Tata Steel Question

Q-4 Do the analyst projections in Exhibit 19 make sense to you? Ans- By seeing ABN Amro Forecast, we can see some figures and analysis surprising. Below are those First and bigger surprising thing is the projection for 2008 by ABN AMRO.As per them Revenue from 2007 to 2008 has been changed from 256514 m rs. to 1,173.388 m Rs. that means a surprising 357% growth in one year which is way more given the demand analysis of India and supply projection from Tata Steel. Every other figure of the projection gets changed based on the revenue figures for 2008 forecast and so on.  Based on ABN AMRO Projection and Morgan Stanley projections there will be a huge gap between the valuations of Tata Steel.  Compared to that for the same 2 years Morgan Stanley is showing the growth in revenue for around 4%.  Also in the case also written that in the coming future Supply is expected to exceed demand in Steel which will affect the overall price of Steel and this whole scenario may even show the decline in the revenue for the near future.

Q-5 How does Corus’s projected debt affects its valuation? Ans- As per 2006 figures Corus’s Non-Current liability To Book value of equity ratio is around 0.45.Let us assume that this itself is current D/E ratio for Corus. (Note assuming the part of current liabilities as debt) Now as per Exhibit 14, Company’s new equity will be 5621 million pound and debt will be 5418. So the new debt/equity ratio will be around 1 In these kind of scenario when there is high amount of debt involved, then the capital structure of company’s get fully changed hence we can’t use

simple NPV valuation technique for getting the valuation for Corus. For this kind of scenario we can use APV method of valuation. In this one component will be value of unlevered Equity Cash flows which values does not get affected with the amount of debt. The other factor is Interest Tax Saving which will be a huge factor in valuation of Corus because of high amount of debt under which the company will be operating Other factor which can affect valuation is that by more debt there will be more strain on company and company debt rating also can go low which means the cost of debt will go high and valuation will go down. Even the bankruptcy cost can go north because of that.

Q-6 How does the cross border nature of the Corus deal affect the valuation of the firm? Ans- Doing a cross border acquisition valuation will be different from domestic acquisition. In Corus it can affect the valuation in following ways There will be cultural differences between both the companies because of different geographies and since Tata Steel is going to retain the original management board of Corus hence in the long term differences can arrive and which can affect the valuation of Corus.  There can be certain exchange rate risk and economic risk which should be assumed while valuing Corus. Because in the future estimation can be done by analysts for transferring the cash flows into home currency.  There is different country risk for India and U.K. and while calculating the discount risk for Corus country risk premium also should be added using some kind of home country index or some global index.  There will be different government standards in both the countries hence there can be legal problems because of Cross border nature of

valuation. So while valuing Corus this factor also should be kept in mind.