05%. According to the actual figures,
the sector lies outside the growth – exposure matrix, towards the third quadrant.
Instead of the actual, if the growth value could be replaced by the trend value
, then the sector would lie in the third quadrant. We could easily substitute th
e actual figure by the trend figure because
68
none of the past 10 years data show a negative value. The reason behind the nega
tive growth would not be sufficient to carry it forward to show a negative trend
.
DATA
SECTOR CONSTRUCTION AUTOMOBILE AUTO ANCILLARY WHITE GOODS GEN. ENG. CURRENT GROW
TH 6.89 15.9 0.63 16.82 -5.05 (A), 4.47 (T) % OF TOTAL EXPOSURE 2.61 30.63 52.00
4.04 10.72
MATRIX SHOWING SECTORS WITH RESPECT TO GROWTH & EXPOSURE
HIGH
WGA AUTO
CURRENT GROWT H
CONST.
GE (T) LOW
LOW GE (A)
LEVEL OF EXPOSURE
AUTO ANC. HIGH
69
Outstanding payment and overdue payment: When sales are made on credit, the enti
re amount of sales is outstanding as on the date of sales. The payment for the s
ame needs to be made when the credit limit expires. However, in case, payment is
still not received with the expiry of the credit limit, the amount becomes over
due in the name of the customer. Usually, we find that credit sales are negotiat
ed by keeping in mind charging of overdue interest on the customer. Out of the t
otal outstanding, 6.81% remains as overdue i.e. payment is not received on time.
Sector-wise, the construction sector shows a low overdue percentage whereas the
general engineering sector shows as high as 11.68%. The remaining sectors have
an overdue of 6% approximately. Thus, Tata Steel needs to control its overdue fo
r all sectors.
Overdue vs. Outstanding
Sector Construction Automobile Auto Ancillary White Goods Gen. Engg. Total % ove
rdue (in terms of outstanding) 3.98 6.03 6.47 6.16 11.68 6.81
70
PREDICTIONS FOR 2010
CONSTRUCTION SECTOR The cycle of fluctuations in case of the construction sector
consists of three years approximately. This means that in every three years the
sector experiences boom and recession respectively. Thus, according to expectat
ion the construction sector will grow at 7.5% in 2010. At present, Tata Steel is
giving very low exposure in terms of outstanding where the percent of overdue i
s also as low as 3.98%. Hence, it can be suggested that Tata Steel can increase
its exposure in this sector. We can place this sector in the low risk and high m
arket attractiveness quadrant in the matrix of 2010. AUTO SECTOR The cycle of fl
uctuations in case of the auto sector consists of three years approximately. Thi
s means that in every three years the sector experiences boom and recession resp
ectively. It is expected that the automobile sector would grow at rate of around
12% to 15% in 2010. Around 30% of the sales go to this sector and the overdue p
ercentage is also as low as 6%. Tata Steel can easily maintain the current scena
rio. We can place this sector in the low risk and high market attractiveness qua
drant in the matrix of 2010. AUTO ANCILLARY SECTOR The cycle of fluctuations in
case of the auto ancillary sector consists of two years approximately. This mean
s that in every two years the sector experiences boom and recession respectively
. The expected growth in this sector in 2010 shall be less than that of the auto
sector. The exposure given to it is extremely very high. Thus, it would lie in
the high risk and low market attractive region in the matrix of 2010.
71
WHITE GOODS SECTOR The cycle of fluctuations in case of the white goods sector c
onsists of three years approximately. This means that in every three years the s
ector experiences boom and recession respectively. In this sector, by 2010 the g
rowth rate would be more than 10% approximately. As observed from the data of 20
05, white goods sector is given low exposure from the total outstanding and the
overdue percentage is 6.16%. Thus, the sector would lie in the high risk and hig
h market attractiveness quadrant in the matrix of 2010. GENERAL ENGINEERING The
cycle of fluctuations in case of the general engineering sector consists of two
years approximately. This means that in every two years the sector experiences b
oom and recession respectively. They shall have a low growth rate by 2010. At pr
esent, the exposure given to this sector is only 10% of total outstanding along
with a very high level of overdue i.e. in 11.68% times. Thus, the sector can be
said to lie in the high risk and low market attractiveness quadrant in the matri
x.
2010 SCENARIO
HIGH
AUTO ANCILLARY GENERAL ENGG.
WHITE GOOD APPL.
RISK
CONSTRUCTION AUTO
LOW LOW
MARKET ATTRACTIVENESS
HIGH
72
STEEL INDUSTRY – WORLD
GROWTH OF STEEL CONS. IN THE WORLD
12.000 10.000 8.000 IN % 6.000 4.000 2.000 0.000 -2.000 1996 1997 1998 1999 2000
2001 YEARS 2002 2003 2004
The past data on the consumption of steel in the world is showing an increasing
trend. On the basis of the absolute values, the growth in the consumption is cal
culated i.e. Growth = (Current year – previous year) / previous year *100. The gra
ph showing the growth figures are very fluctuative, rather increasing, in nature
. • In US, the demand is led by the booming housing industry. The auto industry is
also showing signs of recovery as auto sales hit their strongest levels for the
year in July even as US posted a 2.4% GDP growth. • • In India, CIS and other Asian
countries the demand is led by investment activities in infrastructure. China i
s consuming steel like never before for its infrastructure with investments such
as Three Gorges project on Yangtze as well as part of its build up to the Beiji
ng Olympics in 2008 and the Shanghai Expo in 2010. • • The white goods resurgence in
Europe leads to a boom in the steel sector. Iraq reconstruction work is expecte
d to fuel further demand for steel over the next three years.
73
STEEL INDUSTRY – CHINA
GROWTH OF STEEL IN CHINA
30.000 25.000 20.000 IN % 15.000 10.000 5.000 0.000 1996 1997 1998 1999 2000 YEA
RS 2001 2002 2003 2004
The past data on the consumption of steel in China is showing an increasing tren
d. On the basis of the absolute values, the growth in the consumption is calcula
ted i.e. Growth = (Current year – previous year) / previous year *100. The graph s
howing the growth figures are very fluctuative, rather increasing, in nature. Th
ere are a few dips in the growth rates. • • • China’s red hot steel sector is expected t
o produce a record 350 mt of steel this year According to the China Iron and Ste
el Association (CISA), China steel output s amounted to 220 mt in 2003 and, thi
s year; it is projected to climb to 350 mt. Chinese steel units produced 82.53 m
t of rolled steel in the first quarter this year, up 22.39 per cent year on year
and consumed 83.31 mt during the same period, a net rise of 11.01 per cent • • Acco
rding to the Xinhua News Agency, the CISA expects the rolled steel price to drop
in the light of the present supply-demand situation. According to CISA, in the
first three months of 2005, China turned out 77.79 mt of crude steel, a jump of
25.2 per cent year on year, and 72.57 mt of pig iron, an increase of 27.32 per c
ent year on year. 74
• •
China rolled steel output ranked the first in the world over the past nine year
s, s making up 14 per cent of the world total steel output. s The demand for ro
lled steel has risen by an annual average of 20 per cent in the past five years
since 2000 as more and more people in China buy cars and refrigerators and the c
ountry builds in preparation for the Beijing 2008 Olympics Games.
STEEL INDUSTRY – INDIA
In the Union Budget 2005-06, customs duty on alloy steel has been further brough
t down to 10%. Currently the customs duty on prime non-alloy steel and prime all
oy steel is 5% and 10% respectively. The excise duty on all iron and steel items
, which had been falling, has increased from 12% to 16% in the Union Budget 2005
-06. The rationalization of the excise duty to a single central value added tax
will have no impact on the steel industry. The excise duty on scrap will go up f
rom the current 8% to 16%. The customs duty for steel products will continue at
the present rates. The move to tax the steel companies at factory prices rather
than at the stockyards will have a positive impact on companies like SAIL and TI
SCO, which have very long lead distances. The interim ruling of the World Trade
Organization (WTO) declaring the US government’s section 201 duty on steel imports
as violative of global trade rules is likely to have an adverse impact on India
as it would increase competitiveness of rival countries. Experts point out that
the safeguard duty, which was imposed on countries such as Japan, China, Brazil
, New Zealand, South Korea and the European Union a year ago, had actually helpe
d India as it was excluded from the list. If the figure of steel demand of 840 m
illion tonne for 2005 if is to be accepted, the world should be preparing for ad
ditional capacity creation in the industry. Even the current idle
75
capacities pressed into operation will not fully deliver the goods as the same w
ill fall short of the target. The crux of the problem today lies in demand reces
sion, but much of this demand recession is a demand miscalculation. Most of the
steel companies failed to distinguish between a steady state demand and a pent-u
p demand. Prices could go down genuinely more with an increase in the asset inte
nsity of the industry. Prices remain depressed forcing the producers to clear ma
rkets without covering their variable costs. Steel companies are pressed badly a
t their margins. (Refer Exhibit 1 and 2). Price per unit is so close to the aver
age variable costs that steel producers can hardly aim at covering their fixed c
osts. This explains the world wide trend by which the steel companies are shutti
ng down their lines, disposing off assets and hiving off related but non-core bu
siness. The industry did pay a lot of attention to the problem of the industry f
acing erosion in shareholders confidence. The Ministry’s vision statement 2020 ha
s placed a high priority to treble the steel demand in the coming decades. The p
roblem of demand stagnation can be tackled by penetrating vast rural markets whe
re consumption of steel at present is at the lowest. Industry Scenario The indus
trial sector registered an impressive growth of 8.4 per cent in the first three
quarters of 2004-05, the highest after 1995-96, and the services sector recorded
an 8.9 per cent growth. The improvement is particularly pronounced in manufactu
ring, capital goods and consumer durables. Six core industries, i.e. electricity
, coal, finished steel,
76
cement, crude oil and petroleum products registered a lower average growth of 5.
4 per cent.20 STEEL SECTOR EXPANSION IN INDIA21 • • Steel magnate LN Mittal is expec
ted to set up a 5 million tonnes steel plant in the first phase which will make
the domestic market more competitive. Mittal Steel will invest Rs 250 billion to
set up the plant with a total production capacity of 10 million tonnes of steel
per year. The plant is expected to generate 150,000 jobs in the state. • Several
leading domestic firms have also put forward proposals that are being reviewed b
y the government. Jindal Steel plans to invest Rs 110 billion, while Essar Steel
will invest Rs 50 billion to set up steel plants. • Ispat has also proposed to in
crease its plant capacity at Dolvi, near Mumbai from 3-5 MT over the next couple
of years. It has also recently proposed to set up a 5 MT plant in Orissa, provi
ded it gets assurance from the state for captive mining leases. • Ruias plans Rs 2
k-cr one mt mini steel plant as part of its backward integration plan reported a
leading business daily.
20 21
www.ibef.org The Iron and Steel Review, February 2005 issue
77
INDIA’S FINISHED STEEL CONSUMPTION
GROWTH OF STEEL IN INDIA
9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 1996 1997 1998 1999 2000 2001
2002 2003 2004 YEARS IN %
The past data on the consumption of steel in India shows an increasing trend. On
the basis of the absolute values, the growth in the consumption is calculated i
.e. Growth = (Current year – previous year) / previous year *100. The graph showin
g the growth figures is very fluctuative in nature. The previous 10 years growth
figures are averaged out to give the expected growth in the coming 5 years till
2010. The average growth was calculated as 5.68%. Thus, we get the projections
graph from this.
PROJECTIONS TILL 2010 (@5.68)
50.0 CONS.(in mmt) 40.0 30.0 20.0 10.0 0.0 2004 2005 2006 2007 YEAR 2008 2009 20
10 32.3 34.1 36.1 38.1 40.3 42.6 45.0
78
Reasons for the projection in the growth rate Indian scenario: • • • • • The early recessi
on of 1999 has come to an end and there is a boom in the steel sector. Increased
competition has lead to declining prices in the market, thereby increasing the
demand. Continuous reduction in import duty on iron and steel Huge investments b
eing made in the construction sector. Overall economic growth of the country.
Boom in the Global Economy: • • • • • Olympics infrastructure with investments in China Ho
using Sector in U.S.A White goods resurgence in Europe Infrastructure activities
in CIS and other Asian Countries Reconstruction work in Iraq
WORLD NET OF CHINA The world, excluding China, shows a good growth trend and a h
igh actual growth rate.
GROWTH IN STEEL IN THE WORLD NET OF CHINA
12 10 8 6 4 2 0 -2 -4
IN %
1995
1996
1997
1998
1999 YEARS
2000
2001
2002
2003
79
BCG MATRIX
The Boston Consulting Group (BCG), a leading management consulting firm, develop
ed and popularized a growth- share matrix. The market growth rate on the vertica
l axis indicates the annual growth rate of the market in which the business oper
ates. It usually ranges from 0 percent to 20 percent. A market growth rate above
10% is considered high. Relative market share, which is measured on the horizon
tal axis, refers to the various companies’ market share relative to that of its la
rgest competitor in the segment. It serves as a measure of the company’s strength
in that market segment. A relative market share of 0.1 means that the company’s sa
les volume is only 10% of the leader’s. Relative market share is drawn in log scal
e, so that equal distances represent the same percentage increase. The growth-sh
are matrix is divided into four cells, each indicating a different type of busin
ess. They are Question Marks, Stars, Cash cows and Dogs. These have been explain
ed with the countries itself in the various quadrants. BCG MATRIX FOR THE WORLD
ECONOMY The BCG Matrix for the year 2004 is drawn on relative market share – marke
t growth rate axis, where we take the US economy as a benchmark economy. All oth
er countries are represented in terms of US market share. First of all, we are g
iven the consumption of steel in the global economy including India in the follo
wing table. On the basis of the consumption data, we calculate the growth rate (
compounded annual growth rate i.e. CAGR) for each of the country. The formula fo
r calculation is as follows: CAGR = (((Last year’s cons. / first year’s cons.)^ (1 /
No. of years)) – 1) * 100 Relative market share is calculated on the basis of the
absolute market share. Absolute market share for a country is calculated as a p
ercentage of its consumption in 2004 with respect to the total global consumptio
n. Since we have taken US economy as the benchmark economy, its relative market
share is taken as 1x. For all other economies we
80
calculate the relative market share by dividing its actual market share with tha
t of the US market share. Thus, the relative market share of any country can eit
her be less than or greater than that of US economy. According to the calculatio
ns, China and European Union have a market share that is greater than that of US
, whereas, CIS, S. Korea, Japan and India have a market share that is less than
that of the US economy. WORLD STEEL CONSUMPTION22
YEAR 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 CAGR CHINA 87.4 100.7 103
.3 110.7 122.6 124.6 153.4 185.6 232.4 265 11.7 EU(15) 129.2 113 128.5 139.6 137
.3 143.8 139.6 138.1 137.5 145.7 1.2 CIS 26.5 25.2 27.7 24.5 28.1 35.6 38.4 36.7
38.5 52 7.0 US 100 107 113.4 119.8 116.4 120 106.2 107.4 100.5 115.9 1.5 S.KORE
A 35.2 37.4 37.9 24.7 33.8 38.3 38.1 43.7 45.8 47.2 3.0 JAPAN 77.7 75.8 79.9 70.
3 68.9 76.1 73.2 71.7 73.4 76.9 -0.1 INDIA 22.2 22.8 22.9 23.2 25.1 26.3 27.1 28
.9 30.3 32.3 3.8 OTHERS 166.9 167.1 188.3 179.3 175.8 193.6 194.9 208.7 214.4 23
2.9 3.4 TOTAL 645.1 648.9 701.8 692.1 707.9 758.4 770.8 820.9 872.7 967.9 4.1
COUNTRY MKT SH. FOR 2004 REL. MKT. SH.
CHINA 27.4 2.3
EU(15) 15.1 1.3
CIS 5.4 0.4
US 12.0 1.0
S.KOREA 4.9 0.4
JAPAN 7.9 0.7
INDIA 3.3 0.3
OTHERS 24.1 2.0
On the basis of the above data on growth and relative market share, we draw the
BCG Matrix. Each of the countries can be categorized as stars, cash cow, dogs or
??????. Since, we had taken US as having a market share of 1x, we get the follo
wing in terms of the above: China is a star, EU (15) is a cash cow and Japan, In
dia, CIS and S.Korea are dogs. There is no ????? country in the present scenario
.
22
Market Research Reports at Tata Steel
81
BCG MATRIX
20%
STARS
15%
?????
Market Grow th Rate
CHINA 10%
CASH COW
5% OTHERS U.S JAPAN 5X 1X
DOG
CIS INDIA
S.KORE A
EU(15) 0% 10 X
0.5 X
0.1 X
Relative Market Share
From the above matrix, we can draw the following conclusions for the various cou
ntries: CHINA: China, being a star economy, can be said to be leaders in busines
s and they should also generate large amounts of cash. However, they should ensu
re that their growth rate doesn’t dip down in any chance otherwise they would land
up being a cash cow, by keeping up the market share. EU (15): EU (15) is a cash
cow economy which can be said to be having high profits and cash generation. Th
ey can have low levels of investments because of the low growth rate. JAPAN, IND
IA, CIS and S. KOREA: These countries need to be careful against each other, bei
ng a dog in nature. They are likely to experience various turn around moves from
the other dogs, hence they should be careful about it. Since they have low grow
th rate as well as a very low market share, there is a chance of them getting li
quidated, so they need to ensure constant cash flows for existence in the global
economy.
82
CONCLUSION
Finally, we can say that the credit management at Tata Steel has various compone
nts to be managed. Most of it is under control and some of it needs special care
for maintaining the amount of Working Capital. From the following graph it is c
lear that the Working Capital scenario has improved a lot. The amount of credit
given is also under control.
Working Capital Management
70 60 50 Days of Sale 40 30 20 10 0 FY 01 FY 02 Years FY 03 FY 04 58 44 55 57 47
38 41 38 25 16 37 53 DEBTORS INVENTORY NET WORKING CAPITAL
83
EQUITY ANALYSIS - INTRODUCTION
There are two general schools of stock analysis: fundamental and technical. FUND
AMENTAL ANALYSIS Fundamental stock analysis requires, among other things, a clos
e examination of the financial statements for the company to determine its curre
nt financial strength, future growth and profitability prospects, and current ma
nagement skills, in order to estimate whether the stock price is undervalued or
overvalued. A good deal of reliance is placed s on annual and quarterly earning
s reports, the economic, political and competitive environment facing the compan
y, as well as any current news items or rumors relating to the company operatio
ns. Simply put, fundamental analysis concerns itself with the s "basics" of the
business in assessing the worth of a stock. Numerous ratios, derived from balanc
e sheet and income statement data, are used in fundamental analysis including su
ch widely used ratios as, Working Capital Ratio, Debtequity Ratio, Return on Equ
ity Ratio, Earnings per Share, etc. Fundamental analysis may be the preferred me
thod to use for mid to longer term investors. However, it is not suitable for us
e by day traders because of the amount of research required, and the fact that t
rades are entered into and exited within a very short time frame. The massive am
ount of numbers in a company financial statement can be bewildering s and intim
idating to many investors. On the other hand, if you know how to read them, the
financial statements are a gold mine of information. Financial statement analysi
s is the biggest part of fundamental analysis. Also known as quantitative analys
is, it involves looking at historical performance data to estimate the future pe
rformance. Followers of quantitative analysis want as much data as they can find
on revenue, expenses, assets, liabilities, and all the other financial aspects
of a company. Fundamental analysts look at this information for insight into the
performance of in the future. They don ignore the t company stock price; they
just avoid focusing exclusively on it. s
84
Some of the indicators commonly used to assess company fundamentals include: cas
h flow; return on assets; conservative gearing; history of profit retention for
funding future growth; and soundness of capital management for the maximizing of
shareholder earnings and returns.
Performing fundamental analysis can be a lot of hard work. But that is, arguably
, the source of its appeal. By taking the trouble to dig into a company financi
al statements s and assess its future prospects, investors can learn enough to k
now when the stock price is wrong. Those investors able to spot the market mist
akes can make themselves s money--a lot of it. At the same time, buying companie
s based on intrinsic, long-term value protects investors from the dangers of day
-to-day market flux. However, the fact that fundamental analysis shows that a st
ock is under-valued does not guarantee that it will trade at its intrinsic value
any time soon. Things are not so simple. In reality, real share price behavior
relentlessly calls into question almost every stock holding, and even the most i
ndependent-minded investor can start doubting the merits of fundamental analysis
. There is no magic formula for figuring out intrinsic value. FUNDAMENTAL ANAYSI
S OF TATA STEEL – Valuation of Intrinsic Value of the share of the company as on F
ebruary, 2005. For finding the intrinsic value of the equity share of Tata Steel
, we incorporate future as well in terms of projections made for the next 5 year
s and 6th year onwards. We undertake the following calculations, assumptions and
conclusions on the basis of the previous 5 years financial figures: • • Estimated g
rowth of the Indian Economy for the next 20 years is 8% and thereafter it shall
stabilize at 5%. The growth in the operating income of the previous 5 years is c
alculated for each of the previous years. These figures were found to be very fl
uctuative in nature, ranging from -1.89% to 30%. Thus, in order to project the i
ncome figures for the coming years we assume that the company will grow at a 85
conservative estimate of 10% per annum for the next 5 years followed by 7% in th
e long-run. • Next we calculate the ratio of the various components of the cost of
sales with respect to the operating incomes for the previous 5 years in order t
o project the cost component for the coming years. We find that Tata Steel has b
een successful in reducing the cost component significantly in the last few year
s. But these gains would stabilize at some point of time. The company is already
the world’s lowest cost steel producer. So we propose to assume that the cost str
ucture remains static at the 2004 value. The ratio of cost of sales to the opera
ting income came out to be 0.6623. (Refer Exhibit 4(i)). • The ratio of cash opera
ting profits before taxes to the operating income comes out to be 0.3377 (1-0.66
23). Thus, on the basis of the projected operating income for the coming years w
e calculate the projected cash operating profit before taxes by using the formul
a COPBT for a year = Operating profit for the year * ratio of COPBT to the opera
ting profits. • Tata Steels intends to spend 9100 crores for next 6 years to incre
ase its capacity from 4.7 mT to 9.2 mT. This means company will spend on an aver
age 1200 crores per year for next 6 years till 2010. So we assume that it uses R
s. 1200 towards asset creation. Also during early 1990s Steels sector went for c
apacity expansion which leads to glut situation during late 90s. This along with
recession in world & Indian economy ensured poor growth of industry till 2001.
It is only in 2002 that the industry turned around. Due to growing demand from C
hina & increased infrastructure spending in India, Industry has good future grow
th. Thus projection using past data will not be accurate. • We assume that for eac
h of the coming years the Net Block would be the sum of the previous years net b
lock, Reinvestments for the year or the net purchases in the assets and the cons
tant (assumed to be Rs. 1200) additional investments for the year. • The rate of d
epreciation, for each of the previous 5 years, is determined on the basis of the
following formula:
86
Rate of dep. for a year = dep. Exp. For the year / (Net Block of the previous yr
. + (Net purchases or sales of assets for the year / 2)). Thus, for the future w
e assume that the rate of depreciation would be the average of these separate ra
tes for the 5 years. (Refer Exhibit 4(v)). • The projected depreciation for the ne
xt years is calculated using the formula: Depreciation = (Previous years Net Blo
ck + reinvestments for the year) * average rate of depreciation. (Refer Exhibit
4(vi)). • For finding the expected tax rate for the future, we first find the aver
age rate of tax for the last 5 years. Here we find the Effective Tax Rate and th
e Cash Tax Rate where Effective tax rate (in %) = (Provision for taxes / Adjuste
d PBT (deducting write offs)) *100 Cash tax rate (in %) = (Taxes paid / Adjusted
PBT (deducting write offs)) * 100 It is then averaged out for the past 5 years.
Therefore, Avg. CTR (in %) = 19.86 However, the corporate tax rate is expected
to reduce from the current 36.75% to 30% in the future. Thus, we assume that the
tax rate used for the projections for future would be at 30% level. (Refer Exhi
bit 4(ii) and 4(iii)). • Projection for cash flow from investment activities is th
e sum of projections of the following: Investments in Fixed Assets, Investments
in securities, Replacements and interest & dividend earnings. These projections
are done with the help previous 5 year’s average figure as well as other assumptio
ns made. These projections indicate cash outflows because of investments activit
ies. (Refer Exhibit 4(iv)). • The ratio of Working Capital to Operating Income is
calculated for the last 5 years. This was 40% in 1999 and it fell down to 11.5%
in 2004. Thus, we assume that this ratio would continue for the future also. The
projected working capital can be calculated by using the formula: Projected W.C
. = Projected operating income for the years * 11.5% (Refer Exhibit 4(vii)).
87
After doing this we determine the changes in the Working capital over the next 5
years by simply calculating the difference in the amount of Working capital. • • Th
e weighted average cost of capital (WACC) for the company can be calculated to b
e 10.71%. From all the above calculations we can determine the projected cash op
erating profits after taxes and the projected free cash flow of the firm. Cash o
perating profits after taxes = (COPBT – Dep.) * (1-T) (Refer Exhibit 4(viii)). Pro
jected FCFF = Projected COPAT + Changes in W.C. + Projected CFIA While projectin
g the future FCFF for the 6th year onwards we use summation with the help of the
infinite series, the actual formula being Projected FCFF for 6th year onwards =
Projected FCFF of the 6th year (WACC – Long-run growth rate) Each of these is dis
counted to the present value as on 2005 with the help of WACC. (Refer Exhibit 4(
ix)). Hence, Present value of the firm as on February, 2005 = sum of all project
ed and discounted FCFF = 26850.37 Thus, the Fair Value of the firm / share (Rs.)
= (Present Value of the firm – (Secured Loans + Unsecured Loans)) / Equity share
capital. Intrinsic / Fair Value of the share of TISCO (Rs.) = 424.18 Book value
of a share = (Equity share capital + Reserves & Surplus – Miscellaneous Expenses n
ot written off) / Equity share capital Book Value Of the share of Tata Steel = 1
18.55 (Refer Exhibit 4(x)). Market Price of the share of Tata Steel as on 24th J
une, 2005 at 3.30 p.m. = 363.40 Thus, we can now say that the share of Tata Stee
l is selling below premium i.e. it is under priced. This shall give indications
as to whether an investor should
88
respond to purchase or sale of the share in the stock market. This entire analys
is of the intrinsic value of the share is known as the fundamental analysis of a
company. However, the information received from the fundamental analysis is ver
y conservative and narrow in scope of analysis. It does not incorporate in the m
arket factors that largely influence the price of a company’s share. Thus, we can
say that fundamental analysis is always incomplete. In order to fill this gap of
analysis, we carry out technical analysis of the share of the company. This typ
e of analysis is done on a daily basis and takes into consideration the market s
entiments towards a particular company’s share.
Technical Analysis Technical analysis does not concern itself with a company ba
sics or fundamentals. s Rather, technical analysis involves the study of a stock
trading patterns through the use s of charts, trend lines, support and resista
nce levels, and many other mathematical analysis tools, in order to predict futu
re movements in a stock price, and to help identify trading s opportunities. Th
e basic foundations or premises of technical analysis are that a stock s curren
t price discounts all information available in the market, that price movements
are not random, and that patterns in price movements, in very many cases, tend t
o repeat themselves or trend in some direction. Bob Prechter, a famous practitio
ner of technical analysis once commented that, "... the main problem with fundam
ental analysis is that its indicators are removed from the market itself. The an
alyst assumes causality between external events and market movements, a concept
which is almost certainly false. But, just as important, and less recognized, is
that fundamental analysis almost always requires a forecast of the fundamental
data itself before conclusions about the market are drawn. The analyst is then f
orced to take a second step in coming to a conclusion about how those forecasted
events will affect the markets! Technicians only have one step to take, which g
ives them an edge right off the bat. Their main advantage is that they don have
to forecast their t indicators." 89
A very large number of technical indicators have been developed over the years,
including the widely used overbought/oversold indicators such as the Relative St
rength Index, and the trend following indicators such as Moving Averages. While
technical analysis can be a great help in trading the market, no technical indic
ator is infallible. Further, technical analysis is only as good as its interpret
er. Finally, a significant of time must be spent in learning the principles of t
echnical analysis, and in how to properly interpret the various charts and other
technical indicators.
FINANCIAL ANALYSIS
Profitability
(Refer Exhibit-5(i), (ii), (iii) and 6(all))
The fortune of the Steel industry changed and so did TISCO. After experiencing t
he lowest profit in 2002 which was the worst year for steel industry, when the g
lobal demand was at an all time low the fortunes changed. TISCO is also one of t
he most cost efficient steel producers in the world. For 2002-2003, TISCO reduce
d specific energy consumption by 3.90 percent, raw material consumption by 3.50
percent and increased utilization of waste from 72.60 percent to 79 percent. The
current years profit is more than Rs 1700 crores which will eventually get bett
er with the reduction in the Corporate Tax Rate. The growth rate in profits has
been around 30%.The acquisition of Nat steel has added capacity to the company a
nd Tata Steel is all set to be among the top producer of steel in the world. It
is also entering foreign markets like South Africa, South Korea and Japan. With
the global demand in steel at an all time high and manifold increase in infrastr
ucture, manufacturing activity etc the profits are going to be higher. Turnover
The turnover of the company has consistently increased owing to the increase in
global steel demand from 2003 onwards. The steel industry has recovered after a
series of low 90
growth for years. The turnover was around Rs 12000 crores in 2003-2004.It experi
enced a growth of 22% from the previous year. Return on Equity The Return on Equ
ity has considerably increased owing to the increase in Profits after Tax. The R
OE is the indicator of as to how much return the company has been able to earn p
er rupee invested by the shareholders of the company. The current rate of ROE is
46% which is high because the margins and sales have considerably improved. The
company has been specifically able to control its costs and has emerged as one
of the lowest cost steel producer in the world.
Debt Equity Ratio The Debt Equity Ratio is interesting to watch in case of TISCO
. Steel Industry by nature is capital intensive. Thus it requires higher debts.
The Debt component has come down over the last three years. Currently it is at .
77 coming down from 1.92 in 2002.The year 2002 was tough for the industry as a w
hole. The demand was going down and thus needed debt. In the year 2002 the compa
ny had paid an interest amount to Rs 430 crores and had debt amounting to Rs 430
0 crores. In 2003-04 the debt component came down to Rs 3300 crores and the comp
any incurred interest expenses amounting to Rs 230 crores. The global demand for
steel is at an all time high now and the industry is getting financially strong
er. The lower interest burden has helped in achieving higher profits. TISCO has
reduced its total debts by Rs 475 crores as on October 31, 2003, resulting in lo
wer interest cost. This is in line with the company decision to prepay its high
-cost s debts. It is also in talks with lenders to settle more debt. The total d
ebt of the company as on March 31, 2003, stood at Rs 4,225.61 crores as against
Rs 4,705.48 crores in the previous fiscal. The interest burden for the first six
months of 2003-2004 stood at Rs 133.48 crores as against Rs 166.61 crores in th
e same period of the previous fiscal, representing a 20 per cent reduction. The
company is talking to a few lenders and is willing to pay 50 per cent of the pre
mium on debt. The company clocked a 25.38 per cent 91
fall in interest from Rs 76.41 crores to Rs 57.02 crores for the second quarter
of 20032004. Interest as a percentage of sales dropped from 3.88 per cent to 2.1
8 per cent for the same period.
Asset Turnover Ratio The asset turnover ratio has increased from 78% to 89%.This
reflects upon the efficiency of the company. The Net Profit Margins are at 16%
experiencing a huge rise from 2.78%. The Margins are set to increase for the nex
t year owing to greater profits and cost efficiency. The company is in a good po
sition since it has been able to sustain its costs and the company is fundamenta
lly strong. PE Ratio The PE Ratio tells us how much the investors are willing to
pay in the market for every rupee earned by the company. The ratio has gone up
from 4.88 in 2003 to 7.25 in 2004.The EPS has gone up from Rs5.51 in 2002 to Rs
47 in 2004.The ratio was very high in 2002 owing to a very low EPS but the inves
tors were actually ready to pay a higher price. The industry is cyclical in natu
re and the investors forecasted a higher growth in coming years. Profits, owing
to greater profits and optimistic forecasts the PE is higher than last year. Net
Working Capital The Net Working Capital for a company is the difference between
the current assets and the current liabilities. Current Assets include receivab
les, bank and cash balance, inventory and other miscellaneous expenses. Current
Liabilities includes creditors and outstanding. The tremendous fall in the net w
orking capital is either due to the fall in the current assets or a rise in the
current liabilities. Here we can say that the debtors have been under control to
large extent and for the year 2004 it was extremely low. Having a
92
low net working capital is good for a company. Along with this there was a rise
in the current liabilities for the year 2004. GROSS WORKING CAPITAL Over the pre
vious year, the working capital of the different departments has increased in te
rms of days of debtors and days of inventory. This has been observed for Long Pr
oducts, Flat Products and Ferro Alloys & Minerals Division. (Refer Exhibit 7(iv)
, (v) and (vi)). Inventory The level of inventory in the different departments h
as increased to some extent. (Refer Exhibit 7(i) and (ii)). Debtors The debtors
are under control for almost all departments. As per 2004-05 data the actual deb
tors were less as compared to the target debtors, which gives a positive signal
that less money is blocked in the debtors. It reduces the liquidity of the compa
ny. (Refer Exhibit 7(iii)).
93
INFORMATION TECHONOLGY SERVICES AT TATA STEEL
ROLE OF IT
Enable and improve core business processes
Act as a competitive differentiator
Promote ‘Open and Knowledgebased’ culture
Information Technology Service has different computing technologies, networking
and infrastructure facilities: • • • Computers: Large Computers, Mid-Range Computers a
nd Desktop Computers. Networking: Campus Local Area Network (LAN), Countrywide W
ide Area Network (WAN). Infrastructure: Development and Services Support Facilit
ies.
MAJOR PROJECTS UNDERTAKEN 1) SAP for Finance and Accounts: SAP implementation wa
s extended through a new project called ‘Rupantar’ to Steel Works, Administration, T
own, Medical, Rings & Agrico and Secondary Products with functions of Financial
Accounts, Costing, and Materials Management along with Production Recording and
Plant Maintenance. The key business drivers for this project were better revenue
management through better product Mix decisions, faster closing of accounts and
integrated inventory management for purchased items. The SAP project was implem
ented on 1st December 2001 in a record 94
time of 10 months from the time it was conceived. Due to which Tata Steel was ad
judged the Best SAP R/3 implementation in India by SAP. 2) Information System fo
r CRM 3) Data warehouse and data mining for Hot Strip Mill 4) Office automation
5) E-application such as e-Procurement and e-Tender 6) Web sites for different d
ivisions and several intranet applications 7) Knowledge management site for shar
ing and dissemination of knowledge. SAP SAP, an ERP system, was implemented at T
ata Steel for better customer order management and fulfillment. SAP was introduc
ed in the areas of sales and distribution, material management, Financial-Accoun
t Receivables and control. Some of the benefits from SAP are:
•
It will lead to complete transparency in customer ledgers, orders, stock ledgers
, dispatches and credit lines. It is Internet enabled and will allow customer to
use SAP to get information on their orders. Marketing and sales decisions will
be made on the basis of data available online. Lead time required to process ord
ers, settle complaints, develop new products and reconcile accounts, in substant
ially lesser time.
•
• •
Online availability of data will further improve Inventory Management in the sto
ckyards, leading to better customer service. 95
TATA STEEL HUMAN RESOURCE POLICY
Tata Steel recognizes that its people are the primary source of its competitiven
ess. It is committed to equal employment opportunities for attracting the best a
vailable talent and ensuring a cosmopolitan workforce. It will pursue management
practices designed to enrich the quality of life of its employees, develop thei
r potential and maximize their productivity. It will aim at ensuring transparenc
y, fairness and equity in all its dealings with its employees. Tata Steel will s
trive continuously to foster a climate of openness, mutual trust and team work.
HR goal: “Creating a World Class development environment” The Business plan of Human
Resource Management is 1. To improve employee satisfaction and commitment 2. Cr
eate a world-class development environment and 3. Control employee costs.
The employees of Tata Steel are categorized under two broad types: Officers and
Unionized Employees
96
PROCESS OF EMPLOYEE MOTIVATION
Identify Motivational Factors through: Communication Informal Meeting Focused HR
group discussion Employee Satisfaction Index (ESI) feedbacks
Reinforce these in work environment
Employee Motivating Factors Recognition by peers/seniors Rewards Performance Man
agement System
Measure motivation through ESI
Employee Participation: The organization seeks to bring about an improvement in
the various processes through cooperation and innovation. For this purpose, the
organization has a system of forming cross-functional task forces. Cross unit co
mmunication is achieved through Management Council, knowledge communities, Quali
ty Circles presentations/competitions, etc. The effectiveness of communication m
echanism is measured through continuous and regular feedback, satisfaction surve
ys, Employee Opinion Survey, intranet usage, etc. Tata Steel also encourages job
and career related development and learning for its employees through the Perso
nal Development Plan (PDP) for the officers. It also encourages mid-year and yea
r-end talent reviews through the Performance Management System known as EDGE (En
suring Development and Growth of Employees). This helps in identifying the stren
gths, areas for improvement and development needs of officers. A new initiative
called ‘TEJASWANI’ was started to impart the female workers with higher operational
skills to enable them to take higher level jobs. 97
Succession Planning at Tata Steel is done for all critical positions in the orga
nization. Various criteria such as qualification, experience and competency are
listed down in the Job Analysis Sheet and the individuals matching with the requ
irements are then identified. The prospective candidates are scanned by the peer
group and by the seniors. Recruitment: The identification of characteristics an
d skills needed for any job is done through the preparation of the Job Analysis
Sheet. It specifies the required qualifications, work experience for the job, ke
y functional responsibilities, key results areas, competencies necessary for the
job. Recruitment at the entry level is done through campus selections at premie
r engineering and management institutions as well from the internet websites. It
encourages having professionals from diverse backgrounds. Training is also give
n to the employees’ dependants, known as the Basic Plant Training Schemes, which i
s used for the recruitment of workmen. While recruiting Tata Steel does not disc
riminate on the basis of gender, religion, or social status. Retention: Tata Ste
el makes all provisions to fill up the expectation gap. At the point of the Pre-
placement talks itself, the company communicates the ‘correct’ picture of the compan
y, working/living conditions and the compensation package so that the employees
about the company and it shall reduce the attrition rate because of these reason
s. Induction process: The employees are made aware of the organizational culture
and business direction through the formal induction process. The new appointees
are mentored by a senior official so as to guide them in case of difficulties.
Training: Tata Steel provides training programme to its employees and the office
rs to meet up with the advancement in technology and the nature of diversity in
the organization. (Refer Exhibit 8).
98
Employee Safety: Tata Steel has identified 2063 problem areas which are prone to
accidents and risks. A special Task Force has been formed in July 2002 which fo
cuses on safety of the people. Occupational Health Department takes care of the
health check-ups of the employees. It also initiates Health Awareness Training P
rogrammes regularly along with an on-line feedback system. They are provided wit
h healthy and hygienic working environment. Tata Steel is the first steel plant
in India and one amongst the very few plants to be ISO 14001 certified. This enc
ourages regular internal and external audits to be carried out on environment, h
ealth and safety of employees. Other opportunities: The employees at Tata Steel
are provided with housing schemes, club membership, schooling opportunities, etc
.
KEY SHORT TERM AND LONG TERM HR PLAN HR PLAN ELEMENT Control employee cost (Stra
tegy objective: Lowest cost producer) Create leaders who will build our future (
Vision element) ACTION PLAN Right sizing Variable pay system Divest non-core bus
iness Workers & supervisors training Preparing workers to occupy supervisory pos
ition Officers development through rotation & succession planning Reward high pe
rformance through variable pay To ensure ‘Parivesh’ – Annual plan to improve Health sa
fety and environment.
Improve employee satisfaction & commitment (Vision element)
99
FUTURE OUTLOOK
The Indian steel industry has been passing through a rough phase in the recent t
imes. Excess capacities, huge workforces and lack of better technologies plague
the sector. Even, globally the situation is no different either. The current per
formance of steel companies across the world shows that they have much in common
. They have all been hit hard by the demand crunch, with the vast majority sinki
ng into a sea of red. A global cyclical downswing is very clear. The worry, howe
ver, is that the global steel industry is heading for larger trouble than what h
as so far been presumed. According to estimates by International Iron & Steel In
stitute (IISI), crude steel production in 1998 was down by only 2.3 per cent com
pared to 1997. And 1997 was a record production year of 799 million tonnes.23 Th
e fluctuating growth rates shown by developed countries after the 1973 oil crise
s were offset by sustained demand for steel in the developing world. The Asian f
inancial crises changed that scenario completely. Traders panicked and liquidate
d the excess inventory they had booked in anticipation of higher prices. This ca
used a sharper price drop than warranted. The panic also resulted in a dispropor
tionate fall in steel raw material prices-such as scrap, pig iron, DRI, coal and
coke. The global recession also brought down ocean rates, which increased the a
bility of some manufacturers to reduce prices further. Analysts estimate that fo
r most steel products the price drop has been as much as 50 per cent. This has s
hattered the steel industry worldwide. Restructuring seems to be the only way-ou
t. But most steel companies in developing countries had undertaken massive priva
tization programme between 1992 and 1996. That doesn seem to have helped them mu
ch. New private players who had entered the steel t business in a big way find t
heir capital costs far too exorbitant, bringing down their chances of survival s
harply. The only conclusion that emerges is that developed countries have benefi
ted at the expense of developing countries.
23
Steel Ministry of India
100
The Road ahead……….. 1. Tata Steel expects to grow from a Gross Turnover of around Rs.
10000 Crores in 2003 to Rs. 25000 Crores by 2007-08.24 2. The profit target of t
he company is to increase PAT from around Rs. 1000 Crores in 2003 to Rs. 3000 Cr
ores by 2007-08.25 3. The company identifies that it needs to venture into New B
usiness that would be more profitable other than steel, its core business, becau
se of oversupply in the Global Steel Industry. 4. Tata Steel is in a growth mode
even in the steel business through the organic (internal growth) and acquisitio
n routes. 5. Tata Steel is targeting to be the World Class Industrial Enterprise
from a World Class Steel Company. 6. Tata Steel is developing World Class produ
cts and brands to be sold through a World Class distribution system that would o
perate at World Class efficiencies with World Class Knowledge and expertise and
yet have roots in the Indian environment that nurtures the Tata Group and Tata S
teel.
24 25
Facts About Tata Steel, 2003 Facts About Tata Steel, 2003
101
EXHIBITS
EXHIBIT-1 STEEL MARKET PRICES (AS ON 01-01-05) (Rs. per tonne) Pig Iron Billet 1
00mm Blooms 150*150mm Pencil Ingots Wire Rods 6mm Wire Rods 8mm Rounds 12mm Roun
ds 16mm Rounds 25mm Tar Steel 10mm Tar Steel 12mm Tar Steel 25mm Angles 50*50*6m
m Angles 75*75*6mm Joists 125*70mm Joists 200*100mm Channels 75*40mm Channels 15
0*75mm Plates 6mm Plates 10mm Plates 12mm Plates 25mm HR Coils 2.00mm HR Coils 2
.50mm HR Coils 3.15mm CR Coils 0.63mm CR Coils 1.00mm GP Sheets 0.40mm GP Sheets
0.63mm GC Sheets 0.40mm GC Sheets 0.63 Melting Scrap H M S-I Melting Scrap H M
S-II Sponge Iron (Coal Based) ITEM KOLKATA 18875 22250 22850 20125 25450 25350 2
4250 25250 24850 23900 23875 24100 27450 27500 30450 29650 28050 32000 32325 319
00 31750 32125 33100 32625 32150 34600 34000 37350 36225 37350 36400 16375 15775
12275 DELHI 20000 25000 24000 21000 26200 26200 24500 24500 24500 27900 27500 2
7700 29500 28500 31500 31000 29400 29500 31400 31400 31800 32200 34000 31800 318
00 34500 33600 39000 36000 39400 36400 17800 17200 15800 MUMBAI 19200 23600 2360
0 22700 26600 26200 28200 28000 28000 28000 27750 26500 28000 27650 29500 29500
28250 28250 31800 32250 31750 32750 33100 32625 32100 35750 35000 38250 38000 38
500 37750 15000 14600 14500 CHENNAI 18000 22500 21500 22000 29000 28500 26500 25
500 25500 26500 26000 27000 30500 30500 32500 32000 30500 30500 31800 32500 3100
0 32700 33500 32500 32000 35000 35000 37000 36000 38000 38000 15800 15500 16500
Source: The Iron and Steel review, January 2005 issue
-a-
EXHIBIT-2 STEEL MARKET PRICES (AS ON 15-01-05) (Rs. per tonne) Pig Iron Billet 1
00mm Blooms 150*150mm Pencil Ingots Wire Rods 6mm Wire Rods 8mm Rounds 12mm Roun
ds 16mm Rounds 25mm Tar Steel 10mm Tar Steel 12mm Tar Steel 25mm Angles 50*50*6m
m Angles 75*75*6mm Joists 125*70mm Joists 200*100mm Channels 75*40mm Channels 15
0*75mm Plates 6mm Plates 10mm Plates 12mm Plates 25mm HR Coils 2.00mm HR Coils 2
.50mm HR Coils 3.15mm CR Coils 0.63mm CR Coils 1.00mm GP Sheets 0.40mm GP Sheets
0.63mm GC Sheets 0.40mm GC Sheets 0.63 Melting Scrap H M S-I Melting Scrap H M
S-II Sponge Iron (Coal Based) ITEM KOLKATA 18225 21750 21900 20525 25550 25200 2
4400 24400 25000 24250 24050 24425 27025 27025 31750 30250 28325 32175 32400 319
75 31450 32325 33400 32575 32250 34250 34000 37450 35285 37450 35975 16450 15925
12850 DELHI 20000 25000 24000 22300 27800 27800 26500 26500 26500 28700 28000 2
8200 29500 28500 31500 31500 29400 29500 33000 33000 33500 34000 35000 33000 330
00 35200 34600 41000 36600 41000 37500 17800 17200 15800 MUMBAI 19000 23550 N.A.
22750 26300 26000 28200 28000 28000 28250 28125 26750 27875 27500 29250 30000 2
8250 29875 32625 32875 32625 33350 33750 33625 33250 36750 35500 38750 38500 390
00 38500 15500 15000 15000 CHENNAI 18200 22600 21000 22000 29000 28000 26600 265
00 25500 26500 26000 27000 30000 30000 32000 32000 30000 30000 33000 34000 33000
33500 34500 34500 33500 36000 36000 37500 36500 38500 38000 16500 16000 17000
Source: The Iron and Steel review, February 2005 issue
-b-
EXHIBIT-3 LETTER OF CREDIT & BILL DISCOUNTING WITH HSBC EXHIBIT-3(i)
LATE RECEIVAL OF CHEQUE BY THE BANK RATHI ISPAT (in %)
13
5
11 13
0-2 days 3,4 days 5,6 days 7,8 days 9,10 days 22 11,12,13,14,15 days 16 AND ABOV
E days
15
23
EXHIBIT-3(ii)
LATE RECEIVAL OF CHEQUE BY THE BANK SHAH ALLOYS (in% )
4 4 39 17
0-2 days 3,4 days 5,6 days 7,8 days 13 9,10 days 11,12,13,14,15 days 16 AND ABOV
E days
17
4
-c-
EXHIBIT-3(iii)
LATE RECEIVAL OF CHEQUE BY THE BANK JINDAL STAINLESS (in% )
0 6 31
11
0-2 days 3,4 days 14 5,6 days 7,8 days 9,10 days 11,12,13,14,15 days 16 AND ABOV
E days
11 28
EXHIBIT-3(iv)
LATE RECEIVAL OF CHEQUE BY THE BANK STAINLESS INDIA (in% )
15 5
0 10 15
0-2 days 3,4 days 5,6 days 7,8 days 9,10 days 25 11,12,13,14,15 days 16 AND ABOV
E days
30
EXHIBIT-3(v) TOTAL SAVINGS SHOWN FOR DIFFERENT PARTIES SINCE 2005
CUSTOMER RATHI SHAH ALLOYS JINDAL STAINLESS INDIA TOTAL SAVINGS SAVING FOR 2005
321041.0405 248139.0777 161362.7016 40788.32008 771331.1399
Source: Data collected from HSBC Bank
-d-
EXHIBIT-4
FUNDAMENTAL ANALYSIS
EXHIBIT-4(i) Vertical analysis of Income statement Year Operating Income Expense
s Material Consumed Manufacturing Expenses Personnel Expenses Selling Expenses A
dminstrative Expenses Expenses Capitalised Cost Of Sales Operating Profit Other
Recurring Income Adjusted PBDIT( COPBT) 2004 1.0000 2003 1.0000 2002 1.0000 2001
1.0000 2000 1.0000 1999 1.0000
0.3109 0.2557 0.2603 0.2408 0.2458 0.2808 0.1700 0.1928 0.2260 0.2344 0.2429 0.2
397 0.1237 0.1387 0.1616 0.1336 0.1554 0.1679 0.0075 0.0891 0.0932 0.0934 0.1047
0.1032 0.0643 0.0878 0.0977 0.0618 0.0615 0.0596 (0.0142) (0.0069) (0.0065) (0.
0315) (0.0443) (0.0346) 0.7571 0.8322 0.7324 0.7661 0.8165 0.6623 0.3186 0.2353
0.1549 0.2556 0.2230 0.1656 0.0192 0.0075 0.0128 0.0120 0.0110 0.0178 0.2429 0.1
678 0.2676 0.2339 0.1835 0.3377
EXHIBIT-4(ii) Tax Rate Year Provision for Taxes Deferred Taxes Paid Taxes Adjust
ed PBT( after write offs) ETR CTR 2003 2004 920.44 250.79 0.26 11.69 920.70 262.
48 2828.36 1190.64 32.543 21.063 32.552 22.045 2002 16.10 30.60 46.70 211.50 7.6
12 22.080 2001 49.20 0.00 49.20 675.34 7.285 7.285 2000 54.50 0.00 54.50 326.86
16.674 16.674 1999 33.50 0.00 33.50 180.61 18.548 18.548
EXHIBIT-4(iii) Avg Cash Tax rate % Avg Cash Tax rate %( last 3 yrs.) 19.86 25.56
-e-
EXHIBIT-4(iv) Future Cash Flow from investing activities Year Projected Investme
nts in fixed Assets Projected Investments in securities Projected Replacements I
nterest & dividend earning Projected CFIA 2005 (1,200) (300) (625) 90 (2035) 200
6 2007 2008 2009 (1,200) (300) (800) 100 (2200) 2010 (1,200) (300) (850) 100 (22
50)
(1,200) (1,200) (1,200) (300) (300) (300) (650) (700) (750) 90 90 100 (2060) (21
10) (2150)
EXHIBIT-4(v) Depreciation Year Net block Depreciation Expense Net Purchases/Sell
of assets Rate of Depreciation Avg. Dep. Rate 2004 2003 2002 2001 2000 1999
7,094.21 7,342.72 7,213.55 7,042.39 5,504.58 5,779.03 625.11 555.48 524.75 492.2
5 426.54 382.18 (907.53) (411.65) (502.68) (597.65) (649.80) (1,118.72) 0.0907 0
.0793 0.0773 0.0946 0.0782 0.084 0.084 0.084 0.084 0.084 0.0840 EXHIBIT-4(vi)
Year Reinvestments or Net purchases in asset Future Net block Depreciation
2005 2006 2007 2008 2009 2010 625 650 700 750 800 850 8919.21 10744.21 12644.21
14594.21 16594.21 18644.21 648.48 803.81 961.31 1125.11 1293.11 1465.31 EXHIBIT-
4(vii)
Year Projected W.C (%) Projected Operating income Projected W.C. Changes in W.C.
2006 2007 2008 2009 2010 2005 0.12 0.12 0.12 0.12 0.12 0.12 10908.41 12544.67 14
426.37 16590.33 19078.88 21940.71 1254.47 1442.64 1659.03 1907.89 2194.07 2523.1
8 24.27 188.17 216.40 248.85 286.18 329.11
-f-
EXHIBIT-4(viii) Year Operating Income( Projected) COPBT Depreciation COPAT= (COP
BT- Dep)*(1-T) 2005 11999.25 4052.15 1151.41 2030.52 2006 13199.18 4457.36 1252.
22 2243.60 2007 14519.09 4903.10 1353.03 2485.05 2008 15971.00 5393.41 1453.84 2
757.70 2009 17568.10 5932.75 1554.65 3064.67 2010 19324.91 6526.02 1655.46 3409.
40
EXHIBIT-4(ix) Year Projected COPAT Changes in W.C. Projected CFIA FCFF Value of
firm in terminal year-2010, Rs crores Discounted Value 19.79 335.81 482.55 631.2
4 2005 2030.52 24.27 (2035) 19.79 2006 2243.60 188.17 (2060) 371.77 2007 2485.05
216.40 (2110) 591.45 2008 2757.70 248.85 (2150) 856.56 2009 3064.67 286.18 (220
0) 1150.85 2010 3409.40 329.11 (2250) 1488.51 39482.96 766.08 24634.70
EXHIBIT-4(x) Present value of firm, Rs. Crore Present value of firm, $ billion F
air Value of Firm/ share (Rs.) 26850.37 5.97 424.18
Source: Calculations done on the basis of past financial statements
-g-
EXHBIT-5 EXHIBIT-5(i)
FINANCIAL HIGHLIGHTS INCOME STATEMENT
Mar 04 Income : Operating Income Expenses Material Consumed Manufacturing Expe
nses Personnel Expenses Selling Expenses Adminstrative Expenses Expenses Capital
ised Cost Of Sales Operating Profit Other Recurring Income Adjusted PBDIT Financ
ial Expenses Depreciation Other Write offs Adjusted PBT Tax Charges Adjusted PAT
Non Recurring Items Other Non Cash adjustments Reported Net Profit Earnigs Befo
re Appropriation Equity Dividend Preference Dividend Retained Earnings 10,699.31
3,391.82 1,854.92 1,349.59 81.9 701.43 -155.28 7,224.38 3,474.93 209.1 3,684.03
230.56 625.11 0 2,828.36 920.44 1,907.92 -201.47 39.77 1,746.22 2,053.67 368.98
0 1,637.42 Mar 03 8,716.54 2,246.06 1,692.97 1,217.72 782.96 770.78 -60.79 6,
649.70 2,066.84 66.07 2,132.91 342.41 555.48 44.38 1,190.64 250.79 939.85 26.26
46.2 1,012.31 1,228.13 295.19 0 895.12 Mar 02 6,704.69 1,767.90 1,535.04 1,097
.60 632.67 663.26 -44.05 5,652.42 1,052.27 87.13 1,139.40 403.15 524.75 0 211.5
46.7 164.8 33 7.1 189.19 419.66 147.11 2.07 270.27 Mar 01 6,834.54 1,665.77 1,
621.19 924.34 645.78 427.21 -217.76 5,066.53 1,768.01 83 1,851.01 481.9 492.25 2
01.52 675.34 49.2 626.14 -77.63 4.93 553.44 742.37 196.09 0 524.76 Mar 00 6,08
9.42 1,513.16 1,495.45 957.07 644.92 378.48 -272.51 4,716.57 1,372.85 67.54 1,44
0.39 529 426.54 157.99 326.86 54.5 272.36 152.46 -2.23 422.59 513.09 154.86 0 34
1.19
Source: Annual Reports of past 5 years
-h-
EXHIBIT-5(ii) BALANCE SHEET
BALANCE SHEET Mar 04 SOURCES OF FUNDS Owner s Fund Equity Share Capital Share
Application Money Preference Share Capital Reserves & Surplus Loan Funds Secured
Loans Unsecured Loans Total USES OF FUNDS Fixed Assets Gross Block Less : Accum
ulated Depreciation Net Block Capital Work-in-progress Investments Net Current A
ssets Current Assets, Loans & Advances Less : Current Liabilities & Provisions T
otal Net Current Assets Miscellaneous expenses not written Total Note : Book Val
ue of Unquoted Investments Market Value of Quoted Investments Contingent liabili
ties Mar 03 Mar 02 Mar 01 Mar 00
369.18 0 0 4,146.68 3,010.16 363.12 7,889.14
367.97 1.21 0 2,816.84 3,667.63 557.98 7,411.63
367.97 0 0 3,077.99 4,056.93 650.89 8,153.78
367.97 0 140 4,380.46 4,129.96 542.26 9,560.65
367.97 0 150 4,040.43 4,140.91 766.32 9,465.63
12,505.83 5,411.62 7,094.21 763.64 2,194.12 4,933.61 7,252.41 -2,318.80 155.97 7
,889.14 1,878.43 2,031.69 2,669.02
12,192.71 4,849.99 7,342.72 201.08 1,194.55 4,484.62 5,811.34 -1,326.72 0 7,411.
63 752.67 798.26 1,580.70
11,412.29 4,198.74 7,213.55 330.15 912.74 3,329.17 4,620.82 -1,291.65 988.99 8,1
53.78 485.12 401.23 1,309.84
10,762.47 3,720.08 7,042.39 495.7 846.92 3,225.61 2,970.26 255.35 920.29 9,560.6
5 465.54 381.38 1,454.37
8,746.53 3,241.95 5,504.58 1,919.48 803.1 3,025.11 2,614.76 410.35 828.12 9,465.
63 460.75 455.33 1,584.59
Source: Annual Reports of past 5 years
-i-
EXHIBIT-5(iii) CASH FLOWS
Profit Before Tax Depreciation P and L On Sale Of Assets P and L On Sale of Inve
stments Interest Income Interest Paid Net Interest Net Dividend Received Dividen
d Net Misc. Income Amortisation Of Expenses Payment towards VRS Provision And WO
Net Provision For Dimunition In Investments Provisions For BadDebts NPA Trade A
nd Other Receivables Inventories Trade Payables Tax Provision Direct Taxes Paid
Net CashFlow-Operating Activity Purchase Of Fixed Assets Sale Of Fixed Assets Pu
rchase Of Investments Sale Of Investments Interest Received Dividend ReceivedInv
esActivity Inter Corporate Deposits Investment In Subsidiaries Extraordinary Ite
ms Net Cash Used In Investing Activity Proceeds From Issue Of Pref. Captl Procee
d From Issue Of Cap. Incl. Sh. Prem. Proceed from oth. LTerm Borr Repayment Of B
orrowings Dividend Paid Interest Paid Others From Fin Activity Of Other LTerm Bo
rr Repayment Of Short Term Borrow NetCash Used in Fin. Activity Net Inc/Dec In C
ash And Equivlnt Cash And Equivalnt Begin of Year Cash And Equivalnt End Of Year
Mar 04 2,665.96 625.11 -32.17 -1.24 -21.31 140.81 0 -98.34 0 0 236.65 -267.75
0 18.37 0 364.73 -96.13 305.98 0.7 -926.93 2,914.44 -960.33 52.8 -4,615.68 3,47
0.24 24.99 98.34 48.56 -1.55 0 -1,882.63 0 0 318.71 -1,036.04 -292.8 -144.47 0.4
1 0 0 -1,154.19 -122.38 373.12 250.74 Mar 03 1,262.50 555.48 -21.27 -4.62 -34.
05 342.41 0 -23.25 0 -4.57 230.95 -277.01 0 0.43 43 148.88 -24.28 127.9 0.6 -229
.95 2,093.15 -451.23 39.58 -1,773.26 1,368.51 30.54 23.25 -27.55 0 0 -790.16 0 0
593 -1,281.27 -145.53 -341.29 25.23 0 0 -1,149.86 153.13 219.99 373.12 Mar 02
251 524.75 -27.68 -22.83 -31.22 403.15 0 -49.62 0 0 227.02 -189.35 0 17.82 0 26
8.86 -99.82 -55.08 0.6 -63.47 1,154.13 -534.95 32.27 -794.62 657.02 33.94 49.62
-3.49 0 60.51 -499.7 -140 0 1,178.95 -1,143.35 -185.96 -385.87 1.77 0 0 -674.46
-20.03 239.23 219.2 Mar 01 602.44 492.25 -6.31 -1.91 -35.85 412.39 0 -44.2 0 0
201.52 -197.09 0 0.47 0 -133.87 23.08 208.49 0.2 -66.16 1,455.45 -605.45 7.8 -5
2.82 0.03 34.6 44.2 -48.21 0 22.29 -597.56 -10 0 462.25 0 -159.31 -411.92 4.2 0
-697.26 -812.04 45.85 193.38 239.23 Mar 00 476.59 426.54 -142.22 -10.22 0 -389
.98 355.48 0 -31.02 0 0 -166.11 159.12 0 0 -19.21 71.66 37.22 0 -64.81 703.04 -1
,148.27 498.47 -302.99 80.21 44.43 31.02 -12.16 0 0 -809.29 0 150 1,046.10 0 -15
4.86 0 0 -1,077.80 0 -36.56 -142.81 336.19 193.38
Source: Annual Reports of past 5 years -j-
EXHIBIT-6
Source: Calculations done on the basis of past financial data
FINANCIAL ANALYSIS
EXHBIT-6(i)
NET PROFIT (Rs.Crores)
2000 1800 1600 1400 1200 1000 800 600 400 200 0 1746
NET PROFIT
1012 553 205
282
423
1999
2000
2001
2002
2003
2004
YEAR
EXHIBIT-6(ii)
EARNINGS PER SHARE
50 40 EPS 30 20 10 0 1999 2000 2001 YEAR 2002 2003 2004 7.67 11.26 14.64 5.51 27
.43 47.32
-k-
EXHIBIT-6(iii)
TURNOVER (Rs. Crores)
14000 12000 TURNOVER 10000 8000 6000 4000 2000 0 1999 2000 2001 2002 2003 2004 Y
EAR 6336 6943 7810 7683 9844 12070
EXHIBIT-6(iv)
RETURN ON AVERAGE NETWORTH RET. O N AVG . NW 50 40 30 20 10 0 46.28 35.88 11.51
14.38
7.65 1999
6.38 2002 YEAR 2003 2004
2000
2001
EXHIBIT-6(v)
DEBT-EQUITY RATIO 2.5 2 1.5 1 0.5 0 1999 2000 2001 YEAR 2002 2003 2004 D/E 1.37
1.32 1.18 1.92 1.33 0.77
-l-
EXHIBIT-6(vi)
ASSET TURNOVER RATIO (in %) 100 80 60 40 20 0 78.16 89.96
ATR
55.44
58.47
63.59
63.28
1999
2000
2001 YEAR
2002
2003
2004
EXHIBIT-6(vii)
PRICE-EARNING RATIO 20 P/E RATIO 15 10 5 0 1999 2000 2001 YEAR 2002 2003 2004 13
.51 10.3 8.36 4.88 7.25 17.72
EXHIBIT-6(viii)
NET WORKING CAPITAL (Rs. Crores)
1600 1400 1200 NET WC 1000 800 600 400 200 0 1999 2000 2001 2002 YEAR 2003 2004
84 1426 1197 1138 1086 958
-m-
EXHIBIT-6(ix)
CURRENT RATIO CURRENT RATIO 2 1.5 1 0.5 0 1999 2000 2001 YEAR 2002 2003 2004 1.7
9 1.65 1.55
1.54
1.36 1.02
EXHIBIT-6(x)
RESRVES & SURPLUS (Rs. Crores)
5000.0 4000.0 R&S 3000.0 2000.0 1000.0 0.0 1999 2000 2001 YEAR 2002 2003 2004 40
40.4 4380.5 3078.0 2816.8 4146.7
3796.5
EXHIBIT-6(xi)
INVESTMENTS (Rs. Crores)
2500 INVESTMENTS 2000 1500 1000 500 0 1999 2000 2001 YEAR 2002 2003 2004 585.44
803.1 846.92 912.74 1194.55 2194.12
-n-
EXHIBIT-6(xii)
CASH FLOW FROM OPERATING ACTIVITY (Rs. Crores)
3500 3000 2500 2000 1500 1000 500 0 2914.44 2093.15 703.04 1043.53 1154.13
CFOA
481.9
1999
2000
2001 YEAR
2002
2003
2004
EXHIBIT-6(xiii)
CASH FLOW FROM INVESTMENT ACTIVITY (Rs. Crores)
2000 1500 CFIA 1000 500 0 1999 2000 2001 YEAR 2002 2003 2004 792.51 809.29 597.5
6 790.16 499.7 1882.63
EXHIBIT-6(xiv)
CASH FLOW FROM FINANCING ACTIVITY (Rs. Crores) 1500 CFFA 1000 500 0 1999 2000 20
01 YEAR 2002 2003 2004 217.39 400.12 36.56 674.46 1149.86 1154.19
-o-
EXHIBIT-6(xv)
DIVIDEND PAYOUT RATIO (in %) 80 60 DPR 40 20 0 1999 2000 2001 YEAR 2002 2003 200
4 72.91 57.86 40.68 39.32 32.9 23.84
EXHIBIT-6(xvi)
INTEREST COVERAGE RATIO INT. COVER RATIO 25 20 15 10 5 0 5.14 22.82
2.05 1999
2.32 2000
2.6 2001 YEAR
1.68 2002
2003
2004
EXHIBIT-6(xvii)
AVERAGE DEBTORS TO TURNOVER (in %)
DEBTOR/TURNOVER 25 20 15 10 5 0 1999 2000 2001 YEAR 2002 2003 2004 20.14
17.81
15.86
15.48 10.38 6.75
-p-
EXHIBIT-6(xviii)
AVERAGE INVENTORY TO TURNOVER (in %)
INV./TURNOVER 15 10 5 0 1999 2000 2001 YEAR 2002 2003 2004 12.39
10.73
9.01
8.95
7.72
7.37
EXHIBIT-6(xix)
PBT/TURNOVER (in %)
30 25 20 15 10 5 0 PRT/TURNOVER 24.59 14.39 5.49 7.75 8.74 3.7 2001 YEAR 2002 20
03 2004
1999
2000
-q-
EXHIBIT-7 EXHIBIT-7(i) DIVISION-WISE INVENTORY DIVISION LONG PRODUCTS FLAT PRODU
CTS RM & IM SHARED SERVICES SUPPLY CHAIN (MRO) TOTAL STEEL DIVISION INTERNATIONA
L TRADE FERRO ALLOYS & MINERALS WIRE DIVISION TUBE DIVISION RINGS & AGRICO BEARI
NGS DIVISION SECONDARY PRODUCTS TCIL CONVERSION GROWTH SHOP OTHERS (TM & SS) TOT
AL 2004-05 130.84 425.70 203.86 28.44 67.27 856.11 19.79 113.70 36.67 85.84 30.4
1 29.32 10.16 13.02 4.53 0.45 1200.00 2003-04 94.94 419.07 250.94 38.00 65.65 86
8.60 30.68 78.09 32.68 79.65 21.78 25.92 18.20 13.40 6.85 0.56 1176.41
Source: Tata Steel Intranet Web Site EXHIBIT-7(ii) CATEGORY-WISE INVENTORY CATEG
ORY FINISHED & SEMI-FINISHED RAW MATERIALS STORES & SPARES GRAND TOTAL AVERAGE 2
004-05 796.84 323.56 338.56 1458.96 AVERAGE 2003-04 584.50 255.98 319.31 1159.79
Source: Tata Steel Intranet Web Site
-r-
EXHIBIT-7(iii) DIVISION-WISE DEBTORS DIVISION AVG. DEBTORS TARGET DEBTORS 2004-0
5 2004-05 LONG PRODUCTS 42.04 60.34 FLAT PRODUCTS 247.19 189.23 RM & IM 65.67 63
.11 TOTAL STEEL DIVISION 354.9 312.68 INTERNATIONAL TRADE 66.65 34.29 FERRO ALLO
YS & MINERALS 80.19 57.99 WIRE DIVISION 64.74 51.5 TUBES DIVISION 33.36 52.78 RI
NGS & AGRICO 10.72 10.72 BEARINGS DIVISION 15.14 17.14 SECONDARY PRODUCTS 3.85 4
.31 TCIL CONVERSION 32.87 14.98 GROWTH SHOP 14.11 13.33 TKM DIVISION 3.97 1.52 T
OWN & POWER SERVICES 34.15 24.51 OTHERS 9.61 4.25 TOTAL 724.26 600 Source: Tata
Steel Intranet Web Site EXHIBIT-7(iv) PERIOD Avg. 2003-04 Target 2004-05 1-Apr-0
4 1-May-04 1-June-04 1-July-04 1-Aug-04 1-Sept-04 1-Oct-04 1-Nov-04 1-Dec-04 Avg
. 2004-05 LONG PRODUCTS – GROSS WORKING CAPITAL Inv. Amt. Inv. Debtors Amt. Debtor
s Inv.+Debto Inv.+Debt (Rs. Days (Rs. Crores) Days r Amt. . Days Crores) 97.85 2
1 64.15 14 272.25 35 115.00 60.34 175.34 94.94 20 42.20 9 137.14 29 93.66 20 42.
04 9 135.70 29 118.44 26 50.86 11 169.30 37 119.75 26 32.08 7 151.83 33 122.37 2
7 41.47 9 163.84 36 146.54 32 50.32 11 196.86 43 125.16 25 39.55 8 164.71 33 134
.02 25 37.85 7 171.87 32 153.38 30 41.18 8 194.56 38 123.01 27 41.98 9 165.00 36
Source: Tata Steel Intranet Web Site -s-
EXHIBIT-7(v) FLAT PRODUCTS – GROSS WORKING CAPITAL PERIOD Avg. 2003-04 Target 2004
-05 1-Apr-04 1-May-04 1-June-04 1-July-04 1-Aug-04 1-Sept-04 1-Oct-04 1-Nov-04 1
-Dec-04 Avg. 2004-05 Inv. Amt. Inv. Debtors Amt. Debtors Inv.+Debto Inv.+Debt (R
s. crores) Days (Rs. crores) Days r Amt. . Days 200.69 33 102.12 17 302.81 50 18
8.96 64.75 253.71 187.10 31 85.73 14 272.83 45 187.87 31 79.36 13 267.23 44 228.
17 36 88.62 14 316.79 50 242.17 38 82.09 13 324.26 51 237.95 37 90.54 14 328.49
51 242.33 39 86.28 14 328.61 53 232.60 38 85.64 14 318.24 52 243.63 40 78.33 13
321.96 53 280.63 48 63.80 11 344.43 59 231.07 37 83.20 13 314.28 50 Source: Tata
Steel Intranet Web Site EXHIBIT-7(vi) FERRO ALLOYS & MINERALS DIVISION – GROSS WO
RKING CAPITAL PERIOD Avg. 2003-04 Target 2004-05 1-Apr-04 1-May-04 1-June-04 1-J
uly-04 1-Aug-04 1-Sept-04 1-Oct-04 1-Nov-04 1-Dec-04 Avg. 2004-05 Inv. Amt. Inv.
Debtors Amt. Debtors Inv.+Debto Inv.+Debt (Rs. crores) Days (Rs. crores) Days r
Amt. . Days 82.00 43 60.91 32 142.91 75 113.70 57.99 171.69 78.09 41 67.99 36 1
46.08 77 92.67 47 72.98 37 165.65 84 109.89 54 58.76 29 168.65 83 115.60 51 60.6
6 27 176.26 78 134.40 56 96.57 40 230.97 96 132.07 53 95.01 38 227.08 91 122.46
44 95.69 34 218.15 78 140.58 48 87.08 30 227.66 78 139.74 45 81.53 26 221.27 71
119.57 59 80.19 40 199.76 99 Source: Tata Steel Intranet Web Site
-t-
EXHIBIT-8 STAGES OF TRAINING Nature of Diversity Features Professional Engineers
Doctors Accountants MBAs Cultural Religion Language Social Working in small tow
ns and Metros Education and Training Technical Medical Financial Managerial Crea
tivity Window of the world Provided by/at Tata Management Development Center Tat
a Management Training Center Tata Management Development Center Leading personal
ities of society Culture Associates Tata Steel Rural Development Society Social
Services & Family Initiatives Non-Government Organizations Tata Management Devel
opment Center Other Social Organizations HR/IR Steel Tribal Cultural Society Sha
vak Nanavati Technical Institute Shavak Nanavati Technical Institute
Locations
Rural Development Social Work Environment
Women
Empowerment and Assertiveness Driving Heavy Vehicles & Crane Bring them into mai
n stream
Women Empowered training programme Sexual harassment issues training Tejaswani E
ffort Training to make them at part with others before recruitment Basic Plant T
raining
Tribal
Registered Relations Create opportunity for induction
Source: TBEM 2003, ‘Building Sustainability’ by Tata Steel
-u-
BIBLIOGRAPHY
• • • • • • • • • • • • • • • •
Primary Data collected from Tata Center from the different departments Primary D
ata colleted from HSBC Bank Credit Management Module CD of the Flat and Long Pro
duct Tata World – The Tata Steel Intranet Information Kiosk The Iron and Steel Rev
iew, January 2005 issue The Iron and Steel Review, February 2005 issue The Iron
and Steel Review, March 2005 issue Facts About Tata Steel, 2003 TBEM 2003, ‘Buildi
ng Sustainability’ by Tata Steel The Financial Express The Economic Times The Inve
stors Guide www.google.co.in www.ibef.org www.steel.nic.in www.equitymaster.com
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“Working Capital Management at Tata Steel”

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