“Working Capital Management at Tata Steel”
A Report submitted to INDIAN BUSINESS ACADEMY On 27th June 2005
In Partial Fulfillment 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 Business Academy, Bangalore and is presently pursuing a Post Graduate Diploma in Business Management.
Under my guidance, she has submitted her project report titled “Working Capital Management at Tata Steel” in partial fulfillment of the requirement for the summer internship project during the Post Graduate Diploma in Business 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: +91-80-28435931/32/33/34 Fax: +91-80-28435935
This is to certify, that Miss Priyanka Agarwal is a bonafide student of Indian Business Academy, Bangalore and is presently pursuing a Post Graduate Diploma in Business Management.
Under my guidance, she has submitted her project report titled “Working Capital Management at Tata Steel” in partial fulfillment of the requirement for the summer internship project during the Post Graduate Diploma in Business Management.
This report has not been previously submitted as part of another degree or diploma of another Business School or University.
Prof. Ramesh G Tagat, Dean, Indian Business Academy INDIAN BUSINESS ACADEMY Lakshmipura, Thataguni Post Kanakpura Main Road, Bangalore – 560 062 INDIA Tel: +91-80-28435931/32/33/34 Fax: +91-80-28435935
This is to certify, that Miss Priyanka Agarwal is a bonafide student of Indian Business Academy, Bangalore and is presently pursuing a Post Graduate Diploma in Business Management.
Under my guidance, she has submitted her project report titled “Working Capital Management at Tata Steel” in partial fulfillment of the requirement for the summer internship project during the Post Graduate Diploma in Business Management.
This report has not been previously submitted as part of another degree or diploma of another Business School or University.
Prof. George Thomas,
Internal Mentor, Indian Business Academy
INDIAN BUSINESS ACADEMY Lakshmipura, Thataguni Post Kanakpura Main Road, Bangalore – 560 062 INDIA Tel: +91-80-28435931/32/33/34 Fax: +91-80-28435935
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 internship project during the Post Graduate Diploma in Business Management, a prestigious Post Graduate Diploma awarded by Indian Business Academy, Bangalore.
This 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 conclusions of this report are based on my personal study and experience, during the tenure of my summer internship.
Miss Priyanka Agarwal, B.Sc (Economics), PGDBM 2004-06. INDIAN BUSINESS ACADEMY Lakshmipura, Thataguni Post Kanakpura Main Road, Bangalore – 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 made me sail through successfully my internship programme with a project at Tata Iron 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 motivation given at the beginning of the project.
Mr. George Thomas, Internal Mentor, Indian Business Academy, Bangalore, for extending support during the entire internship program. pro gram.
Mr. S.N.Banerjee, Head – Marketing and Finance, Kolkata, who supported and helped me whenever needed.
Mr. Shankarnarayanan – Head of Finance, Bangalore, 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 a ct as a motivator in my m y life.
Mrs. Debjani Dasgupta – Manager Accounts, Kolkata, who actually helped me out immensely in my project.
Mr. Abhijit 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 me to carry out my project work.
Mr. Sanjay Agarwal – Senior Credit Manager, Long Product, Kolkata, who provided me with the required materials.
Mr. Ashwini Lal – Ferro 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 other officers and staff of all the floors of Tata Center where I had received immense support in carrying out my internship th
programme. This is inclusive of the Finance & Accounts Department, 13 Floor, Tata Centre.
I would like to thank all other people who are in some way or the other involved with my internship. These 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 points of time.
Priyanka Agarwal Indian Business Academy PGDBM 04-06
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Table of Content
Executive Summary …………………………………………………………………...... i
1) Mission..………………………………………………………………………………..1 2) Vision……………………………………………………………………….…………..2 3) Strategic Goals………………………………………………………………..………...3 4) Values…………………………………………………………………………………..3 5) Corporate Social Responsibility………………………………………………...……...3 6) Quality Policy…………………………………………………………………….…….4 7) Research Policy…………………………………………………………………….…..4 8) Environmental, Occupational, Health and Safety Policy……………………………....5 9) Human Resource Policy…………………………………………………………..……6 10) The Steel Industry in India………………………...……………………………..…...7 11) Indian Steel Industry-A SWOT Analysis……………………………………………10 12) Tata Iron and Steel Company………………………………………………………..11 13) Landmarks of Tata Steel…….……………………..………………………………...17 14) Organizational Structure of Tata Steel…………………………………………........19 15) Product and Segment of Application………………………………………………..21 16) Strategic Challenges faced by Tata Steel….………………………..………………27 17) Risks of the Company………………………………...……… Company………………………………...………….….........................29 ….….........................29 18) Working Capital Management…………………………………..………………......30 19) Credit Management Module…………………………………………………………38 20) Factoring or Bill Discounting……………………………..…....……………………42 21) O.E.Finance……………………….………………………..………………………..42 22) Receivable Receivable Purchases.……………………………… Purchases.……………………………………………………….............47 ……………………….............47 23) Letter of Credit and Bill Discounting……….…………..……...................................50 Discounting……….…………..……...................................50 24) Overdraft Management………………………………………………………………55 25) Reduction of days sales outstanding for Flat Product..……………………………...57 26) Predictions for 2010…………………………………………………………………71
27) Steel Industry-World…………………………………………………...………….73 28) Steel Industry-China..……………………………………………………………...74 29) Steel Industry-India………… Industry-India…………………………………… ……………………………. …. .....................................75 30) World Net of China…………………………………………………….…………..79 31) BCG Matrix…………………………………………….………….……………….80 32) Conclusion……….…………………………………………………….…………...83 33) Equity Analysis …………………………………………………………………….84 34) Financial Analysis…………….……………………………………….…………...90 35) Information Technology Services…………………………………………….……94 36) Human Resource Policy at Tata Steel………………………………………………96 37) Future Outlook…………………………………………………………………….100 Exhibits……………………………………………………………………...……… -aBibliography…………………………………………………………………………….I
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 year 2004. It is one of the few companies that adopts the concept of Economic Value Add and thereby achieved an incremental EVA of Rs. 516 crores in the year 2004. 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 ensure that its money doesn’t remain blocked in the market and there is constant flow 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 Working Capital. Working Capital of a company is the difference between its current assets and the current liabilities. It includes the company’s debtors, bank/cash, creditors, inventory, outstanding and other miscellaneous expenses. Each of these needs to be managed separately so as to have a control over the liquidity of business.
Management of Working Capital includes various sub-components at the operational level of the company which directly affect the level of Working Capital. These include study of Letter of Credit, Bill Discounting, Factoring through Receivable Purchases and O.E.Finance, Channel Financing, Overdraft management. Proper Working Capital Management depends on how well these sub-components are handled. The company needs to overcome the shortcomings in this respect.
The customer base of Tata Steel is found in the construction, auto and auto ancillary, white good appliance and the general engineering sector. Thus, in order to control the 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.
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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 functions 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 profits and the turnover and also by venturing into new line of business. It is now targeting to be the World Class Industrial Enterprise from a World Class Steel Company. It is striving to have a huge global base.
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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 productivity, consistent with modern management practices.
Tata Steel recognizes that while honesty and integrity are essential ingredients of a strong and stable enterprise, profitability provides the main spark for economic activity.
Overall, the company seeks to scale heights of excellence in all that it does in an atmosphere free from fear, and one which encourages innovativeness and creativity.
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TATA STEEL STRATEGIC GOALS
•
Create a culture of continuous learning and change.
•
Achieve world class status in services and products
•
Reach the position of the most cost competitive steel producer.
•
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 quality of life of people.
Tata Steel will volunteer its resources, to the extent it can reasonably afford, to sustain and improve healthy and prosperous environment and to improve the quality of life of the people of the areas in which it operates.
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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 facets 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 reviewing the Quality Objectives and shall be communicated across the organization. The policy will be reviewed with business direction and to comply with all the requirements of the Quality Management Standard.
TATA STEEL RESEARCH POLICY Tata Steel believes that research provides the foundation for sustained, long-term, stakeholder delight. Tata Steel shall nurture and encourage innovative research in a creative ambience to ensure that the competitive advantage in its overall business is retained and surpassed. Towards this goal, the Company commits itself to providing all necessary resources and facilities for use by motivated researchers of the highest caliber. Research at Tata Steel shall be aligned to the technological initiatives necessary to evolve and fulfill fu lfill the overall business objectives of the Company.
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TATA STEEL ENVIRONMENTAL, OCCUPATIONAL, HEALTH AND SAFETY POLICY Tata Steel reaffirms its commitment to provide safe work place and clean environment to its employees and other stakeholders as an integral part of its philosophy and values. We will continually enhance our Environmental, Occupational Health & Safety (EHS) performance in our activities, products and services through a structured EHS management framework. Towards this commitment, we shall: •
Establish and achieve EHS objectives and targets
•
Ensure compliance with applicable EHS legislation and other requirement and go beyond
•
Conserve natural resources and energy by constantly seeking to reduce consumption and promoting waste avoidance and 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 accountability for sound EHS performance.
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TATA STEEL HUMAN RESOURCE POLICY Tata Steel recognizes that its people are the primary source of its competitiveness. It is committed to equal employment opportunities for attracting the best available talent and ensuring a cosmopolitan cosmopo litan workforce. It will pursue management practices designed to enrich the quality of life of its employees, develop their potential and maximize their productivity. It will aim at ensuring transparency, fairness and equit y in all its dealings with its employees. Tata Steel will strive continuously to foster a climate of openn ess, mutual trust and team work.
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THE STEEL INDUSTRY IN INDIA
The steel industry is generally a stable industry except for the cyclical movements of prices due to its commodity nature. But the last one and half years proved otherwise for the Indian steel makers. It has been a rollercoaster ride for the Indian steel industry with fortunes fluctuating drastically, both positively and negatively. First was the boom in domestic steel market. It was followed by rapid 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 when the demand was peaking. Then was the news of Chinese slowdown, which effectively 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 Producers: •
SAIL, TISCO, RINL
•
Approximately 45% market share.
2) Secondary Majors: •
Jindal, ESSAR, LLYODS, Ispat
•
Approximately 20% market share.
3) Mini Steel plants
4) Rerollers
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The Iron And Steel Review, January 2005 issue
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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 in India with the exception of TISCO were making losses because of excess capacity and low price levels. Analysts have even written off some of the major steel makers. But things changed with the boom in the domestic steel demand in early 2002. The Infrastructure initiative taken by the government like the Golden Quadrilateral highways project, an increase in housing activity and an improvement in the off take of consumer durables and passenger cars were the main reasons behind 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 majors 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 around 90 percent of the growth in global steel demand in 2002 and 2003. This proved to be a good export opportunity for Indian steel makers. In the first six months 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 w as no stopping for the Indian steel makers. 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 than 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 import around 15 million tonnes of coke every year. China is one of the main suppliers of coke along with Australia, New Zealand and Canada. Due to the strong domestic 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 tonne 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's Rourkela Steel plant reduced the daily hot metal production from 5000 tonnes to 4100 tonnes in early 2004. The Durgapur Steel plant cut average daily production of hot metal from 6000 tonnes to 5000 tonnes. If the integrated steel makers faced the 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 steel 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 makers as they were not able harvest on the rising steel demand and prices in the domestic 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 Jindal 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 acquisitions. But these activities are negligible compared with pace of consolidations happening in the rest of the world. The biggies have to come together to form steel giants, who can challenge the global stars like Arcelor or Ispat International. The industry has miles to go in this regard.
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INDIAN STEEL INDUSTRY – A SWOT ANALYSIS Strengths: •
Abundance of Iron-Ore and other minerals for steel
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Skilled manpower and low unit labor costs
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High ash content of domestic coking coal
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Low labor productivity
Weaknesses: •
High costs of some basic inputs like power, coal, co al, fuel, etc.
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High social costs
•
Poor quality of basic infrastructure
•
Distribution network
•
Low IT usage in efficiency enhancement
•
Fragmentation
Opportunities: •
Low per capita consumption
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Unexplored rural market
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Low export market penetration
Threats: •
Substitution by aluminum, plastic and composites one of the most remunerative markets – Automobiles
•
Poor R&D and threat of technological obsolescence in a large part of the market
•
Availability of imported low ash coking coal.
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TATA IRON AND STEEL COMPANY Established in 1907, Tata Steel is Asia's first and India's largest integrated private sector steel company. With its captive iron ore and coal mines and one of the world's most 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 inception in 1907, Tata steel has pioneered the steel industry in India to occupy a
leading position in the global steel industry today. The steel business unit, which forms 86% of Tata Steel's turnover, manufactures and markets steel products broadly, 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. Development of infrastructure viz. roads, bridges, dams, ports, etc is a key enabler 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 products, is undergoing a million tonnes capacity expansion to be completed by September 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 produce 7.4 million tonnes and the balance capacity will be put up or acquired elsewhere in India and overseas. Tata Steel recently announced its first major overseas investment in NatSteel, Singapore, which will give it a manufacturing footprint 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 Africa and the southern Indian state of Tamil Nadu, India respectively. Tata Steel's relentless quest for excellence through initiatives like ASPIRE, which combines TPM, Six Sigma, Total Operational Performance, Suggestion Management and Quality Circles,
2
Tata Steel Intranet Web Site
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has reaped rich benefits. The company has been conferred the prime Minister's Trophy 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, categorizing 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 Steel Dynamics, USA, for the past four years. It was also awarded Asia's Most Admired Knowledge Enterprise Award-2003 by Teleos, an independent Knowledge Management company of South Korea. Products
Tata Steel's products include hot and cold rolled coils and sheets, galvanized sheets, tubes, wire rods, construction re-bars, rings and bearings. In an attempt to 'discommoditise' steel, the company has introduced brands like Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee (Galvanized Corrugated Sheets), Tata Tiscon (re-bars), Tata Pipes, Tata Bearings, Tata Agrico (hand tools an implements) and Tata Wiron (galvanized 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 app lications. Strategic Business Units
Apart from the main steel division, Tata Steel's operations are grouped under the fallowing strategic business units. •
Bearings Divisions: Manufactures ball bearings, double row self-aligning
bearings, clutch release bearings and tapped roller bearing for two wheelers, fans, water pumps, etc. •
Ferro Alloys and Minerals Division: Operates chrome mines and has unit for
making Ferro chrome and Ferro manganese. It is one of the largest players in the global Ferro chrome market.
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•
Rings and Agrico Division: The ring plants manufactures forged and rolled rings
for bearings and automotive components .Tata Agrico is the first organized manufacturer in India of hand tools and implements for application in agriculture. •
Tata Growth Shop (TGS): Has designed, developed, manufacture, erected and
commissioned thousands of tones of equipments ranging from overhead cranes to high precision components, including a rocket launch pad for the Indian Space and Research Organization. •
Tubes Division: The biggest steel tube manufacturer with the largest market
share in the country, it aspires to strengthen its market presence by expanding and modernizing its commercial and precision tube manufacturing capa city. •
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 T ATA STEEL
1. Tata Refractories Limited (TRL)………………………………………………51% (TRL)………………………………………………51% 2. The Tinplate Company of India Limited (TCIL)…………………………..30.60% (TCIL)…………………………..30.60% 3. Tata Yodogawa Limited (TAYO)………………………………………….36.53% (TAYO)………………………………………….36.53% 4. Tata Sponge Iron Limited (TSIL)…………………………………………..39.74% (TSIL)…………………………………………..39.74% 5. Tata Pigments Limited (TPL)………………………………………………...100% (TPL)………………………………………………...100% 6. TRF Limited (TRF)…………………………………………………….…..34.77% (TRF)…………………………………………………….…..34.77% 7. Stewarts and Lloyds of India Limited (S&L)………………………………99.99% 8. Tata Metaliks Limited (TML)……………………………………………...46.66% (TML)……………………………………………...46.66% 9. Jamshedpur Injection Powder Limited (JAMIPOL)……………………….28.22% (JAMIPOL)……………………….28.22% 10. Tata Ryerson Limited (TRYL)………………………………………………..50% (TRYL)………………………………………………..50% 11. TM International Logistics Limited (TMILL)………………………………...51% (TMILL)………………………………...51% 12. Metaljunction.com Private Limited…………………………………………...50% Limited…………………………………………...50%
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SUBSIDIARY / ASSOCIATES / JVS Tinplate Company of India Limited (TCIL): With a market share of over 35%, it is the
industry leader in India. It has the capability to supply all tinning line product including electrolytic tinplate / tin-free steel and cold-rolled products. Tayo Rolls Limited: The country's leading roll manufacturer and supplier, the company
produces rolls which find application in integrated steel plants, the paper, textile and food processing sectors, and the government mint. It also produces special castings for use in power plants. Tata Ryerson Limited (TRYL): Is in the business of steel processing and distribution. It
offers hot and cold rolled flat steel products in customized sizes and quantities through processing services. It also provides materials management services. Tata Refractories Limited (TRL): Produces High Alumina Refractory, Basic
Refractory, 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, procurement, re-lining applications etc. (www.tataeref.com) Tata Sponge Iron Limited (TSIL): Has the first Indian sponge iron plant based on
indigenously developed Direct Reduction Technology. Its major product lines are sponge iron lumps and fines.(www.tatasponge.com) Tata Metaliks: Is among the top wealth creating companies (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 positioning.
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Jamshedpur Injection Powder Limited (Jamipol): Manufactures carbide and
magnesium-based de-sulphurising compounds which are used for de-sulphurising hot metal for the production of low-sulphur, high-quality steel. TM International Logistics Limited (TMILL): Provides material handling and port
operation services at Haldia and Paradip Ports in addition to freight forwarding and chartering services to 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 divisions--metaljunction.com (e-selling business unit) and commercejunction.com (e-procurement business unit). It also offers complete e-sourcing services TRF Limited: It is one of India's leading companies in the business of design,
manufacture, supply, installation and commissioning of engineered-to-order equipment and systems in the areas of bulk material handling, loading and unloading, processing, reclaiming and blending of bulk materials. With world-class technical associates, TRF has also made its mark in the fields of coke oven equipment, coal dust injection systems for blast furnace and coal beneficiation systems. Jamshedpur Utility and Service Company Limited (JUSCO): Re-engineered out of
Tata Steel's town services, JUSCO a wholly owned subsidiary of Tata Steel and is the country's first enterprise that provides municipal and civic services for townships. JUSCO is the only EMS 14001 civic services provider in the country. The Indian Steel 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 fastener division and a steel roll manufacturing unit named Jamshedpur Engineering and Machining Company (JEMCO). Lanka Special Steel Limited: The only unit in Sri Lanka manufacturing galvanized
wires.
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Sila Easten Company Limited: Established to develop limestone mines in Thailand,
mainly for the captive use of Tata Steel. Environment Management: Jamshedpur was India's first planned industrial township.
In more recent times, Tata Steel has received ISO 14000 certification for environment management for its steel works. Most of its other, mines and collieries also have been accredited with ISO certification. Corporate Social Responsibility The welfare of its employees and the upliftment of the
communities in which it operates are critical part of Tata Steel's guiding values and principles, inextricably interlocked with productivity at the steel plant .This belief has resulted in a mammoth social outreach programme covering the town of Jamshedpur (population 0.65 million) and over 600 villages in and around its manufacturing and raw materials operations. The company-run town of Jamshedpur has India's only ISO 14001 certified municipal services and is also amongst the six participating cities of the UN Global Compact Cities Pilot programme for addressing intractable social, economic and environmental issues in the urban context. The company has dedicated agencies for community welfare work in diverse areas such as education, community health and HIV/AIDS awareness, income generation for economic well-being, environment management, relief, sports, art and culture, etc. Regarded globally as a benchmark in corporate social responsibility coupled with its record of 75 years of industrial harmony, Tata Steel's commitment to its employees and the community remains the bedrock of continued sustainability.
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LANDMARKS OF TATA STEEL
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1882 – At the age of 43 Jamshetji Nusserwanji Tata read a report by a German Geologist,
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 1904 – 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 Weld and Srinivasa Roa discovered the village of Sakchi at the confluence of
two rivers; 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 Chelmsford to rename Sakchi as Jamshedpur and
Kalimati Railway Station as Tatanagar Railway Station.
5 March 1920 – Jamshedpur Labour Association formed. The principle of Joint
Consultation introduced for the first time in India.
8 August 1925 – Mahatma Gandhi, Chittaranjan Das and CF Andrews visited
Jamshedpur to discuss labour problem with RD Tata.
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Facts about Tata Steel, 2003
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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 – Agreement signed with Kaiser Engineers for two million tones
expansion programme.
1 April 1973 – Amalgamation with West Bokaro Limited for coal mines o peration.
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.
R olling Mill Complex. 24 April 2000 – Inauguration of the Cold Rolling
27 September 2002 – Won the Golden Peacock Award for Corporate Social
Responsibility & Excellence in Corporate Governance.
3 December 2003 – Placed second in Leadership Development among 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 into 3 levels, each level having separate roles and responsibilities. These 3 levels are upper management, senior management and the middle management. Each of these lower levels is responsible to perform its functions and thereby report to the next higher level in the organization on a periodic basis. Overall, we can say that the company has a flat structure, beginning from the top management to the lowest level of management. The Upper Management of the company has designation like the Managing Director of the entire company and the Group Executive officer. The Senior Management has the various Vice Presidents of the different departments which come directly under the Managing Director. Under the Vice Presidents we have the Chiefs of the various functions who coordinate the activities of its function along with the other departments. There can be more than one chief in a department depending upon the number of line of the products. This is seen in 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 Sectional Heads who are the Unit Leaders, the Managers or the Officers. This structure is prevalent in the entire organization on a n ational scale. In the Finance and 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 officers who carry out the actual accounting ac counting 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 C old Rolling / pipes
•
CR – Auto/ Appliances / Panels / 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 steel. A constant pursuit to increase customer focus, enrich product mix, energy efficient technologies & optimum utilization of raw materials have resulted in a long term competitive advantage.4 Products •
•
•
•
•
2) LONG PRODUCT
4
•
SBQ – Auto
•
HC / WR – Auto / Construction / Railways / Power
•
LC / WR – Electrode / General Engineering
•
MSWR – Construction / General Engineering
•
Rebars – Construction
•
Semis
•
Others
Tata Steel Intranet Web Site
21
The Long Products Department was created in the year 1999-2000. It is the outcome of Tata Steel’s relentless trust towards customer-oriented organization. The department 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. 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)
KEY CUSTOMERS
Tata Motors, Ashok Leyland ASIL, Hero, TPI, ITW Wheels India, Kalyani Lemmerz, Toyota Tata Motors, Ashok Leyland, Maruti, Mahindra & Mahindra, Hyundai Authorized Distributor Authorized Distributor Bansal, Ramswarup, Miki Wires, Arti Steel ESAB, Advani Oerlikon, Feero Wires Gammon, DLF, Chevron Authorized Distributors
CR for distribution Galvanized Corrugated (GC) HCWR LCWR TISCON (Re-bars)
6
CAPACITY OF FLAT PRODUCT IN THE MARKET
SAIL
41%
TATA STEEL
20%
ESSAR
14%
LIOYDS
4%
ISPAT
9%
JVSL
10%
OTHERS
6%
5
6
Tata Steel Intranet Web Site TBEM 2003, ‘Building Sustainability’ by Tata Steel
22
CAPACITY - FLAT PRODUCTS SAIL TATA STEEL
6%
10% 9%
41%
ESSAR LIOYDS ISPAT JVSL
4% 14% 20%
OTHERS
7
CAPACITY OF LONG PRODUCT IN THE MARKET
SAIL + IISCO
10%
TATA STEEL
3%
RINL
10%
OTHERS
77%
CAPACITY - LONG PRODUCTS
10% 3% 10%
SAIL + IISCO TATA STEEL RINL
77%
OTHERS
KEY ENTERPRISE PROCESSES
7
•
Leadership
•
Strategic planning and risk management
•
Market development
TBEM 2003, ‘Building Sustainability’ by Tata Steel
23
•
Investment management
•
Human Resource
•
Improvement and Change management
•
Order generation
•
Operation and fulfillment
•
Supply management
•
Research and Development
•
Information management
•
Social responsibility and corporate services.
POSITIVE REFERRALS FROM CUSTOMERS
Customers giving positive referrals for Tata Steel’s products: •
TELCO
•
MARUTI
•
FORD
•
Wheels India / Brakes India
•
Wheel and Axle plant
•
ESAB
•
L&T
Customers having purchasing intention from Tata Steel due to this positive referral: •
All ancillaries
•
Major ancillaries
•
KRUPP JBM
•
TVS Group buy
•
All auto manufacturers
•
All electrode manufacturers
•
All construction sub contractors / Major project customers of L&T
24
CUSTOMER SATISFACTION DETERMINATION
TYPE OF DATA
PARAMETERS
TOOLS
Opinion Data
Feedback, Survey, Complaints, Call Reports, Customer meets, Top executive customer meets Repeat Business, Market Share
Customer satisfaction Index measurement, Complaint analysis, Visit reports
Behavior Data
Repeat Business, market share in key markets
PROCESS FOR FOLLOW UP WITH CUSTOMERS ON PRODUCTS/SERVICES
Concept of dedicated CAMs Maintain adequate sales person per key customer
Planned customers visits by sales personnel
FEEDBACK
Close proximity of sales offices Distributor monthly reports
Customer visits by application engineers/plant personnel Call centers
Customer champions/ RVM workshops
25
DETERMINATION OF CUSTOMER CONTACT REQUIREMENTS
CUSTOMER GROUP
PROCESS FOR CAPTURING REQUIREMENTS
Distribution Channel
1. Distributor / Retailer meets feedback 2. Retail Value Management workshop 3. Fabricators/architects meets 4. Distributor/retailers Distributor/retailers visits 5. Call centers 1. Customer value management workshop 2. Customer page 3. Customer visits by CAMs, application engineers, plant personnel 4. Visits by customer champions 5. Customer forum/ customer visits feedbacks
Enterprise Accounts / Key Commercial Channel / Original Equipment Customers
CUSTOMER SATISFACTION DETERMINATION
TYPE OF DATA
Opinion Data
Behavior Data
PARAMETERS
TOOLS
Feedback, Survey, Complaints, Call Reports, Customer meets, Top executive customer meets Repeat Business, Market Share
Customer satisfaction Index measurement, Complaint analysis, Visit reports
26
Repeat Business, market share in key markets
STRATEGIC CHALLENGES FACED BY TATA STEEL
1. Operational: Operational challenges includes some of the following i.e.
increasing service level expectation of customers, commodity nature of steel, balancing the economies of scale in manufacturing and simultaneously servicing a fragmented domestic market, innovation as a substitute to investment.
2. Human Resource: Human Resource challenges are attracting and retaining talent,
managing rising employee costs, empowering employees at lowest levels, developing employees for 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 all stakeholders, upholding the ethical standards in current environment.
4. Global: Consolidation in steel industry, emerging dominance of China, reducing
trade barriers, driven by WTO, likely appreciation of o f rupee against dollar.
5. Societal: Lack of understanding of industry and business, law and order situation
in the 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
Business Unit (profit center/cost center)
Functional Unit
Department
KEY PARTICIPANTS
TIME HORIZON
Business Review Committee of Tata Steel Top management (MD, DMD, VP’s) Key senior leaders Chief of Business Unit / VP’s Key senior leadership of business unit Chief of functional unit Key senior leadership of functional unit Key senior leadership Key Operating Staff
COMMONLY USED STRATEGIC PLANNING TOOLS
Short term: Up to within a year Long term: Over a year, up to 5 years
Long Term Cash Flow Forecasting Growth Horizon Framework Project Based Analyses
Short term: Up to within a year Long term: Over a year, up to 5 years
Product Portfolio Matrix
Short term: Up to within a year Long term: Over a year, up to 5 years
Focus Group Discussion: Scenario Analysis
Short term: Up to a quarter Long term: Up to a year, once a quarter
Decision Tree Analysis
28
RISKS OF THE COMPANY Like all other companies Tata Steel also faces certain risks at the strategic, operational and the governance level. These risks vary according to the level in the organization. At the departmental level, there are risks related to audit monitoring and others which are dealt with by the Strategic planning process. At the business unit level, risks related to credit policy extended to customers, their rating, etc. are targeted for mitigating it. At the corporate level, risks faced are broader in nature based on the overall assessment of the business opportunities and projects.
Types of Risks faced by Tata Steel S teel
•
Financial Risk: Any financial strategy has to pass a series of scrutiny so as to
minimize the financial risks which is known as the Investment Management Process. The proposal is first 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 through a price ladder mechanism and a pricing
model (developed in-house) for linking the global prices to domestic price movements. The basic price ladders, forecasting model and the forecast values are continuously evaluated and improved. Strategic 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 known as the firms working capital. Managing the working capital needs of the organization is important, because shortage of funds could disrupt the day to day operations 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 Capital. Gross working capital is the sum total of all Current Assets, Inventories, Debtors, Loans & Advances & Cash & Bank balances. Net Working Capital is the difference between Current Assets & Current Liabilities & therefore represents the funds which the firm has to finance through Borrowings. A firm needs to invest 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 of the business and it is the primary responsibility of the management to keep it flowing to generate profits. A profitable business generates cash surpluses, which is used to expand the business. The faster the Business Expands, the more funds it will require for meeting its working capital needs. Good management of working capital will generate cash, help to improve profits and reduce risks.
The two most important elements in the business cycle that absorbs cash are inventory (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 the 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 and Sales.
Working Capital Management includes the following at Tata Steel: •
Debtors Management
•
Bank / Cash Management
•
Inventory Management
In order to analyze these, we need to go to the nitty-gritty’s of mode of financing by Tata Steel. These can be explained by the following: 1) O.E. Finance 2) Receivable Purchase 3) Channel Financing 4) L/C and Bill Discounting 5) Overdraft Management 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 realisation is becoming more and more important in the context of strategic benefits and 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 – Freight = Net Realization - Cost to serve (calculated on the basis of per tonne of sales) •
Sales Commission (paid to the agents)
•
Handling Charges (consignment agent 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,
advertisements,
administration) •
Inventory carrying costs (even for the consignment agents/conversion agents, charged at the bank rate)
= Net of Net Realization - Cost of production (costs incurred in Jamshedpur, the co sts are standardized per tonne of sales, which is revised from time to time) = Net Profitability of the customer
The above calculation is done on a monthly basis for each customer. This profitability statement forms the basis for deciding whether the company should continue with the customer or not.
32
Credit Worthiness of the customers is assessed on the following parameters: a.
Ability to Pay: Ability to pay is applicable to the organised sector only. It includes
the following: Solvency, Financial Viability, Technological Soundness and Commercial Feasibility. b.
Willingness to Pay: It is based on judgement of experts and is applicable to both
organised and unorganised sector. It includes the following: 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 the 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 done on a regular basis. Since 1999 the entire scenario has again changed. The company started having a separate department which would look after the collections on o n a daily basis.
Credit Management Process
Tata Steel has to continuously decide as to how much credit should be given to its customers and also the credit limit i.e. their maximum exposure. Prior to given credit, the credit department analyses the credit worthiness of the customers based on their financial parameters. 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 Account Manager). They collect all the required information abo ut the customers and fill the Lotus Notes form or the CMG Module which has a predefined template. Then the credit limit is fixed based on their credit evaluation. This credit evaluation 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, etc. 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 where 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 department or Tata Tata
Group Company or private limited companies or traders or distributors. For credit appraisal and risk assessment, customers are broadly classified into three groups: •
Organised Sector
Private & public ltd companies in the private sector, public sector companies including government undertaking •
Unorganised Sector
Traders, partnership firms, SSI units etc. •
Government Departments
Defence, irrigation, Power, Railways, PWD and CPWD
Supporting Sections for CMG Co-ordination •
Accounts (Marketing & Sales-Kolkata, Jamshedpur)
•
Customer Service Department
•
CRM and HSM, WRM Despatch
•
Financial Controller – Flat and Long Product
•
Finance Managers
•
Tata 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 Balance Sheet. Since these companies are listed hence their Balance Sheet can be relied upon in the process of giving credit. It can tell us about the value of the company and the amount of working capital the company has. CAMs are responsible for entering the non-financial information of the company into Lotus Notes such as the products to be sold, credit period and the nature of the credit, etc. All these are then send to the Regional Finance Manager (RFM) via an electronic mail, along with the Balance Sheet of the company, who updates the Lotus Notes with 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 for 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 the credit. The CMG assigns and approves the credit limit based on the recommendations made by the RFM. In case RFM/CMG rejects a credit request, CAM can appeal directly 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 basis for future credit transactions with the customer.
In case of Government Departments like Railways, PWD, etc. credit is extended on the basis of the past track record of the business transaction. These companies do not have a published Balance Sheet. For such enterprises RFM automatically gives his consent for the proposal. 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 Departments and no financials shall be required to t o approve credit limit for them.
A Private Limited Company or Partnership has a Balance Sheet which cannot be completely relied upon. Hence they require many more information apart from it. It includes Credit Limit desired and the payment terms with the customer, monthly lifting 35
of the Customer, Future expected monthly business potential, Price negotiated, Credit 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, Overdue >6 month, Sales & collection of the customers,
Market Information on customers 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 dealings are finalized with those Traders who offer highest prices. Their credit worthiness cannot be judged on the basis of their Balance Sheet or any other financial statement. Credit to a trader is given for a specific sale and a period. After the sales are complete, the credit continues for the allotted period and thereafter it is reversed.
Distributors are authorized customers by the Company having 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 credit to the distributors.
Debtors Control
After the credit is extended to a customer, the CMG keeps a regular track of the status of outstanding and overdue. At the beginning of each month, for each customer, Manager-Marketing sends an Accounts 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 outstanding, system stops any further delivery orders thereby stopping further sales. In case where customer’s total outstanding has become overdue > 2 months, while releasing 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.
36
Along with the control of debtors, their accounts needs to be continuously reconciled 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 Manager sends the Account Statement to all the customers for confirmation of balances.
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 interest payment are mentioned at the time of credit sales in the Sales Order or the 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 updated very instant. Thus, when the credit sales are made, all information like invoice 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 sends 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. This module is very exhaustive because it captures all the information about the customer to whom credit is being given. It begins by capturing the essential information relating to sales like: •
Products to be purchased by the customer
•
Tonnage on cash
•
Tonnage on credit
•
Invoice price (Rs. / MT)
•
Credit period (Days)
•
Proposed credit (Rs. Lacs)
•
Total tonnage
•
Share of spend (%)
•
Future expected Monthly lifting potential (MT)
A customer might already have an account with Tata Steel. In such cases the accounts status of the customer as on the date when credit sales is being made are also entered into Lotus Notes. These includes the amounts of outstanding and overdue as on a particular date, Cheque payment history, existing credit limit, interest free credit period, Guarantee provided, if any, level of secured and unsecured credit. It also mentions whether the customer’s company has been rated by a credit rating agency or not, how is its relationship with Tata Steel and what is its level of Management Quality.
This module also asks whether the customer’s company has been referred to the BIFR. All details of relevant financial figures of the current financial year and the past two years are recorded in Lotus Notes. Some of such figures are Working Capital, Retained Earnings, EBIT, Net Worth, Total Assets, Total Liabilities, Debt, Interest on Debt, Equity, Inventory, Receivables, Sales, PAT, etc. Apart from these absolute figures certain ratios are also recorded, such as Structural Ratios (Debt-Equity Ratio and Interest Coverage Ratio), Liquidity Ratios (Current Ratio and Acid Test Ratio), Turnover Ratios (Asset 38
Turnover Ratio, Inventory Turnover Ratio and Receivable Turnover ratio) and Profitability Ratios (Gross Profit Margin Ratio and Net Profit Margin Ratio). On the basis of these financial figures the credit management group calculates the Z-score of the customer which forms the Corporate Bankruptcy Prediction.
The Z-score formula
It is very essential to know when a company is at risk of corporate collapse. To detect the signs of looming bankruptcy, investors calculate and analyze all kinds of financial ratios: working capital, profitability, debt levels and liquidity. However, each of these ratios gives different implications which might turn out to be contradictory also. Thus, NYU Professor Edward Altman introduced the Z-score formula in the late 1960s which is weighted of the five key performance ratios into a single score. This gives a very good overview of the corporate 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 Assets B = Retained earnings / Total Assets C = Earnings before interest & tax / Total To tal Assets D = Market Value of Equity / Total Liabilities E = Sales / Total Assets
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 with scores above 3 are unlikely to enter bankruptcy. Scores between 1.8 and 3 lie 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 their 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 industry as a whole. However, in Tata Steel the following are used: Above 4 is considered to be low risk, between 4 and 2.6 is considered to be medium risk, less than 2.6 is considered to be high risk and less than 1.1 is a sign of Bankruptcy. Bank ruptcy.
In the credit management module the following are also included: 1) Technology possessed by the customer: •
Product Quality
•
Product Mix
•
Technical Know How
•
Power Availability
•
Process Suitability
•
Plant / Equipment condition
2) Economic / Commercial factor of the customer: •
Product Salability
•
Raw-Material Availability: Debtors Quality
•
Labour Relations
•
Insulation from change in import / local tariff
•
Compliance with legal / Regulatory Authorities
3) Quality of Management of the customer: •
Track Record
•
Market Reputation
•
Experience in field
•
Ownership Disputes (absence of)
•
Technical Competence
4) Credibility of Management of the customer: •
Ethical in business dealings 40
•
Commitment Level
•
Relationship with Creditor
•
Relationship with regulatory authorities
•
Relationship with banks
•
Relationship with competitors
5) Past performance with Tata Steel •
Length of sound dealings
•
Promptness in payments
•
Honouring commitments
•
Payment patterns and adherence to credit terms
•
Willingness to furnish information
•
Capacity to hold stocks
•
Ability to absorb supply spikes
•
Avoidance of over-trading
6) Health of the group companies •
Financial soundness of the group company
•
Possible diversion of funds to new business ventures (unlikely)
•
Bank Ratings
41
FACTORING OR BILL DISCOUNTING Tata Steel has two types of customers: •
Original Equipment Manufacturers and other 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 would try to convert its debtors to cash. This can be done either by restricting credit 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 sell 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 funds 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 restrict 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 time spend by CAM’s following up for pa yment
•
No legal cost as assignment of Legal Rights Ri ghts 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 invoice 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 the specified parties and makes an upfront payment to Tata Steel of the corresponding amount. For providing the facility of discounting of the bills, the Bank charges 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 liable 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, then 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 discounted is the difference between the due date when the bill expires and the discounting date. The amount of discounting charges is calculated on the basis of this along with the rate at which the bank discounts the bill. Discounting Charges = Bill Amount * Days Da ys Discounting * Rate of discounting.
FACTORING FOR DISTRIBUTORS
The factoring facility that is extended for the distributors of Tata Steel is known as CHANNEL FINANCE. It helps in meeting the financing needs of the distributors. 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 carrying 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 Steel carries out its channel financing activities with the help of a separate company named Metaljunction.com. Thus, the entire factoring of distributors has been 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 credit limit, thereby reducing the overall exposure to uncertainty and chances of bad-debt. The quick receipt of money has now been possible because of the electronic 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. Distributor submits documents to Bank 2. TISCO provides LOR & LOC to Bank 3. Bank assigns credit limit to distributor 4. Distributor registers on Metaljunction for transaction 5. Raises a finance request 6. Bank confirms by giving an MRX no. Credits Credits Tata Steel’s account & debits Distributor account 7. Finance manager makes a Money Receipt 8. Distributor pays bank after credit period along with Interest.
OE FINANCE OE Finance is arrangement between Tata Steel and the Bank wherein all the prospective receivables against invoices issued are sold to the bank. It is invoice backed financing for the purchases made from Tata Steel, on a WITHOUT RECOURSE basis to Tata Steel as
44
to principle and overdue interest. The programme size for this is around 150 crores. This arrangement does not block both Tata Steel’s and the customer’s line of credit because these are unsecuritized credit given to the party. Currently this type of financing is being done through Citibank and HDFC bank. The other banks to whom the proposal has been send are Standard Chartered Bank and Bank of America. It is a Tripartite agreement wherein the bank finances Tata Steel’s customers so 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 being 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 setup, financials of the OE customers and the Bank’s internal credit guidelines. The OE customers are broadly classified under two categories: •
Category A: This includes factoring for large corporate who has or are targeting
corporate banking relationships. 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 agree for direct debit to their account with HDFC Bank. •
Category B: These include those customers who are having no banking
relationship with HDFC. Hence it is invoice 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 required in its operations: The invoice details are electronically sent
to Tata Steel 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 d emand (in case of audit) or in case of dispute / default.
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Operations process flow:
1. In the first place, Tata Steel sends a recommendation 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 customers 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 Category Catego ry 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 into 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. MIS 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.
6. The interest on the invoice amount for the number of days of discounting is 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 the Bank. The invoices will be made available to the bank at request or for any internal / RBI / statutory inspection requirements. The bank will also be allowed to do a sample verification v erification of the invoices once a quarter qua rter at its discretion. 8. In case of material rejection / goods not received by the end customers, the transaction would be reserved and the amount would be debited to Tata Steel’s account, to the extent of the rejected amount.
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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 bank on a particular date. It is known as factoring of the receivables. This factoring is done on WITHOUT RECOURSE to TISCO as regards the Principle and Overdue Interest. This arrangement is different from OE Finance in the sense that unlike OE Finance, here the debts are not sold off prospectively. In this the invoices which are to be factored are issued invoices. The company sells a set of receivables to the bank and gets the discounted amount on the date of discounting and also debits Tata Steel’s account by the amount of interest charges. The date of discounting 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 authorization 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 its RPs with HDFC Bank. HDFC Bank shall conduct a due diligence audit of the invoices 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 forward the details of the invoices which are paid in a particular week. All invoices collected by Tata Steel from its customers throughout the week ended Tuesday is to be paid to the bank on Wednesday. These details are compiled at the Tata Center, Kolkata Office, Head of Marketing and
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Sales and then the Payment is forwarded to the bank along with a debit authorization 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 bank 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 Flat Product Department of Tata Steel. All the receivables from each of the department is handled by the Finance & Accounts Department at Tata Centre.
The receivables of the following customers in the Long Product Department are treated for receivable purchases: •
HCC
•
GAMMON
•
Ramswarup
•
Mahanadi Coal Fields
The receivables of the following customers in the Flat Product Department are treated for receivable purchases: •
Blue Star
•
HMS 1
•
Hongo
•
LG Electronics
•
Mark Auto
•
Maruti 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 customer code in SAP and any invoice raised in the name of a particular customer is 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 from the customer on a regular basis. This report is downloaded from SAP in an excel 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 allocation-wise and separate excel file is prepared for each branch. These individual files are then sub-totaled due date wise and sent to the respective branches so that the branches can pass the entry entr y for money receipt.
The Master Dump looks like the following:
CUST. NAME
BRANCH DOC. INV. NO.
NET
DATE DUE
INV.
INV. DISC.
AMT. NO.
PAYMENT INT.
DATE DATE
DAYS AMT.
DATE
The first 7 columns are downloaded from SAP into excel. This is done for both flat product and long product customers. Thereafter, a final master list is prepared by pasting all individual customer invoices into a single file. This is the final 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 branches are intimated to send the receipts for the week to the Tata Centre, Kolkata. For this the Finance Managers from all the branches are suggested a colour in 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 transferred to bank vendor account. After getting all the payment details, all the files are consolidated and sub-totaled branch allocation-wise and advice for payment 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 bank vendor.
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INT.
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's drafts up to a stated amount. It is a commercial instrument through which a bank or other financial institution instructs a correspondent 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 credit 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 till that specified amount and cannot exceed it. It is used as an instrument for payment by most of the companies nowadays. Those who issue such letters are usually 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 means 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 company which is secured in nature. The entire procedure of operating through a L/C shall be explained with an example. One of the customers in the FAMD department is M/S Jindal Stainless Ltd. We take a scenario where Tata Steel has raised 7 invoices 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 charges 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. This L/C value can be greater than or equal to the value of the sum of invoices raised by Tata Steel. Assume that the opening bank for Jindals is Canara Bank.
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•
Every L/C has separate specifications such as the name of the beneficiary, advising bank, negotiating bank, L/C number, date and amount, Analysis Test Certificate. In this case, the name of the beneficiary is Tata Steel. The advising bank is Tata Steel’s bank, to whom the opening bank shall make the payment. Here the advising 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 becomes 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 interest 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 goods to the Jindals and the date of negotiation. Opening bank charges shall be charged to the opener’s bank account and the beneficiary bank charges shall be charged 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 invoice and other required documents.
•
At the end of the credit period of the letter of credit, the opening bank shall have to issue a payment in the name of the beneficiary.
When Tata Steel accepts to receive the payment of its bills (several invoices make 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 charged for a duration from the date of drawing of invoices or bill to the date of expiry of the L/C. According to the arrangement with Tata Steel in the FAMD department, the company shall not bear the overdue charges in case of late receipt of payment from the customer’s bank. Thus, HSBC would transfer this burden on the issuing bank b y charging a certain interest for late payment. pa yment.
Prior to HSBC, Tata Steel 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 could be competitive enough and then in late December 2004, HSBC matched their rates with that of SBI. It was then decided that Tata Steel would discount its bills with HSBC from 1 st January, 2005 onwards. According to the agreement, Tata Steel would be discounting only commercial invoices having 30 days d ays of interest free period.
Problem of Interest burden on Tata Steel from HSBC in the FAMD Department
Tata Steel sells of its L/C to HSBC Bank. Payment for the L/C from the customers 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 factoring through L/C is found to be 6.5%. However, HSBC is charging 7.25% to Tata Steel 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 fact that whether actually the parties are paying late or not. In case of late receipt of payment by the opening bank, HSBC would charge an interest of 15% p.a. on 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 the 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 number and date, issuing bank or the customer’s bank, Name of the Applicant or the customer, 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 bill to the customer, the due date of payment for the L/C, the date of discounting 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. Prior 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 department i.e. Rathi Ispat Ltd., Jindal Stainless Ltd., Shah Alloys, Stainless India Ltd. Above 90% of the sales come from these customers.
What was done?
For each of the party, the difference in the days of receipt of Cheque by HSBC and issue date of Cheque is calculated. This gives the delays in receipt of Cheque. This should be minimum but according to HSBC’s claim it is very high. According to the calculations, for only 11% of the cases for Rathi Ispat the Cheque was received within two days of its issuance in 2005, for Shah Alloys it was for only 4% of 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 overall 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 entire 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 charged @ 7.25% on the bill for the number of days discounted. Thus, amount of interest = Bill Amount * rate of interest * Discounting no. of days. Thus, because of the fault of the customers Tata Steel has to bear excess burden of interest expenses for every bill that is discounted with HSBC. According to the calculations done in this respect, the savings that could be done for each party due to the difference in interest rates is as follows: Rathi Ispat –
Rs. 321041.0405
Shah Alloys –
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 company can effectively negotiate with the customers to ensure prompt payment of the bill on expiry. On an aggregate, inclusive of Tata Steel’s 4 prime customers, the company can save an amount of Rs. 771331.13999 only in a short duration of three months for 2005 onwards. (Refer Exhibit 3(v)). Thus, the company needs a modification in the terms of business with its customers. This shall great implications in the years to come. The following are the suggestions which could prove beneficial b eneficial for the company: •
When the payment is received by the bank, it is recorded on that date. However, no direct intimation is received by Tata Steel regarding it from the customer’s bank. Thus, there can be chances of wrong information being deliberately imparted and entered by the bank. Thus, in order to avoid any kind of such situations from happening or that could happen, Tata Steel should make 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 condition 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 benefit both the company and the customer. Tata Steel would be able to cut down on its interest expenses whereas the customer’ bank will save on the payment of interest @ 15% to the beneficiaries bank. This would in turn lower down the interest burden on the customer directly.
•
While negotiating with the customer, Tata Steel can specify that the opening bank of the customer should have an electronic mode 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, most of the opening banks are nationalized bank which are likely to be less electronically efficient as compared to the foreign banks that are nowadays entertaining discounting of bills.
9
Refer Exhibit 3(v)
54
•
Since the opening bank should ensure that the payment is received on time by HSBC, HSBC should claim to the opening bank to explain the reasons for the delay. As it has become a regular happening, the opening bank should take care of the same by giving all the details to HSBC.
OVERDRAFT MANAGEMENT Tata Steel carries out its financing activities through various banks. Two of its main banks that constitute more than 90% of the operational activities are State Bank of India and the Central Bank of India. Since years, Tata Steel was inefficient in managing its funds with the banks there were large balances of overdraft with them. This created a lot of burden upon the company. But this was realized soon and the overdraft was brought into control by the managers of the company. Money, which is received from Jamshedpur, is put into the current of with the 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, according 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. 10
Overdraft days for different months in State Bank Ban k of India MONTH Sept.'04 Oct. '04 Nov. '04 Dec. '04 Jan. '05 Feb. '05 Mar. '05 Apr. '05
10
NO. OF TIMES 0 0 1 0 0 0 2 3
Bank Statement of State Bank of India
55
AMOUNT (IN RS.) 0 0 28937061.97 0 0 0 23065575.95 46728341.5
OVERDRAFT SCENARIO ON MONTHLY BASIS
3.5
3
3 S 2.5 Y A D 2 F O 1.5 . O 1 N
0.5
2
1
0
0
0
0
0
0 Sep Sept.' t.'04 Oct. ct. '04 Nov. '04 Dec. '04 Jan. '05 MONTHS
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Feb. '05 Mar Mar. '05 Apr Apr. '05
REDUCTION OF DAYS SALES OUTSTANDING FOR THE FLAT PRODUCTS
The Flat Product Department has both cash and credit sales. Its customers largely cover several companies from the following industries:
•
Construction Sector
•
Automobile Sector
•
Auto Ancillary Sector
•
White Goods Appliance Sector
•
General Engineering
The credit limits, various credit terms and amount of credit given to each of the 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 of these sectors we need to analyze each of the sectors separately and exhaustively. 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 smooth upward trend. On the basis of this trend, the construction sector would grow at a rate of 8% till 2010, approximately.11
11
www.ibef.org
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GROWTH OF CONSTRUCTION SECTOR 14 12 10 % 8 N I 6 4 2 0 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2
YEARS
As predicted by Rupen Patel, managing director of the Rs 750-crore Patel Engineering, it is expected to clock a turnover of over Rs 2,000 crores in civil engineering 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 Building up of over-bridges, railway tracks, etc. have increased a lot. Examples for some of such activities since 2005 onwards are as follows13:
•
Nagarjuna Constructions has bagged an Rs 450 crores order for construction of a 4-lane highway on NH-58 from National Highways Authorit y of India (NHAI).
•
Mumbai-based Patel Engineering bagged orders for two irrigation projects in Andhra Pradesh worth Rs 878 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, meanwhile, are switching their focus back to the Indian market.
12 13
www.google.com www.ibef.org
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•
Projects in industries such as surface transport (roads, bridges, railways), energy 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 engineering and construction hub. The value of FII holding is increasing at the cost of domestic holding. The sharp rise in overseas interest for engineering and construction firms comes on the back of strong order inflows, which have shot up in recent 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 biggest industry player Larsen & Turbo, which exited its cement business to re-emerge as a specialized engineering and construction company, has seen a sharp rise from 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 on a very large scale. The SWOT of this sector is as follows: Strength: •
Large potential for expansion in the sector supported by huge investments encouragement by the government.
•
Housing industry is being considered as a health h ealth barometer of the economy.
•
Increasing volume of infrastructural activities being undertaking in India as well as globally.
•
Increase in the per capita income of the middle-class 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.
•
Reduction in the minimum land area requirement in the residential sector from 100 acres to 25 acres.
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•
Minimum area for commercial development pegged at 50000 sq. meters.
Opportunity: •
Liberalization of FDI in the construction sector upto 100%.
•
Loan for infrastructural activities available at a cheaper rate.
•
Raw-material cost is expected to decline over the next 2 years.
•
Outsourcing being introduced in the sector 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 construction 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 market size of approximately Rs 540 billion and consistent growth figures of nearly 8% per annum, India's automobile sector consists of the passenger cars and utility vehicles, commercial vehicle, two wheelers and tractors segment. In the passenger car segment the big players are Maruti Udyog Ltd., Tata Motors Ltd. and Hyundai Motor India. In the motorcycle segment, we have Hero Honda Motors Ltd. and Bajaj Auto Ltd. India's automobile sales expanded by 15.9% in the year ended March 31, 2005 to 7,896,475 vehicles as against 6,810,537 vehicles sold in the fiscal year 2003-04. This includes sales of passenger cars, two-wheelers and commercial vehicles, including utility vehicles and multi purpose vehicles. Automobile exports, meanwhile, jumped 31.2% in
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the year ended March 2005 to 629,887 units with passenger cars and motorcycles contributing to the bulk of exports.14 INFAC is forecasting a 12-15% annual growth 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, DaimlerChrysler, Honda, Toyota, Hyundai, already have made significant investments in India. In the next 2-3 years from 2005, 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. Annual growth was 16.0 per cent in April-December, 2004; the growth rate in 2003-04 was 15.1 percent. The automobile industry grew at a compound annual growth rate (CAGR) of 22 per cent between 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 turnover of the auto-component sector, the automotive industry’s turnover, which was above Rs. 84,000 crores in 2002-03, is estimated to have exceeded Rs.1, 00,000 crores in 2003-04.15 16
Current scenario in the auto sector •
Car market leader Maruti has lined up around Rs 6,000 crores for its new plant and engine facility.
•
Hyundai too has planned a $450m second plant with component makers chipping in another $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 the 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 crores in ‘05-06.
14
www.ibef.org www.steel.nic.in 16 www.google.com 15
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•
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 investments, including money being pumped in by the components sector as OEMs ramp up capacity.
The entire auto sector is expected to grow by 15% till 2010. The auto sector combined with the auto ancillary sector can be graded as high in terms of opportunity 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 maintain it. The Auto sector lies in the first quadrant in the growth-exposure matrix. AUTO ANCILLARY SECTOR
A growth of 30% in automobile sales in ‘04-05 is encouraging ancillary majors to invest heavily in capacity expansions. It is spending around Rs 1,600 crores in creating new capacities over the next 2-3 years. The larger ancillary companies have benefited from strong demand for commercial vehicles, passenger cars and two-wheelers, auto components companies have been able to protect their profitability despite rising metal prices, mainly of steel. The growth in the Indian auto ancillary sector was around 16 percent by the end of the 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 growth of auto component exports from India has spurred due to availability of skilled, low cost labour and the high quality consciousness.17 Among the companies outsourcing from India are General Motors, Ford, Daimler Chrysler, Hyundai, Fiat, Toyota, Delphi, Navistar, Visteon, Cummins and Caterpillar. A 17
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number of Indian companies with global ambitions are gradually moving towards creating a niche in the world market: Bharat Forge Ltd. and Tata Auto Components System (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 Management) 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 are 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 the auto ancillary sector which is quite high. Along with this, the sector is showing a low growth rate. In the growth-exposure matrix the auto ancillary sector lies in the forth quadrant. So the company needs to reduce its exposure to this sector by some extent. This is necessary to ensure that the company compan y would not suffer in case of adverse adve rse situations. The SWOT analysis of the auto and the auto ancillary sector is as follows: Strength: •
Diversification in the variety of vehicles.
•
Increase in the standard of living of the people leading to rising demand for new vehicles.
•
Reduction in the duty rates in Budget 05-06.
•
Export friendly norms provoking manufacturers to expand their business with better quality.
•
Good rate of R&D activities being undertaken.
Opportunity: •
18
Falling steel prices.
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•
Foreign player are coming.
•
Innovation is taking place at a high speed due to improving technology, new models of vehicles being introduced.
•
Expansion through setting 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 industry.
•
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, Dishwashers, Electrical Lamps & Tubes, Storage Batteries, Dry Cells, Lead Acid Battery, etc. The important players in this sector are: Electrolux, National, Daewoo, Whirlpool, Godrej, BPL, Videocon, Samsung, LG, Onida and Maharaja. White goods industry has been growing at an average rate of 10-12% every year for the last five years. The Industry is focusing smaller goods in the range of 3 to 4 kg capacity as compared to larger machines as there are more and more nuclear families rather 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 is greater consumer awareness about the quality and safety of these goods, driving the manufacturers to adhere to the quality standards. The state government will encourage producers of refrigerators, washing machines, kitchen appliances, TVs, furniture and other domestic goods.
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19
Refrigerator Industry •
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 having increasing market share.
•
Refrigerators form the largest segment of this industry and is estimated at about 3 million appliances, followed by washing machines at about a million appliances and air conditioners, which are about .6 million appliances.
•
The Refrigerator industry is growing at a rate of 10 to 12 %, Washing 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 rapidly with a growth rate o f 20% every year. However, the penetration of this category is very ver y low. The industry is almost divided 50:50 into room air conditioning and package air conditioning. Example: Whirlpool •
Whirlpool is a mass player with 27% market share in R efrigerators and a 20% market share in washing machines. They The y are leaders in refrigerators.
•
Due to their global 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 average of 70% to 80%.
•
They are the key suppliers in Asia and also countries in Latin America, Europe Europ e and the US.
•
19
Electrolux is its global competitor
www.google.com
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The SWOT analysis of the White Goods Industry can be enumerated as follows: Strength: •
Growth in the service sector.
•
Quality products being demanded by the public 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 competition.
•
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 in terms of threat and opportunity. It is showing a very high growth rate of 16.82% 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 GOODS SECTOR SE CTOR 60 50 40 30 % 20 N I 10 0 -10
1996
1997
1998 1999
2000
2001
-20 YEAR
66
2002 2003
2004
2005
However, the amount of business of Tata Steel with companies in this sector is to the extent of only 4.04%. This corresponds to a very small portion of the total outstanding inclusive of all sectors. In the growth-exposure matrix, the white goods sector lies in the second quadrant. GENERAL ENGINEERING SECTOR
The general engineering sector consists of the various va rious industries. A brief on such industries is mentioned as follows: Heavy Industry: Heavy Engineering Industry is one of the largest segments of Industrial
production. It occupies a whole range of industries 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 ranging from 6% to 28%. Trends across major sectors show that growth in the two lead sectors-capital goods and consumer non-durable goods-have decelerated but still remain at the double-digit levels which have been compensated by the strong recovery in the intermediate goods segment. se gment. Machine Tools Industry: It is the Backbone 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 around 125 machine tool manufactures in the organized sector as also around 300 units in the small ancillary sector. Mining Equipments: At present there are 32 manufactures in the organized sector both in
public and private sector for underground and surface mining equipment of various types. Out of these 17 units manufacture 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 engineering goods. It also makes construction machinery, equipment for irrigation projects, diesel engines, tractors, and transport vehicles, cotton textile and sugar mill machinery. The heavy electrical industry meets the entire domestic demand. BHEL is the largest engineering and manufacturing enterprise in India in the energy 67
related/infrastructure sector today. It has been earning profits continually since 1971-72 and paying dividends since 1976-77. BHEL caters to the core sectors of the economy i.e. Power generation & transmission, industry transportation, telecommunication, renewable energy etc. Petroleum Industry: The petroleum industry in India is undergoing a major change. The
industry has been thrown open for private sector in all the major areas of exploration, production, refining and marketing, resulting in increased demand for the oil field and related equipment. The users are ONGC, Oil India Ltd. Sugar Industry: Domestic manufactures of sugar machinery occupy a predominant
position in the global scenario. They are capable 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 complete sugar plants and components with a current level of production value of Rs. 136.87 136.8 7 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 industries catering to the needs of textile sector. The Textile Machinery Industry are endeavoring to upgrade the production of sophisticated machines so as to cater to the needs of garments and weaving sector. Indian Textile Machinery Manufactures are manufacturing textile machinery. After the patent regime, Indian Textile 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 engineering 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. However, 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 the actual figure by the trend figure because
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none of the past 10 years data show a negative value. The reason behind the negative growth would not be sufficient to carry it forward to show a negative trend.
DATA SECTOR
CURRENT GROWTH
% OF TOTAL EXPOSURE
CONSTRUCTION
6.89
2.61
AUTOMOBILE
15.9
30.63
AUTO AUTO ANC ILLARY
0.63
52.00
WHITE GOODS
16.82
4.04
-5.05 (A), 4.47 (T)
10.72
GEN. ENG.
MATRIX SHOWING SECTORS WITH RESPECT TO GROWTH & EXPOSURE
H G I H
WGA AUTO
H T W O R G T N E R R U C
CONST.
GE (T) W O L
AUTO ANC. HIGH
LOW
LEVEL OF EXPOSURE GE (A)
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Outstanding payment and overdue payment:
When sales are made on credit, the entire amount of sales is outstanding as on the date of sales. The payment for the same 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 overdue in the name of the customer. Usually, we find that credit sales are negotiated by keeping in mind charging of overdue interest on the customer. Out of the total 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 for all sectors.
Overdue vs. Outstanding Sector Construction
% overdu overd ue (in terms of outstanding) 3.98
Automobile
6.03
Auto Ancillar A ncillary y
6.47
W hite Goods Goods
6.16
Gen. Engg.
11.68
Total
6.81
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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 expectation 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 is 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 market attractiveness quadrant qua drant in the matrix of 2010.
AUTO SECTOR
The cycle of fluctuations in case of the auto sector consists of three years approximately. This means that in every three years the sector experiences boom and recession respectively. 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 percentage is also as low as 6%. Tata Steel can easily maintain the current scenario. We can place this sector in the low risk and high market attractiveness quadrant 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 means 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.
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WHITE GOODS SECTOR
The cycle of fluctuations in case of the white goods sector consists of three years approximately. This means that in every three years the sector experiences boom and recession respectively. In this sector, by 2010 the growth rate would be more than 10% approximately. As observed from the data of 2005, 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 high 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 boom and recession respectively. They shall have a low growth rate by 2010. At present, 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 matrix.
2010 SCENARIO H G I H
AUTO ANCILLARY GENERAL ENGG.
WHITE GOOD APPL.
K S I R
CONSTRUCTION AUTO
W O L
LOW
HIGH
MARKET ATTRACTIVENESS
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STEEL INDUSTRY – WORLD
GROWTH OF STEEL CONS. IN THE WORLD 12.000 10.000 8.000 6.000 % N I 4.000 2.000 0.000 -2.000
1 99 99 6 1 99 997 1 99 99 8 1 99 99 9 20 00 00 2 00 001
2 00 002
2 00 003 2 00 004
YEARS
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 calculated i.e. Growth = (Current year – previous year) / previous year *100. The graph 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 is 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 Beijing 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 expected to fuel further demand for steel over the next three years.
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STEEL INDUSTRY – CHINA
GROWTH OF OF STEEL STEE L IN CHINA 30.000 25.000 20.000 % 15.000 N I 10.000
5.000 0.000 1996
1997
1998
1999
2000
2001
2002
2003
2004
YEARS
The past data on the consumption of steel in China is showing 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 showing the growth figures are very fluctuative, rather increasing, in nature. There are a few dips in the growth rates. •
China’s red hot steel sector is expected to produce a record 350 mt of steel this year
•
According to the China Iron and Steel Association (CISA), China's steel output amounted to 220 mt in 2003 and, this year; it is projected to climb to 350 mt.
•
Chinese steel units produced 82.53 mt 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
•
According 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 cent year on year. 74
•
China's rolled steel output ranked the first in the world over the past nine years, making up 14 per cent of the world's total steel output.
•
The demand for rolled 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 country 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 brought down to 10%. Currently the customs duty on prime non-alloy steel and prime alloy steel is 5% and 10% respectively. respectively. The excise duty on all iron and steel items, items, which had been falling, has increased from 12% to 16% in the Union 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 from 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 TISCO, 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 helped India as it was excluded ex cluded from the list. If the figure of steel demand of 840 million tonne for 2005 if is to be accepted, the world should be preparing for additional capacity creation in the industry. Even the current idle
75
capacities pressed into operation will not fully deliver the goods as the same will fall short of the target. The crux of the problem today lies in demand recession, 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-up demand. Prices could go down genuinely more with an increase in the asset intensity of the industry. Prices remain depressed forcing the producers to clear markets without covering their variable costs. Steel companies are pressed badly at their margins. (Refer Exhibit 1 and 2). Price per unit is so close to the average variable costs that steel producers can hardly aim at covering their fixed costs. This explains the world wide trend by which the steel companies are shutting down their lines, disposing off assets and hiving off related but non-core business. The industry did pay a lot of attention to the problem of the industry facing erosion in shareholders' confidence. The Ministry’s vision statement 2020 has placed a high priority to treble the steel demand in the coming decades. The problem of demand stagnation can be tackled by penetrating vast rural markets where consumption of steel at present is at the lowest. Industry Scenario
The industrial 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 manufacturing, capital goods and consumer durables. Six core industries, i.e. electricity, coal, finished steel,
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cement, crude oil and petroleum products registered a lower average growth of 5.4 per cent.20 21
STEEL SECTOR EXPANSION IN INDIA •
Steel magnate LN Mittal is expected 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 by 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 increase 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, provided it gets assurance from the state for captive mining leases.
•
Ruias plans Rs 2k-cr one mt mini steel plant as part of its backward integration plan reported a leading business daily.
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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 N I 4.00
3.00 2.00 1.00 0.00 1 99 6 19 9 7 19 98 1 99 9 2 0 0 0 2 0 01 2 00 2 2 00 3 2 0 04 YEARS
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 showing 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 PROJECTIONS TILL TILL 2010 (@5.68) ( @5.68) 50.0 ) t 40.0 m m30.0 n i ( . S 20.0 N O C 10.0
32.3
34.1
36.1
2005
2006
38.1
40.3
42.6
45.0
2008
2009
2010
0.0 2004
2007 YEAR
78
Reasons for the projection in the growth rate Indian scenario:
•
The early recession 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 being made in the construction sector.
•
Overall economic growth of the country. countr y.
Boom in the Global Economy:
•
Olympics infrastructure with investments in China
•
Housing 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 high actual growth rate.
GROWTH IN STEEL IN THE WORLD NET N ET OF CHINA 12 10 8 6 % 4 N I 2 0 -2 -4
1995
1996
1997
1998
1999 YEARS
79
2000
2001
2002
2003
BCG MATRIX The Boston Consulting Group (BCG), a leading management consulting firm, developed and popularized a growth- share matrix. The market growth rate on the vertical axis indicates the annual growth rate of the market in which the business operates. 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 horizontal axis, refers to the various companies’ market share relative to that of its largest 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 sales volume is only 10% of the leader’s. Relative market share is drawn in log scale, so that equal distances represent the same percentage increase.
The growth-share matrix is divided into four cells, each indicating a different type of business. They are Question Marks, Stars, Cash cows and Dogs. These have been explained 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 – market growth rate axis, where we take the US economy as a benchmark economy. All other countries are represented in terms of US market share. First of all, we are given the consumption of steel in the global economy including includin g India in the following 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 for 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 percentage of its consumption in 2004 with respect to the total global consumption. 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 that of the US market share. Thus, the relative market share of any country can either be less than or greater than that of US economy. According to the calculations, 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. 22
WORLD STEEL CONSUMPTION
YEAR
CHINA
EU(15)
CIS
US
S.KOREA
JAPAN
INDIA
OTHERS OT HERS
TOTAL
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
87.4 100.7 103.3 110.7 122.6 124.6 153.4 185.6 232.4 265
129.2 113 128.5 139.6 137.3 143.8 139.6 138.1 137.5 145.7
26.5 25.2 27.7 24.5 28.1 35.6 38.4 36.7 38.5 52
100 107 113.4 119.8 116.4 120 106.2 107.4 100.5 115.9
35.2 37.4 37.9 24.7 33.8 38.3 38.1 43.7 45.8 47.2
77.7 75.8 79.9 70.3 68.9 76.1 73.2 71.7 73.4 76.9
22.2 22.8 22.9 23.2 25.1 26.3 27.1 28.9 30.3 32.3
166.9 167.1 188.3 179.3 175.8 193.6 194.9 208.7 214.4 232.9
645.1 648.9 701.8 692.1 707.9 758.4 770.8 820.9 872.7 967.9
CAGR
11.7
1.2
7.0
1.5
3.0
-0.1
3.8
3.4
4.1
CIS 5.4 0.4
US 12.0 1.0
S.KOREA 4.9 0.4
COUNTRY MKT SH. FOR 2004 REL. MKT. SH.
CHINA 27.4 2.3
EU(15) 15.1 1.3
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 following in terms of the above: China is a star, EU (15) is a cash cow and Japan, India, 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%
STA RS
?????
15%
e t a R h t w o r 10% G t e k r a M
CHINA
CASH COW
DOG CIS
5%
INDIA OTHERS
S.KOREA
EU(15)
U.S
0% 10 X
JAPAN 5X
1X
0.5 X
0.1 X
Relative Market Share
From the above matrix, we can draw the following conclusions for the various countries: cou ntries: CHINA: China, being a star economy, can be said to be leaders in business and they
should also generate large amounts of cash. However, they should ensure 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. They can have low levels of investments because of the low growth rate. JAPAN, INDIA, CIS and S. KOREA: These countries need to be careful against each
other, being 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 growth rate as well as a very low market share, there is a chance of them getting liquidated, 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 components 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 clear that the Working Capital scenario has improved a lot. The amount of credit given is also under und er control.
Working Capital Management 70 60 50
e l a S 40 f o s 30 y a D 20
58
55 44
57 53 47
DEBTORS 38
41
38
37
INVENTORY
25 16
10 0 FY'01
FY'02
Years
FY'03
FY'04
83
NET WORKING CAPITAL
EQUITY ANALYSIS - INTRODUCTION There are two general schools of stock analysis: fundamental and technical. FUNDAMENTAL ANALYSIS
Fundamental stock analysis requires, among other things, a close examination of the financial statements for the company to determine its current financial strength, future growth and profitability prospects, and current management skills, in order to estimate whether the stock's price is undervalued or overvalued. A good deal of reliance is placed on annual and quarterly earnings reports, the economic, political and competitive environment facing the company, as well as any current news items or rumors relating to the company's operations. Simply put, fundamental analysis concerns itself with the "basics" of the business in assessing the worth of a stock. Numerous ratios, derived from balance sheet and income statement data, are used in fundamental analysis including such widely used ratios as, Working Capital Ratio, Debtequity Ratio, Return on Equity Ratio, Earnings per Share, etc. Fundamental analysis may be the preferred method to use for mid to longer term investors. However, it is not suitable for use by day traders because of the amount of research required, and the fact that trades are entered into and exited within a very short time frame. The massive amount of numbers in a company's financial statement can be bewildering and intimidating 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 analysis is the biggest part of fundamental analysis. Also known as quantitative analysis, it involves looking at historical performance data to estimate the future performance. 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't ignore the company's stock price; they just avoid focusing exclusively on it.
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Some of the indicators commonly used to assess company fundamentals include: cash 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's financial statements and assess its future prospects, investors can learn enough to know when the stock price is wrong. Those investors able to spot the market's mistakes can make themselves money--a lot of it. At the same time, buying companies based on intrinsic, long-term value protects investors from the dangers of day-to-day da y-to-day market flux. However, the fact that fundamental analysis shows that a stock 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 independent-minded investor can start doubting the merits of fundamental analysis. There is no magic formula for figuring out intrinsic value.
FUNDAMENTAL ANAYSIS OF TATA STEEL – Valuation of Intrinsic Value of the share of the company as on February, 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 years and 6th year onwards. We undertake the following calculations, assumptions and conclusions on the basis of the previous 5 years financial figures: •
Estimated growth 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 calculated for each of the previous years. These figures were found to be very fluctuative in nature, ranging from -1.89% to 30%. Thus, in order to project the income 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 the 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 to project the cost component for the coming years. We find that Tata Steel has been successful in reducing the cost component significantly in the last few years. 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 structure remains static at the 2004 value. The ratio of cost of sales to the operating income came out to be 0.6623. (Refer Exhibit 4(i)).
•
The ratio of cash operating profits before taxes to the operating income comes out to be 0.3377 (1-0.6623). Thus, on the basis of the projected operating income for the coming years we calculate the projected cash operating profit before taxes by using the formula COPBT for a year = Operating profit for the year * ratio of COPBT to the operating profits.
•
Tata Steels intends to spend 9100 crores for next 6 years to increase its capacity from from 4.7 mT to 9.2 mT.
This means company will spend on an
average 1200 crores per year for next 6 years till 2010. So we assume that it uses Rs. 1200 towards asset creation. Also during early 1990s Steels sector went for capacity 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 China & increased infrastructure spending in India, Industry has good future growth. Thus projection using past data will not be accurate. •
We assume that for each of the coming years the Net Block would be the sum of the previous years net block, Reinvestments for the year or the net purchases in the assets and the constant (assumed to be Rs. 1200) additional investments for the year.
•
The rate of depreciation, for each of the previous 5 years, is determined on the basis of the following formula:
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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)). 2 )). Thus, for the future we assume that the rate of depreciation would be the average of these separate rates for the 5 years. (Refer Exhibit 4(v)). •
The projected depreciation for the next nex t years is calculated using the formula: Depreciation = (Previous years Net Block + 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 average rate of tax for the last 5 years. Here we find the Effective Tax Rate and the Cash Tax Rate where Effective tax rate (in %) = (Provision for taxes / Adjusted 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 Exhibit Ex hibit 4(ii) and 4(iii)).
•
Projection for cash flow from investment activities is the 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 assumptions made. These projections indicate cash outflows because of investments activities. (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)).
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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. •
The weighted average cost of capital (WACC) for the company can be calculated to be 10.71%.
•
From all the above calculations we can determine the projected cash operating profits after taxes and the projected free cash flow o f the firm. Cash operating profits after taxes = (COPBT – Dep.) * (1-T) (Refer Exhibit 4(viii)). Projected FCFF = Projected COPAT + Changes in W.C. + Projected CFIA While projecting 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 discounted 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 projected and discounted FCFF = 26850.37
Thus, the Fair Value of the firm / share (Rs.) = (Present Value of the firm – (Secured Loans + Unsecured Loans)) / Equity Equ ity 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 not written off) / Equity share capital Book Value Of the share of Tata Steel = 118.55 (Refer Exhibit 4(x)). th
Market Price of the share of Tata Steel as on 24
June, 2005 at 3.30 p.m. =
363.40
Thus, we can now say that the share of Tata Steel 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 analysis 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 very conservative and narrow in scope of analysis. It does not incorporate in the market 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 type of analysis is done on a daily basis and takes into consideration the market sentiments towards a particular company’s share.
Technical Analysis
Technical analysis does not concern itself with a company's basics or fundamentals. Rather, technical analysis involves the study of a stock's trading patterns through the use of charts, trend lines, support and resistance levels, and many other mathematical analysis tools, in order to predict future movements in a stock's price, and to help identify trading opportunities. The basic foundations or premises of technical analysis are that a stock's current 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 to repeat themselves or trend in some direction. Bob Prechter, a famous practitioner of technical analysis once commented that, "... the main problem with fundamental analysis is that its indicators are removed from the market itself. The analyst 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 forced 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 gives them an edge right off the bat. Their main advantage is that they don't have to forecast their 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 Strength Index, and the trend following indicators such as Moving Averages. While technical analysis can be a great help in trading the market, no technical indicator is infallible. Further, technical analysis is only as good as its interpreter. Finally, a significant of time must be spent in learning the principles of technical analysis, and in how to properly interpret the various charts and other technical indicators.
FINANCIAL ANALYSIS (Refer Exhibit-5(i), (ii), (iii) and 6(all)) Profitability
The fortune of the Steel industry changed and so did TISCO. After experiencing the lowest profit in 2002 which was the worst year for steel industry, when the global demand was at an all time low the fortunes changed. TISCO is also one of the most cost efficient steel producers in the world. For 2002-2003, TISCO reduced 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 better 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 and 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 infrastructure, 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 experienced a growth of 22% from the previous year. Return on Equity
The Return on Equity has considerably increased owing to the increase in Profits after Tax. The ROE is the indicator of as to how much return the company has been able to earn per 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 whole. The demand was going down and thus needed debt. In the year 2002 the company had paid an interest amount to Rs 430 crores and had debt amounting to Rs 4300 crores. In 2003-04 the debt component came down to Rs 3300 crores and the company 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 stronger. 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 lower interest cost. This is in line with the company's decision to prepay its high-cost debts. It is also in talks with lenders to settle more debt. The total debt 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 the 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 premium 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 2.18 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 next year owing to greater profits and cost efficiency. The company is in a good position since it has been able to sustain its costs and the company is fundamentally 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 investors were actually ready to pay a higher price. The industry is cyclical in nature 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 receivables, bank and cash balance, inventory and other miscellaneous expenses. Current Liabilities includes creditors and outstanding. The tremendous fall in the net working 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
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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 previous year, the working capital of the different departments has increased in terms of days of debtors and days of inventory. This has been observed for Long Products, Flat Products and Ferro Alloys & Minerals Division. (Refer Exhibit 7(iv), (v) and (vi)).
Inventory
The level of inventory in the different departments has 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 debtors 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 company. (Refer Exhibit 7(iii)).
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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:
•
Comp uters. Computers: Large Computers, Mid-Range Computers and Desktop Computers.
•
Networking: Campus Local Area Network (LAN), Countrywide Wide Area
Network (WAN). •
Infrastructure: Development and Services Support Facilities.
MAJOR PROJECTS UNDERTAKEN
1) SAP for Finance and Accounts: SAP implementation was extended through a new
project called ‘Rupantar’ to Steel Works, Administration, Town, 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 implemented on 1st December 2001 in a record 94
time of 10 months from the time it was conceived. Due to which Tata Steel was adjudged the Best SAP R/3 implementation in India by SAP.
2) Information System for CRM
3) Data warehouse and data d ata mining for Hot Strip Mill
4) Office automation
5) E-application such as e-Procurement and e-Tender
6) Web sites for different divisions and several intranet applications
7) Knowledge management site for sharing and an d dissemination of knowledge.
SAP
SAP, an ERP system, was implemented at Tata Steel for better customer order management and fulfillment. SAP was introduced in the areas of sales and distribution, material management, Financial-Account 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 orders, settle complaints, develop new products and reconcile accounts, in substantially lesser time.
Online availability of data will further improve Inventory Management in the stockyards, leading to better customer service. 95
TATA STEEL HUMAN RESOURCE POLICY Tata Steel recognizes that its people are the primary source of its competitiveness.
It is committed to equal employment opportunities for attracting the best available talent and ensuring a cosmopolitan workforce.
It will pursue management practices designed to enrich the quality of life of its employees, develop their potential and maximize their productivity.
It will aim at ensuring transparency, fairness and equity in all its dealings with its employees.
Tata Steel will strive continuously to foster a climate of openn ess, 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. Create 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
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PROCESS OF EMPLOYEE MOTIVATION
Identify Motivational Factors through:
Communication Informal Meeting Focused HR group discussion Employee Satisfaction Index (ESI) feedbacks
Employee Motivating Factors
Recognition by peers/seniors Rewards Performance Management System
Reinforce these in work environment
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 communication is achieved through Management Council, knowledge communities, Quality Circles presentations/competitions, etc. The effectiveness of communication mechanism is measured through continuous and regular feedback, satisfaction surveys, Employee Opinion Survey, intranet usage, etc.
Tata Steel also encourages job and career related development and learning for its employees through the Personal Development Plan (PDP) for the officers. It also encourages mid-year and year-end talent reviews through the Performance Management System known as EDGE (Ensuring Development and Growth of Employees). This helps in identifying the strengths, 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 organization.
Various criteria such as qualification, experience and competency are listed down in the Job Analysis Sheet and the individuals matching with the requirements are then identified. The prospective candidates are scanned by the peer group and by the seniors.
Recruitment: The identification of characteristics and 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, key functional responsibilities, key results areas, competencies necessary for the job. Recruitment at the entry level is done through campus selections at premier engineering and management institutions as well from the internet websites. It encourages having professionals from diverse backgrounds. Training is also given to the employees’ dependants, known as the Basic Plant Training Schemes, which is used for the recruitment of workmen.
While recruiting Tata Steel does not discriminate on the basis of gender, religion, or social status.
Retention: Tata Steel 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 company, working/living conditions and the compensation package so that the employees about the company and it shall reduce the attrition rate because of these reaso ns.
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 officers to
meet up with the advancement in technology and the nature of diversity in the organization. (Refer Exhibit 8).
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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 focuses on safety of the people. Occupational Health Department takes care of the health check-ups of the employees. It also initiates Health Awareness Training Programmes regularly along with an on-line feedback system. They are provided with 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 encourages regular internal and external audits to be carried out on environment, health 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
ACTION PLAN
Control employee cost (Strategy objective: Lowest cost producer)
Right sizing Variable pay system Divest non-core business Workers & supervisors training Preparing workers to occupy supervisory position Officers development through rotation & succession planning Reward high performance through variable pay To ensure ‘Parivesh’ – Annual plan to improve Health safety and environment.
Create leaders who will build our future (Vision element)
Improve employee satisfaction & commitment (Vision element)
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FUTURE OUTLOOK The Indian steel industry has been passing through a rough phase in the recent times. Excess capacities, huge workforces and lack of better technologies plague the sector. Even, globally the situation is no different either. The current performance performance 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 sinking into a sea of red. A global cyclical downswing is very clear. The worry, however, is that the global steel industry is heading for larger trouble than what has so far been presumed. According to estimates by International Iron & Steel Institute (IISI), crude steel production in 1998 was down by only 2.3 per cent compared to 1997. And 1997 was a record production year of 799 million tonnes.23 The fluctuating growth rates shown by developed countries after the 1973 oil crises were offset by sustained demand for steel in the developing world. The Asian financial crises changed that scenario completely. Traders panicked and liquidated the excess inventory they had booked in anticipation of higher prices. This caused a sharper price drop than warranted. The panic also resulted in a disproportionate 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 ability of some manufacturers to reduce prices further. Analysts estimate that for most steel products the price drop has been as much as 50 per cent. This has shattered the steel industry worldwide. Restructuring seems to be the only way-out. But most steel companies in developing countries had undertaken massive privatization programme between 1992 and 1996. That doesn't seem to have helped them much. New private players who had entered the steel business in a big way find their capital costs far too exorbitant, bringing down their chances of survival sharply. The only conclusion that emerges is that developed countries have benefited at the expense of developing countries.
23
Steel Ministry of India
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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 the company is to increase PAT from around Rs. 1000 Crores in 2003 to Rs. 3000 Crores by 2007-08.25 3. The company identifies that it needs to venture into New Business that would be more profitable other than steel, its core business, because 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 acquisition 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 products and brands to be sold through a World Class distribution system that would operate 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 Steel.
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) ITEM
KOLKATA
DELHI
MUMBAI
CHENNAI
Pig Iron Billet 100mm Blooms 150*150mm Pencil Ingots Wire Rods 6mm Wire Rods 8mm Rounds 12mm Rounds 16mm Rounds 25mm Tar Steel 10mm Tar Steel 12mm Tar Steel 25mm Angles 50*50*6mm Angles 75*75*6mm Joists 125*70mm Joists 200*100mm Channels 75*40mm Channels 150*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)
18875 22250 22850 20125 25450 25350 24250 25250 24850 23900 23875 24100 27450 27500 30450 29650 28050 32000 32325 31900 31750 32125 33100 32625 32150 34600 34000 37350 36225 37350 36400 16375 15775 12275
20000 25000 24000 21000 26200 26200 24500 24500 24500 27900 27500 27700 29500 28500 31500 31000 29400 29500 31400 31400 31800 32200 34000 31800 31800 34500 33600 39000 36000 39400 36400 17800 17200 15800
19200 23600 23600 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 38500 37750 15000 14600 14500
18000 22500 21500 22000 29000 28500 26500 25500 25500 26500 26000 27000 30500 30500 32500 32000 30500 30500 31800 32500 31000 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) ITEM
KOLKATA
DELHI
MUMBAI
CHENNAI
Pig Iron Billet 100mm Blooms 150*150mm Pencil Ingots Wire Rods 6mm Wire Rods 8mm Rounds 12mm Rounds 16mm Rounds 25mm Tar Steel 10mm Tar Steel 12mm Tar Steel 25mm Angles 50*50*6mm Angles 75*75*6mm Joists 125*70mm Joists 200*100mm Channels 75*40mm Channels 150*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)
18225 21750 21900 20525 25550 25200 24400 24400 25000 24250 24050 24425 27025 27025 31750 30250 28325 32175 32400 31975 31450 32325 33400 32575 32250 34250 34000 37450 35285 37450 35975 16450 15925 12850
20000 25000 24000 22300 27800 27800 26500 26500 26500 28700 28000 28200 29500 28500 31500 31500 29400 29500 33000 33000 33500 34000 35000 33000 33000 35200 34600 41000 36600 41000 37500 17800 17200 15800
19000 23550 N.A. 22750 26300 26000 28200 28000 28000 28250 28125 26750 27875 27500 29250 30000 28250 29875 32625 32875 32625 33350 33750 33625 33250 36750 35500 38750 38500 39000 38500 15500 15000 15000
18200 22600 21000 22000 29000 28000 26600 26500 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 %)
5
13
0-2 days
11
3,4 days 13
15
5,6 days 7,8 days 9,10 days
22 23
11,12,13,14,15 days 16 AND ABOVE days
EXHIBIT-3(ii)
LATE RECEIVAL OF CHEQUE BY THE BANK B ANK SHAH ALLOYS (in%)
4 4
0-2 days 17
39
3,4 days 5,6 days 7,8 days
13 17
4
9,10 days 11,12,13,14,15 days 16 AND ABOVE days
-c-
EXHIBIT-3(iii)
LATE RECEIVAL OF CHEQUE BY THE BANK B ANK JINDAL JINDAL STAI S TAINLESS NLESS (in% (in% )
0 6
0-2 days
11
3,4 days
31
5,6 days 14
7,8 days 9,10 days 11,12,13,14,15 days
11
16 AND ABOVE days
28
EXHIBIT-3(iv)
LATE RECEIVAL OF CHEQUE BY THE BANK B ANK STAINLESS INDIA (in%)
15
0-2 days
0 10
3,4 days 5
15
5,6 days 7,8 days 9,10 days
30
11,12,13,14,15 days
25
16 AND ABOVE days
EXHIBIT-3(v) TOTAL SAVINGS SHOWN FOR DIFFERENT PARTIES SINCE 2005 CUSTOMER
SAVING FOR 2005
RATHI SHAH ALLOYS JINDAL STAINLESS INDIA
321041.0405 248139.0777 161362.7016 40788.32008
TOTAL SAVINGS
771331.1399
Source: Data collected from HSBC Bank
-d-
EXHIBIT-4
FUNDAMENTAL ANALYSIS EXHIBIT-4(i) Vertical analysis of Income statement Year
Operating Income Expenses Material Consumed Manufacturing Expenses Personnel Expenses Selling Expenses Adminstrative Expenses Expenses Capitalised Cost Of Sales Operating Profit Other Recurring Income Adjusted PBDIT( COPBT)
2004
2003
2002
2001
2000
1999
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
0.3109
0.2557
0.2603
0.2408
0.2458
0.2808
0.1700 0.1928 0.2260 0.2344 0.2429 0.2397 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) 0.6623 0.7571 0.8322 0.7324 0.7661 0.8165 0.3186 0.2353 0.1549 0.2556 0.2230 0.1656 0.0192 0.0075 0.0128 0.0120 0.0110 0. 0110 0.0178 0. 0178 0.3377 0.2429 0.1678 0.2676 0.2339 0.1835
EXHIBIT-4(ii) Tax Rate Year
2004
Provision for Taxes Deferred Taxes Paid Taxes Adjusted PBT( after write offs) ETR CTR
2003
2002
2001
2000
1999
920.44 250.79 0.26 11.69 920.70 262.48 2828.36 1190.64 32.543 21.063 32.552 22.045
16.10 30.60 46.70 211.50 7.612 22.080
49.20 0.00 49.20 675.34 7.285 7.285
54.50 0.00 54.50 326.86 16.674 16.674
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.)
-e-
19.86 25.56
EXHIBIT-4(iv) Future Cash Flow from investing activities Year
2005
2006
2007
2008
2009
2010
Projected Investments in fixed Assets Projected Investments in securities Projected Replacements Interest & dividend earning
(1,200) (300) (625) 90
(1,200) (1,200) (1,200) (300) (300) (300) (650) (700) (750) 90 90 100
(1,200) (300) (800) 100
(1,200) (300) (850) 100
Projected CFIA
(2035)
(2060)
(2200)
(2250)
(2110)
(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
7,094.21 625.11 (907.53) 0.0907 0.084
7,342.72 555.48 (411.65) 0.0793 0.084
7,213.55 524.75 (502.68) 0.0773 0.084
7,042.39 492.25 (597.65) 0.0946 0.084
2000
1999
5,504.58 5,779.03 426.54 382.18 (649.80) (1,118.72) 0.0782 0.084 0.0840
EXHIBIT-4(vi) Year
2005
Reinvestments or Net purchases in asset Future Net block Depreciation
2006
2007
2008
2009
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.
2005
2010
2006
2007
2008
0.12 0.12 0.12 0.12 10908.41 12544.67 14426.37 16590.33 1254.47 1442.64 1659.03 1907.89 24.27 188.17 216.40 248.85
-f-
2009
2010
0.12 0.12 19078.88 21940.71 2194.07 2523.18 286.18 329.11
EXHIBIT-4(viii) Year
Operating Income( Projected) COPBT Depreciation COPAT= (COPBT- Dep)*(1-T)
2005
2006
2007
2008
2009
2010
11999.25 4052.15 1151.41 2030.52
13199.18 4457.36 1252.22 2243.60
14519.09 4903.10 1353.03 2485.05
15971.00 5393.41 1453.84 2757.70
17568.10 5932.75 1554.65 3064.67
19324.91 6526.02 1655.46 3409.40
EXHIBIT-4(ix) Year
Projected COPAT Changes in W.C. Projected CFIA FCFF
2005
2006
2007
2008
2009
2010
2030.52 24.27 (2035) 19.79
2243.60 188.17 (2060) 371.77
2485.05 216.40 (2110) 591.45
2757.70 248.85 (2150) 856.56
3064.67 286.18 (2200) 1150.85
3409.40 329.11 (2250) 1488.51
Value of firm in terminal year-2010, Rs crores Discounted Value
39482.96 19.79
335.81
482.55
631.24
EXHIBIT-4(x)
Present value of firm, Rs. Crore Present value of firm, $ billion Fair Value of Firm/ share (Rs.)
26850.37
5.97 424.18
Source: Calculations done on the basis of past financial statements
-g-
766.08 24634.70
EXHBIT-5 EXHIBIT-5(i)
FINANCIAL HIGHLIGHTS
INCOME STATEMENT Mar ' 04 Income : Operating Income Expenses Material Consumed Manufacturing Expenses Personnel Expenses Selling Expenses Adminstrative Expenses Expenses Capitalised Cost Of Sales Operating Profit Other Recurring Income Adjusted PBDIT Financial Expenses Depreciation Other Write offs Adjusted PBT Tax Charges Adjusted PAT Non Recurring Items Other Non Cash adjustments Reported Net Profit Earnigs Before Appropriation Equity Dividend Preference Dividend Retained Earnings
Mar ' 03
Mar ' 02
Mar ' 01
Mar ' 00
10,699.31
8,716.54
6,704.69
6,834.54
6,089.42
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
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
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
1,665.77 1,621.19 924.34 645.78 427.21 -217.76 5,066.53 1,768.01 83 1,851.01 481.9 481.9 492.25 201.52 675.34 49.2 626.14 -77.63
1,513.16 1,495.45 957.07 644.92 378.48 -272.51 4,716.57 1,372.85 67.54 1,440.39 529 426.54 157.99 326.86 54.5 272.36 152.46
39.77 1,746.22
46.2 1,012.31
7.1 189.19
4.93 553.44
-2.23 422.59
2,053.67 368.98 0 1,637.42
1,228.13 295.19 0 895.12
419.66 147.11 2.07 270.27
742.37 196.09 0 524.76
513.09 154.86 0 341.19
Source: Annual Reports of past 5 years
-h-
EXHIBIT-5(ii) BALANCE SHEET
BALANCE SHEET 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 : Accumulated Depreciation Net Block Capital Work-in-progress Investments Net Current Assets Current Assets, Loans & Advances Less : Current Liabilities & Provisions Total Net Current Assets Miscellaneous expenses not written Total Note : Book Value of Unquoted Investments Market Value of Quoted Investments Contingent liabilities
Mar ' 04
Mar ' 03
Mar ' 02
Mar ' 01
Mar ' 00
369.18 0 0 4,146.68
367.97 1.21 0 2,816.84
367.97 0 0 3,077.99
367.97 0 140 4,380.46
367.97 0 150 4,040.43
3,010.16 363.12 7,889.14
3,667.63 557.98 7,411.63
4,056.93 650.89 8,153.78
4,129.96 542.26 9,560.65
4,140.91 766.32 9,465.63
12,505.83 5,411.62 7,094.21 763.64 2,194.12
12,192.71 4,849.99 7,342.72 201.08 1,194.55
11,412.29 4,198.74 7,213.55 330.15 912.74
10,762.47 3,720.08 7,042.39 495.7 846.92
8,746.53 3,241.95 5,504.58 1,919.48 803.1
4,933.61
4,484.62
3,329.17
3,225.61
3,025.11
7,252.41 -2,318.80 155.97 7,889.14
5,811.34 -1,326.72 0 7,411.63
4,620.82 -1,291.65 988.99 8,153.78
2,970.26 255.35 920.29 9,560.65
2,614.76 410.35 828.12 9,465.63
1,878.43
752.67
485.12
465.54
460.75
2,031.69 2,669.02
798.26 1,580.70
401.23 1,309.84
381.38 1,454.37
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 Investments Interest Income Interest Paid Net Interest Net Dividend Received Dividend Net Misc. Income Amortisation Of Expenses Payment towards VRS Provision And WO Net Provision For Dimunition In Investments Provisions For BadDebts NPA Trade And Other Receivables Inventories Trade Payables Tax Provision Direct Taxes Paid Net CashFlow-Operating Activity Purchase Of Fixed Assets Sale Of Fixed Assets Purchase Of Investments Sale Of Investments Interest Received Dividend ReceivedInvesActivity Inter Corporate Deposits Investment In Subsidiaries Extraordinary Items Net Cash Used In Investing Activity Proceeds From Issue Of Pref. Captl Proceed From Issue Of Cap. Incl. Sh. Prem. Proceed from oth. LTerm Borr Repayment Of Borrowings Dividend Paid Interest Paid Others From Fin Activity Of Other LTerm Borr Repayment Of Short Term Borrow NetCash Used in Fin. Activity Net Inc/Dec In Cash 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 3,470.24 24.99 98.34 48.56 -1.55 0 -1,882.63 0
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
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 0 268.86 -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
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 -52.82 0.03 34.6 44.2 -48.21 0 22.29 -597.56 -10
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
0 318.71 -1,036.04 -292.8 -144.47 0.41 0 0 -1,154.19 -122.38 373.12 250.74
0 593 -1,281.27 -145.53 -341.29 25.23 0 0 -1,149.86 153.13 219.99 373.12
0 1,178.95 -1,143.35 -185.96 -385.87 1.77 0 0 -674.46 -20.03 239.23 219.2
0 462.25 0 -159.31 -411.92 4.2 0 -697.26 -812.04 45.85 193.38 239.23
150 1,046.10 0 -154.86 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 PROFIT (Rs.Crore s) 2000
1746
1800 1600
I 1400 F O1200 R P 1000 T E 800 N 600 400
1012
553 423 282
205
200 0 1 99 9
20 0 0
20 0 1
2 0 02
2 003
2 00 4
YEAR
EXHIBIT-6(ii) EARNINGS PER SHARE 47.32
50 40 S 30 P E 20
10
27.43 7.67
11.26
14.64 5.51
0 1999
2000
2001
2002 YEAR
-k-
2003
2004
EXHIBIT-6(iii) TURNOVER (Rs. Crores) 14000
12070
12000
9844
10000
E V 8000 O N R 6000 U T 4000
6336
6943
7810
7683
20 0 1
2002
2000 0 19 99
2 0 00
20 0 3
2004
YEAR
EXHIBIT-6(iv) RETURN ON AVERAGE NETWORTH N50 . G40 V A30 N20 O . T 10 E 0 R
46.28 35.88
7.65
1999
11.51
14.38 6.38
2000
2001
2002
2003
2004
YEAR
EXHIBIT-6(v) DEBT-EQUITY RATIO
2.5 2 E 1.5 / D 1
1.92 1.37
1.32
1.33
1.18
0.77
0.5 0 1999
2000
2001
2002 YEAR
-l-
2003
2004
EXHIBIT-6(vi) ASSET TURNOVER RATIO (in %)
100 80 R 60 T A 40 20 0
78.16 55.44
58.47
63.59
63.28
1999
2000
2001
2002
2003
89.96
2004
YEAR
EXHIBIT-6(vii) PRICE-EARNING RATIO
17.72
20 13.51
O I 15 T A 10 R E / P 5
10.3
8.36 4.88
7.25
0 1999
2000
2001
2002
2003
2004
YEAR
EXHIBIT-6(viii) NET WORKING CAPITA CAPITAL L (Rs. Cro re s) 1600
1426
1400
1197
1200
1138
1086
C 1000 W T 80 0 E N 60 0
95 8
40 0 84
20 0 0 1999
2 0 00
2 00 1
2002 YEAR
-m-
20 03
2004
EXHIBIT-6(ix) CURRENT RATIO
1.79
2 I T A 1.5 R T N 1 E R R 0.5 U C 0
1.65
1.55
1.54
1.36 1.02
1999
2000
2001
2002
2003
2004
YEAR
EXHIBIT-6(x) RESRVES & SURPLUS (Rs. Crores) 5000.0 4000.0
3796.5
4040.4
4380.5
4146.7 3078.0
2816.8
2002
2003
S 3000.0 & R 2000.0
1000.0 0.0 1999
2000
2001
2004
YEAR
EXHIBIT-6(xi) INVESTMENTS (Rs. Crores) 2500 S T 2000 N E 1500 M T S 1000 E V N I 500
2194.12
1194.55 585.44
803.1
846.92
912.74
2000
2001
2002
0 1999
YEAR
-n-
2003
2004
EXHIBIT-6(xii) CASH FLOW FROM OPERATING ACTIVITY (Rs. Crores) 3500 3000 2500 A 2000 O F 1500 C 1000 500 0
2914.44 2093.15
481.9
1999
703.04
2000
1043.53
1154.13
2001
2002
2003
2004
YEAR
EXHIBIT-6(xiii) CASH FLOW FLOW FROM FROM INVESTMENT INVESTMENT ACTIVITY (Rs. Cror es) es ) 1882.63
2000 1500 A I F 1000 C 500
792.51
809.29
790.16
597.56
499.7
2001
2002
0 1999
2000
2003
2004
YEAR
EXHIBIT-6(xiv) CASH FLOW FROM FINANCING ACTIVITY (Rs. Crores)
1500 A 1000 F F C 500
1149.86
1154.19
2003
2004
674.46 217.39
400.12 36.56
0 1999
2000
2001
2002 YEAR
-o-
EXHIBIT-6(xv) DIVIDEND PAYOUT RATIO (in %)
80
72.91 57.86
60 R P 40 D 20
40.68
39.32
32.9
23.84
0 1999
2000
2001
2002
2003
2004
YEAR
EXHIBIT-6(xvi) INTEREST COVERAGE RATIO I T 25 A 20 R R 15 E V O 10 C 5 . T N I 0
22.82
5.14
2.05
2.32
2.6
1.68
1999
2000
2001
2002
2003
2004
YEAR
EXHIBIT-6(xvii) AVERAGE DEBTORS TO TURNOVER (in %) E 25 V O 20 N R U 15 T / R 10 O T B 5 E D 0
20.14
17.81
15.86
15.48 10.38 6.75
1999
2000
2001
2002 YEAR
-p-
2003
2004
EXHIBIT-6(xviii) AVERAGE INVENTORY TO TURNOVER (in %) 15 E V O 10 N R U T / . 5 V N I 0
12.39
1999
10.73
2000
9.01
8.95
2001
2002
7.72
7.37
2003
2004
YEAR
EXHIBIT-6(xix)
PBT/TURNOVER (in %) 30 E V 25 O 20 N R 15 U T / 10 T R 5 P 0
24.59 14.39 5.49
1999
7.75
8.74
2000
2001
3.7
2002 YEAR
-q-
2003
2004
EXHIBIT-7
EXHIBIT-7(i) DIVISION-WISE INVENTORY
DIVISION
LONG PRODUCTS FLAT PRODUCTS RM & IM SHARED SERVICES SUPPLY CHAIN (MRO) TOTAL STEEL DIVISION INTERNATIONAL TRADE FERRO ALLOYS & MINERALS WIRE DIVISION TUBE DIVISION RINGS & AGRICO BEARINGS DIVISION SECONDARY PRODUCTS TCIL CONVERSION GROWTH SHOP OTHERS (TM & SS) TOTAL
2004-05
2003-04
130.84 425.70 203.86 28.44 67.27 856.11 19.79 113.70 36.67 85.84 30.41 29.32 10.16 13.02 4.53 0.45 1200.00
94.94 419.07 250.94 38.00 65.65 868.60 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 CATEGORY
FINISHED & SEMI-FINISHED RAW MATERIALS STORES & SPARES GRAND TOTAL
AVERAGE 2004-05
AVERAGE 2003-04
796.84 323.56 338.56 1458.96
584.50 255.98 319.31 1159.79
Source: Tata Steel Intranet Web Site
-r-
EXHIBIT-7(iii) DIVISION-WISE DEBTORS AVG. DEBTORS
DIVISION
2004-05
LONG PRODUCTS FLAT PRODUCTS RM & IM TOTAL STEEL DIVISION INTERNATIONAL TRADE FERRO ALLOYS & MINERALS WIRE DIVISION TUBES DIVISION RINGS & AGRICO BEARINGS DIVISION SECONDARY PRODUCTS TCIL CONVERSION GROWTH SHOP TKM DIVISION TOWN & POWER SERVICES OTHERS TOTAL
TARGET DEBTORS 2004-05
42.04 247.19 65.67 354.9 66.65 80.19 64.74 33.36 10.72 15.14 3.85 32.87 14.11 3.97 34.15 9.61 724.26
60.34 189.23 63.11 312.68 34.29 57.99 51.5 52.78 10.72 17.14 4.31 14.98 13.33 1.52 24.51 4.25 600
Source: Tata Steel Intranet Web Site EXHIBIT-7(iv)
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
LONG PRODUCTS – GROSS WORKING CAPITAL Inv. Amt. Inv. Debtors Amt. Debtors Inv.+Debto (Rs. Days (Rs. Crores) Days r Amt. Crores)
97.85 115.00 94.94 93.66 118.44 119.75 122.37 146.54 125.16 134.02 153.38 123.01
21
64.15 14 60.34 20 42.20 9 20 42.04 9 26 50.86 11 26 32.08 7 27 41.47 9 32 50.32 11 25 39.55 8 25 37.85 7 30 41.18 8 27 41.98 9 Source: Tata Steel Intranet Web Site -s-
272.25 175.34 137.14 135.70 169.30 151.83 163.84 196.86 164.71 171.87 194.56 165.00
Inv.+Debt . Days
35 29 29 37 33 36 43 33 32 38 36
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. (Rs. crores) Days
200.69 188.96 187.10 187.87 228.17 242.17 237.95 242.33 232.60 243.63 280.63 231.07
33 31 31 36 38 37 39 38 40 48 37
Debtors Amt. Debtors (Rs. crores) Days
102.12 64.75 85.73 79.36 88.62 82.09 90.54 86.28 85.64 78.33 63.80 83.20
17 14 13 14 13 14 14 14 13 11 13
Inv.+Debto r Amt.
Inv.+Debt . Days
302.81 3 02.81 253.71 272.83 267.23 316.79 324.26 328.49 328.61 318.24 321.96 344.43 314.28
50 45 44 50 51 51 53 52 53 59 50
Source: Tata Steel Intranet Web Site
EXHIBIT-7(vi) FERRO ALLOYS & MINERALS DIVISION – 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. (Rs. crores) Days
82.00 113.70 78.09 92.67 109.89 115.60 134.40 132.07 122.46 140.58 139.74 119.57
43 41 47 54 51 56 53 44 48 45 59
Debtors Amt. Debtors (Rs. crores) Days
60.91 57.99 67.99 72.98 58.76 60.66 96.57 95.01 95.69 87.08 81.53 80.19
32 36 37 29 27 40 38 34 30 26 40
Source: Tata Steel Intranet Web Site
-t-
Inv.+Debto r Amt.
142.91 171.69 146.08 165.65 168.65 176.26 230.97 227.08 218.15 227.66 221.27 199.76
Inv.+Debt . Days
75 77 84 83 78 96 91 78 78 71 99
EXHIBIT-8 STAGES OF TRAINING Nature of Diversity
Features
Education and Training
Provided by/at
Professional
Engineers Doctors Accountants MBAs
Technical Medical Financial Managerial
Tata Management Development Center Tata Management Training Center
Cultural
Religion Language Social
Creativity Window of the world
Locations
Working in small towns and Metros
Rural Development Social Work Environment
Women
Empowerment and Assertiveness Driving Heavy Vehicles & Crane
Women Empowered training programme Sexual harassment issues training Tejaswani Effort
Tata Management Development Center Leading personalities of society Culture Associates Tata Steel Rural Development Society Social Services & Family Initiatives Non-Government Organizations Tata Management Development Center Other Social Organizations HR/IR Steel
Tribal
Bring them into main stream
Training to make them at part with others before recruitment Basic Plant Training
Registered Relations Create opportunity for induction
Source: TBEM 2003, ‘Building Sustainability’ by Tata Steel
-u-
Tribal Cultural Society Shavak Nanavati Technical Institute Shavak Nanavati Technical Institute
BIBLIOGRAPHY
•
Primary Data collected from Tata Center from the different departments
•
Primary Data colleted from HSBC Bank
•
Credit Management Module CD of the Flat and Long Product
•
Tata World – The Tata Steel Intranet Information Kiosk
•
The Iron and Steel Review, 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, ‘Building Sustainability’ by Tata Steel
•
The Financial Express
•
The Economic Times
•
The Investors Guide
•
www.google.co.in
•
www.ibef.org
•
www.steel.nic.in
•
www.equitymaster.com
I