Sec-C Grp-9 Company Analysis Tata Steel

Financial Analysis of Tata Steel

Group-9, Section-CPGP-1

PARTICIPANT ROLL NUMBER

Akshay Gupta 2011PGP526

Anusha K 2011PGP564

Debayan Ghosh 2011PGP613

Jashanjot Singh Sekhon 2011PGP663

Nitin Kumar 2011PGP758

Rohit Phulsunge 2011PGP831

Swastik Panda 2011PGP916

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Company Overview Financial Summary Economic Value Added Financial Analysis Du Pont Analysis Recent Mergers and Acquisitions Comparison with Steel Industry Future Strategy

Contents

TATA STEEL- Brief Background

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Tata Steel (formerly TISCO), owned by TATA Group, is the world’s seventh largest steel company, headquartered at Jamshedpur

Incorporated in 1907, Tata Steel is present in 26 countries across Asia, Africa and Europe, with a reported net profit of Rs. 6865.69 crores.

Tata Steel deals in steel, wires, bearings tubes, ferro-alloys and minerals under the brand name of Tata Steelium, Tata Pipes, Tata Shaktee, Tata Tiscon, Tata Wiron etc.

Tata Steel targets to become the 2nd largest steel maker in the world by 2012 and acquire capacity of 100mn tonnes by 2015

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Contents

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Mar'11 Mar'10 Mar’09 Mar’08 Mar’07

Sales Turnover 31,902 26,757 26,843 22,189 19,762

Other Income 2,505 1,735 2,495 2,537 2,304

Total Income 29,936 25,021 24,348 19,652 17,458

Operating Profit 12,609 10,145 9,778 8,830 7,332

Interest 1686 1848 1489 929 251

PBDT 10,923 8,297 8,289 7,900 7,080

Depreciation 1,416 1,083 973 834 819

PBT 9,776 7,214 7,315 7,066 6,261

Net Profit 6,305 4,421 4,981 4,374 4,305

EPS 69.93 54.97 66.75 61.06 69.95

Financial Summary (Rs. Cr)

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Contents

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Economic Value Added (Rs. Cr)

EVA = (Operating Capital)(ROIC-WACC) Operating Capital = Net operating working capital + Operating long term assets

Net operating working capital = (Inventory + Cash + Receivables) – (Accounts Payable + Accruals)

NOWC = 24055.24 + 10892.6 + 10004.52 – 28171.06 = 16781.3 Operating Capital = 16781.3 + 113399.58 = 130180.88

ROIC = NOPAT/Operating Capital NOPAT = EBIT (1-tax rate) NOPAT = 19723.8(1-0.3) = 13806.667 ; tax @30% ROIC = 138066.7/130180 = 10.6%

Assuming WACC as 12%, EVA = 130180.88 (0.106-0.12) = -1822.5

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Contents

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The company has risen consistently over years as the demand for steel has been on a rise. Different governments across the world stressed on infrastructure projects in economic downturns in

their stimulus packages, fuelling the need of steel The acquisition of the steel major Corus strengthened the company’s position in European markets. The company is also foraying into third world countries like South Africa, Oman, Mozambique

increasing its worldwide presence and spread.

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.00

5,000.0010,000.0015,000.0020,000.0025,000.0030,000.0035,000.00

Total Revenue (Rs. Cr)

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Revenue 6838 8870 11076 15087 15596 18109 20666 25289 26080 30746

Net Margin (%)

Net margin expresses the relationship between net profit after tax and sales. It signifies the overall profitability of the company. It determines the ability of the firm to fight low

prices, competition etc. Higher ratio indicates better performance Steady increase in steel sales mainly due to increase in domestic consumption Sales affected in 2009-10 due to global recession specially in the European markets Investments in capacity building from less than 3mn tonnes in 2001 to more than 5mn tonnes which

greatly increased sales

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2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Net Margin 5.1 13.23 16.85 23.26 22.49 23.78 21.17 19.7 16.95 20.51

Return on Equity (%)

ROE helps investors gauge the value the company creates. It measures the profit the company generates on shareholder funds.

A company with high ROE is likely to be able to generate more cash internally. The company has witnessed a continuous decline in its ROE since 2004; this is primarily due to

swelling equity In order to finance the future growth plans, the company required high amount of capital, which it

raised through equity and debt

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2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

10203040506070

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

ROE (%) 8.47 35.41 45.36 60.02 41.7 35.4 25.97 21.88 14.19 16.36

Return On Capital Employed (ROCE, %)

A ratio that indicates the efficiency and profitability of a company's capital investments

EBIT ÷ (shareholders’ funds + debt) ROCE should always be higher than the rate at which the company borrows, otherwise any increase

in borrowing will reduce shareholders' earnings Prior to 2005, the continuous increase in Operating Profit resulted in the increase in ROCE Post 2005, thought Operating Profit kept on increasing, but the Shareholders’ Fund and Total Debt

increased even more, so ROCE is on a decline

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2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

10203040506070

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

ROCE 10.5 24.8 38.18 63.79 50.13 36.63 23.27 17.23 13.70 16.68

Cash flow from investing activities (Rs. Cr)

Cash flow from investing activities denote the amount of cash invested by the company in investing activities, such as building plant, property and equipment, purchase of long-term assets

Net cash flow from investing activities of the company maintained an almost constant level from 2001 to 2005, after which it reduced considerably

The company spent a lot of amount in purchasing fixed assets for its subsidiaries during the period 2006-2008, in 2007, it acquired Corus for which it had to be pay a huge amount of money

This increased the net outflow of cash for investing activities by a considerable extent

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-35000-30000-25000-20000-15000-10000

-50000

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CFI -499 -790 -1882 -2604 -2464 -5429 -29318 -9580 -5254 -13288

Total Debt (Rs. Cr)

Total Debt is everything that a company owes. It includes long-term debt and current liabilities. Helps a company invest in new plants and equipment Too much debt, however, is risky Continuous increase in value since 2006 indicates the major M&As, JVs and horizontal expansion

(new plants)

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2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total Debt 4705 4225 3382 2739 2516 9645 18021 26946 25239 28301

Debt-Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders‘ equity.

Rs. 960 crore worth electrolytic Cleaning line in Cold Rollling Mill, Jamsedhpur was bought in 2002, which caused the liability to shoot up

Loans of US$2.07 billion in 2008-09 to maintain liquidity buffer in Global liquidity Crisis and also to fund major M & A like Corus, Al Bahja grp in Oman

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2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

0.5

1

1.5

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

DE 1.13 1.35 0.99 0.53 0.31 0.51 0.67 0.78 0.78 0.64

Current Ratio

It is a liquidity ratio that measures a company's ability to pay short-term obligations In FY 08 Tata Steel won their bid to buy Corus at 6.7 billion pounds. The acquisition lead to the

increase in current assets and liabilities Reason for the increase in current asset was a growth in inventories, sundry debtors and loans and

advances which were more than 10 times as compared to FY 07 Current Liabilities did not increase in proportion with the current assets

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2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.000.501.001.502.002.503.003.50

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Current Ratio

0.76 0.7 0.67 0.65 0.71 1.27 2.88 2.3 1.05 1.39

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Contents

Du Pont Analysis

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ROE

2011 2010 2009 2008 2007

14.63% 13.73% 20.63% 21.40% 29.28%

PAT/SALES

2011 2010 2009 2008 2007

0.22 0.19 0.19 0.21 0.21

SALES/TA

2011 2010 2009 2008 2007

0.42 0.43 0.47 0.49 0.83

TA/NW

2011 2010 2009 2008 2007

1.60 1.68 2.31 2.08 1.68

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Contents

Recent Mergers and Acquisitions

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Month, Year

TATA company

Acquired company

Country Stake acquired

Value

2007

January Tata steel Corus UK 100% $12.1 billion

March Tata steel Rawmet Industries

India 100% Rs.101 crore

2006

April Tata steel Millennium Steel

Thailand 67.11% $167 million

2005

February Tata steel NatSteel Asia Pte

Singapore 100% $468.10 million

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Company Overview Financial Summary Financial Analysis Economic Value Added Du Pont Analysis Recent Mergers and Acquisitions Comparison with Steel Industry Future Strategy

Contents

Tata Steel vs Steel Industry – Market Price

Tata Steel’s share price movements have been consistent with the changes in industry market price

Demand for Steel reduced during recession and thus there was a sharp drop in the market prices of Steel as well as Tata Steel’s Shares

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Market Price - Tata Steel’s Shares Market Price – Steel

Tata Steel vs Steel Industry – Ratios

Tata Steel’s DE ratio has always been lower than the industry levels. Its long term goal is to bring the DE ratio close to 1.

Historically Tata Steel’s Current Ratio has been lower than the industry as a whole. But in 2008, this ratio increased significantly when Tata Steel acquired Corus, which had excess of Current Assets.

Until the year 2007, Tata Steel’s ROCE was much above the industry levels. Recently Tata Steel has been taking a lot of debts (Corus acquisition) and thus it’s ROCE has been falling.

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2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Tata Steel

Debt-Equity Ratio 0.64 0.78 0.78 0.67 0.51 0.31 0.53 0.99 1.35 1.13

Current Ratio 1.39 1.05 2.3 2.88 1.27 0.71 0.65 0.67 0.7 0.76

ROCE (%) 16.68 13.7 17.23 23.27 36.63 50.13 63.79 38.18 24.82 10.51

Steel Industry

Debt-Equity Ratio 1.02 0.97 0.86 0.81 0.87 0.97 1.5 2.92 3.49 2.88

Current Ratio 1.21 1.17 1.45 1.62 1.37 1.24 1.1 0.93 0.85 0.84

ROCE (%) 22.22 2.67 15.71 24.1 27.24 22.84 37.58 16.25 8.88 NA

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Company Overview Financial Summary Financial Analysis Economic Value Added Du Pont Analysis Recent Mergers and Acquisitions Comparison with Steel Industry Future Strategy

Contents

To become the 2nd largest steel maker in the world by 2012 To increase capacity to 100mn tonnes by 2015 To cut costs by rationalising operations in Europe and reworking interest costs To facilitate the issue of Ordinary Shares with differential voting rights in the future, the

authorised share capital of the company was increased from Rs. 8,000 crores to Rs. 8,350 crores by creation of a new class of Capital

Tata Steel India is implementing an expansion project at Jamshedpur Works to increase its crude steel capacity from 6.8 million tonnes per annum to 9.7 million tonnes per annum. It is expected to complete this project by the end of FY 2011-12

Tata Steel has a strategic interest of 5% in the coal mining project in Australia in partnership with Vale, Nippon Steel, JFE and POSCO with up to 20% rights. This mine is being operated by Long Wall method and is expected to produce around 3 million tonnes of Coking and PCI coal during FY 2011-12

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Future Strategy

Thank You!

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Sec-C Grp-9 Company Analysis Tata Steel