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Group 9 TATA Scrap 28th July 201New BusinessDevelopment
New BusinessDevelopment
Group 9
Anuj Gupta 074
Sharath Nair 241
Alpana Nagar 259Saurabh Gupta 298
Vipul Mehta 314
For Tata Group
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Contents
Steel Industry in India
Metal Recycling for TATA Group
Proposing the Business model for TATAGroup
Viability of the Business Model
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Indian Steel Industry Anoverview
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Indian Steel Industry
Consolidation: Buy outs, an easy way of
getting hold of land and regulatory approvals
by companies seeking growth.
Doggedness of Foreign Firms: Delays in
approvals and setting up plants have not
deterred foreign firms from setting up shop inIndia.
Relocation, Smaller Plants: Arcelor Mittal
has pointed towards setting up smaller modular
Use of Low grade raw Materials: Raw
Materials account for 50-55% of costs,
technology for processing low grade raw
materials
Environmental Awareness: Stricter
environment bills and a mining bill, calls forsharing of 26% of profits with locals, companies
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Indian steel industryproblems
Energy Supply: Power shortageshamper production at many locations.
Procurement of Raw Materials &
Input Costs: Considerable amount of
raw materials imported. Indian raw
materials low quality and scarcity of rawmaterials are jacking up prices.
Inefficient Transport System:
Insufficient freight capacity & transport
infrastructure that is inadequate
Financing Capacity Expansion: Steel
is a capital intensive industry with high
fixed costs. Even though equity market
has boomed, ability to finance a project
is uncertain. 5
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Steel Industry InflectionPoints
Old Paradigm:Continue expansion through brownand green field projects
Inflection Point:
Rising Costs of Raw MaterialsInability to set up plants near Iron orefacilitiesRising transportation costsEnvironment friendly organisation inlight of the mining bill.
New Paradigm:Enter into Scrap recycling in order to cutcostsBecome more environment friendlyTake advantage of Indias huge scrapimports.
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Metal Recycling for TATAGroup
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S i d i i
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Scrap industry scenario inIndiaExisting process:
Recycling has not gained scale, not even a SSI status. Ferrous scrap is
often melted by small foundries. No norm exists for End of Life Vehicles (ELV) in India, US and China has
a 10 year limit
Existing players in the industry:
Metal Scrap Recycling Association of India brings under one associationall regional players in the country
Metal Scrap Trading Corporation (MSTC) and its subsidiary FSNL dealswith public sector steel mills and other government departments
Private sector players like FEENOINDIA and METCO deal with ferrous andnon ferrous scrap in the countryLocal Scrap
dealers(Kabadiwalas)
Intermediate scrapdealers
Scrapprocessingcompanies
Ferrous scrap:Old cars, steel beams,household appliances, railroad
tracks, ships, and foodpackaging and othercontainers
Non Ferrous scrap:Aluminium (including foil and
cans), copper, zinc, lead,nickel , cobalt , titanium,chromium, and precious metals
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Industry analysis
Moderately competitiveindustry with very highbargaining power ofSuppliers
Threat of new entrants LOW to MEDIUM (2/5) High economies of scale required No product differentiation possible High initial capital requirements Government norms will be supportive
Threat of substitute products or service LOW to MEDIUM (2/5) Landfills : environmentally unsustainable Fresh ore to make metals : increasing prices and decreasing availability
Bargaining power of customers-HIGH (4/5)
Concentrated buyers in the form of big steel mills Standardized products in the form of shredded scrap % of scrap metal in buyers raw material is low initially Quality of product is important Buyer(Tata Steel) can do backward integration itself
Bargaining power of suppliers VERY HIGH (5/5) Low switching cost as the rate offered is close to existing market rate
Substitute is existing scrap processing companies, reuse after repair Forward integration less likely as scrap dealers are small and unorganized Scrap recyclers are highly important to suppliers
Competitive rivalry- MEDIUM to HIGH (3/5) Small local competitors High potential for growth owing to rising ore prices High capital intensive with high fixed costs Exit barriers are high 9
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TATA ScrapBenefits to TATA Benefits to the TATA Group from recycling business :
Energy saving: Processing ores is about 60 percent of thetotal energy used in the production of most metals i.e.crushing and grinding the ores.
Metal reuse: Metals can be repeatedly recycled withoutdegradation of their properties. Metals from secondarysources are just as good as metals from the primarysources, at a cheaper cost
Environmental impact : e.g. in case of steel, recyclingsteel saves
90 % savings in virgin materials 86 % emissions reduction 40 % effluent reduction 76 % water pollution reduction
97 % mining waste reduction Cushion against rising raw material costs:
Tata Steel Expects 15% Jump in Raw Material Costs ason date
60% of its annual procurement budget of $16-$18 bn israw material for TATA Steel mills
Derives synergies : It uses the existing distribution
channels of TATA Motors and TATA steels for establishing itsnetwork10
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NBD Strategy
Products
Markets
Existing New
Existing
N
ew
RelatedConstrained
Diversification
Both Operationaland CorporateRelatedness
UnrelatedDiversification
Related LinkedDiversification
LowHighO
pe
rationa
lRela
Corporate Relatedness
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New BusinessDevelopment
NBD CharacteristicsRadicallyNew
NextGeneration
IncrementalChange
Breakthroughs
Platforms
Derivatives
Support
Nochange
NewCategory
Variants
Improvementin existingbenefits
NewBenefit
Impact of the product onthe market
BUse aheavyweight
team withintheorganization
CUse aheavyweight
team in aseparatespinout
AUse a lightweightteam within the
organization
DDevelopmentmay occur in-
house through aheavyweightteam ,butcommercialization requires aspinout
GOOD
POO
R
Fit with organizations v
Fit
wit
pro
ces
GOOD
Disruptive Technology for TATA Ste
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New BusinessDevelopment
Proposing the businessmodel for TATA Group
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New BusinessDevelopment
Operational Model
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Process
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Supply Channel
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New BusinessDevelopment
Plant Location 10 plants in all the 5 zones
in the first year
Gradual expansion to atotal of 15 plants in each
zone
Warehouses on key ports in
the country
Considerations:
Geographically wide-
spread
Cost Benefit
Transportation cost
and viability to Tata
Steel
Proximity to collection
areas
Manesar
Jamshedp
urBurhanpur
Chakan
Chennai
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Tata Scrap Organizational Setup
CEO Recruited from Tata Steel
Complete knowledge about the customers requirement and synergies Complete check on the quality of scrap that would be sold to the Tata Steel
Corporate Relations Head
Relations with other Tata Companies like Tata Motors Logistic In charge
Takes care of supply issues, heads procurement team and managestransportation
Business Development Head Look for new customers and diversifying Procurement
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Staffing for each Plant
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Tata Scrap Expansion Plan
10 metal recycling plants in the firstyear, increasing to 80 plants by year10
Strategic alliance with companiessuch as Feen India, Metco
Import of junk vehicles and otherferrite junk apart from automobile
junk thus adding to capacity
Be a market leader in the next 10
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Viability of the BusinessModel
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Approach for Assessment
Junk
availableforrecycling toTata Group
Junk
sources inIndia incomingyears
Recycling
Unitinvestmentand costs
Revenueoptions
andprofit
generation
Various Sources Quantity year-wise
Competition
Installed capacity Operationalconstraints
Capital
expenditure Variable costs Fixed costs
Revenue
generated Profits NPV and IRR
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Junk Availability in IndiaS.N
.Vehicles CAGR 2012 2013 2015 2018 2019 2021
1 Passenger Cars 11% 325000 360750 444480.075 607884.729 674752.05 831362
2 MUVs 9.50% 74000 81030 97156.9958 127560.565 139678.819 167478.396
3 LCVs 5.60% 68000 71808 80075.6859 94295.8157 99576.3814 111041.208
4 MCVs / HCVs 4.40% 93000 97092 105824.066 120416.484 125714.809 137021.096
5 2-wheelers 8.10% 2500000 2702500 3158036.1 3989276.81 4312408.23 5039312.08
6 3-wheelers 9.10% 123000 134193 159727.378 207421.426 226296.775 269356.752
7 Refrigerators 10.00% 1000000 1100000 1331000 1771561 1948717.1 2357947.69
8 Air conditioners 10.00% 6000000 6600000 7986000 10629366 11692302.6 14147686.1
No. of car equivalents 2001200 2145190 2469555.4 3064527.21 3297233.08 3824074.02
Car equivalents produced considering weight of above products relative to car(ie 1000 kgs)
Greatest quantity of steel to come from MCV/HCV, passenger carsand industrial scrap
Source: SIAM, ICRA research report
About 58 lakh tonnes of scrap is imported in India every yearAbout 70 lakh tonnes of scrap is generated domestically
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Profit for TATA Steel
Figures in tonnes Mar-13 Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
No. of carequivalents
2001200 2145190
2300956
2469555
2652149
2850009
3064527
3297233
3549802
3824074
Vehicles (tonnes)(10%)
500000 550000 580000 600000 650000 700000 750000 800000 1000000
1200000
Industrial
domesticscrap (tonnes)
0 200000 345000 587500 881250 884375 1012813
1069094
1106003
1176603
Imported scrap(tonnes)
0 0 200000 500000 1000000
1200000
1300000
1500000
1600000
1700000
Car equivalents(tonnes)
500000 7500001125000
1687500
2531250
2784375
3062813
3369094
3706003
4076603
Ferrous material(68%) (tonnes)
340000 510000 765000 1147500
1721250
1893375
2082713
2290984
2520082
2772090
Non-ferrous metal(9%) (tonnes)
45000 67500 101250 151875 227812.5
250593.8
275653.1
303218.4
333540.3
366894.3
Plastic (4%)(tonnes)
20000 30000 45000 67500 101250 111375 122512.5
134763.8
148240.1
163064.1
In next 5 yrs, the recycling plant will supply 2 mm tonnes of scrap iron toTata Steel
Total saving to Tata Steel in next 5 yrs = (Re. 4.5 Re. 3 ) X 2 bn = Rs300 crores/yr
The saving will amount to about Rs 500 crores /yr in a decade.
1. The number of vehicle equivalents surging rapidly with CAGR of 10-20%
2. Government likely to bring regulation on End of Life age of vehicles
Source: SIAM, ICRA research report24
Investment Analysis for
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Investment Analysis forRecyclingFollowing are the main things considered:
1. Investment in dismantling and shredding units
To reach full installed capacity in 7-8 years ( 4mmt/yr)
2. Revenue sources:Sale of ferrous, non-ferrous and plastics
2 stage growth model has been considered
3. Cost factors:
Fixed costs (land rents, equipments, permanent staff etc)Variable costs (labor, energy, consumables, handling etc)
Cost of input junk + transportation cost
Straight line depreciation considered
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Microsoft Excel
Worksheet
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Cash Flow AnalysisParticulars Mar-
13Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Car equivalents recycled peryear
500000 750000 1125000
1687500
2531250
2784375
3062813
3369094
3706003
4076603
Total Revenues per year(Rs crores)
807 1211 1816 2724 4085 4494 4943 5438 5981 6580
Total Variable costs (Rscrores)
135 203 304 456 683 752 827 910 1001 1101
Total Land rent costs (Rscrores)
71 71 71 71 71 71 71 71 71 71
Total Fixed wage costs (Rscrores)
29 29 29 29 29 29 29 29 29 29
Cost : End-of-Life Vehicle (Rscrores)
500 750 1125 1688 2531 2784 3063 3369 3706 4077
Operating profits (Rscrores)
73 159 288 481 771 858 954 1060 1175 1303
Depreciation 72 72 72 72 72 72 72 72 72 72
Profit Before Tax 1 87 216 409 699 786 882 988 1103 1231Profit After Tax (35% tax
rate)
0 56 140 266 455 511 573 642 717 800
Free cash flows to firm(Rs crores)
72 128 212 338 527 583 645 714 789 872Initial investment of Rs 720 crores andWACC of 18%NPV: Rs 920 cr (10 yr investment horizon)IRR: 37%
Source: SIAM, ICRA research report, businessstandard
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Scenario AnalysisImpact of input junkcostInitial growth rate NPV IRR
Worst case (20 30 %) 121 21
Likely (45 55 %) 920 37
Optimistic case (60 80%)
1800 48
Impact of initial salesgrowth rate
Step by step increase inplant load has been
consideredSo base taken is quite
low
Cost considered based on car equivalentinput (or ELV)
Benchmark or Comparative
analysis Sims Metal Management: Leading metals recycler in the UK (230 sitesworldwide)Deals in ELV, Consumer goods, Industrial dismantling, In plant processingetcHandles around 11mmt of ferrous scrap every yearTurnover in excess of 5 bn pounds (Approx Rs 45000 cr);Profit around Rs 600 cr(Net Margin: 1.6 %; Operating Margin: 3 %; ROE: 4 %
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lNew Business
References
http://www.business-standard.com/india/news/the-problemmaking-ferrous-scrap/4
Imacs, SIAM 2006: Report on Fleet Management and Vehicle
Recycling Policy for India
Sims Metal Management
Steel recycling institute :
http://www.recycle-steel.org/en/Recycling%20Resources
http://www.recycle-steel.org/Steel%20Markets/Automotive.aspx
Scrap recycling institute :
http://www.isri.org/iMIS15_Prod/ISRI/Home/ISRI/Home.aspx?hkey=b5f15281-53ed-
Worldwide scrap news : http://scrap.org/
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http://www.business-standard.com/india/news/the-problemmaking-ferrous-scrap/413425/http://www.recycle-steel.org/en/Recycling%20Resourceshttp://www.recycle-steel.org/Steel%20Markets/Automotive.aspxhttp://www.isri.org/iMIS15_Prod/ISRI/Home/ISRI/Home.aspx?hkey=b5f15281-53ed-4f73-8dc0-a238a1d8c4b4http://scrap.org/http://scrap.org/http://www.isri.org/iMIS15_Prod/ISRI/Home/ISRI/Home.aspx?hkey=b5f15281-53ed-4f73-8dc0-a238a1d8c4b4http://www.recycle-steel.org/Steel%20Markets/Automotive.aspxhttp://www.recycle-steel.org/en/Recycling%20Resourceshttp://www.business-standard.com/india/news/the-problemmaking-ferrous-scrap/413425/