tata steel - group 8
TRANSCRIPT
Section I:-Market OverviewIndian Steel IndustryInstitute for Technology & Management, Kharghar
December 2010Group 8
Index
Steel Industry•Market Overview: Global and Indian•Market Segmentation•Competitive Landscape•PEST Analysis•Regulatory Framework•Growth Drivers of the Industry•Challenges faced by the Industry
TATA Steel•Company Overview•Products and Services•Company History and Milestones•Financial Highlights•Segmental Result Analysis
Index
TATA Steel•Peer Group Analysis•Stock Chart Analysis•Board of Directors and Shareholding Pattern•SWOT Analysis
Financial Model: TATA Steel•Assumptions of the Model•Historical and Projected Financials•DCF Model•Key Ratios •IFRS Convergence
Annexure•News Highlights
Investment Rationale
• Worlds Seventh largest steel maker.•Huge expansion plans.• Global recovery has made CORUS perform better.• The strong Raw Material Holding in India gives Tata Steel advantage over its peers.• Mine acquisitions overseas to reduce raw material prices.• Highest Operating profits in INDIAN steel industry.• Quarterly PAT and EBITDA is highest for Tata steel & is growing steadily except 1QFY11 in the last six quarters.
Steel Industry in India
Section I:-Market Overview
Major Steel Producing Nations in 2009
• Total world production was 1,226.5 mmt in 2009, down from 1,329.0 mmt in 2008• India’s position moves up from 5th to 3rd in the Steel production •India’s contribution to World’s Steel Production is 5.1% up from 4.3% in 2008•India rank’s 18th in World Exporters of Steel• Global crude steel production dipped by 8.7% in 2009 compared to previous year. China experienced a growth of 13.5%, followed by India’s 2.7%
Source: World Steel Association
Rank Company mmt
1 ArcelorMittal 77.5
2 Baosteel 31.3
3 POSCO 31.1
4 Nippon Steel 26.5
5 JFE 25.8
7 Tata Steel* 20.5
Source: World Steel Association* Includes Corus and NatSteel
World Steel Top Producers in 2009
Rank Country Production
2009 2008
1 China 567.8 500.3
2 Japan 87.5 118.7
3 India 62.8 57.8
4 Russia 60.0 68.5
5 USA 58.2 91.4
World 1,226.5 1,329.0
‘India Ranks 3rd in Global Steel Production After China & Japan’
Figures in million tonnes
‘India is a net importer of steel due to the increased domestic consumption & lower external demand’
2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Dec 2009-10
0
1000
2000
3000
4000
5000
6000
7000
8000
Total Finished Steel
Import Export
Year
(‘000
Ton
ne)
Source:- Annual Report, MoS; IBEF
Steel exports decreased by 36%, while steel imports grew at 16.6% in 09-10 due to the increased domestic demand and reduced global demand due to the global economic crisis
2005-06 2006-07 2007-08 2008-09 2009-10
Production 46.6 52.5 56.1 55.1 56.6
Consump-tion
41.4 46.8 52.1 51.9 56.3
Production Vs Consumption in India
In M
n t
onne
s
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10P
0
10000
20000
30000
40000
50000
60000
70000
80000
80
82
84
86
88
90
929191
89
91
88
84
Production vs. Capacity Utilization of Steel
Production ('000 tonne) Capacity (‘000 tonne)
Utilization (%)
('000
ton
ne)
Util
izati
on (%
)
Source:- Annual Report, MoS; IBEF
‘Production in India goes up by 4.2% against reduction of 8.2% in world production’
• Production grew at a CAGR of 6.7% in 05 to CAGR of 9.3% in 09• India’s steel consumption grew by 8% in 09-10 as against 52.3 MT in 08-09. 11-12E: 65MT• Domestic demand for steel is growing at an average of 8% and is expected to go up by 10% by 2015• Growth was driven by capacity expansion from 47.99 mtpa in 2004-05 to 72.76 mtpa in 2009-10. *6.42 million tonne capacity added during April-December 2009• Total Installed Capacity :- 70 MT Expected Capacity by 2011-12 :- 124 MT• Present per Capita Consumption in India is only 47 kg (2008) against the world average of 190 kg and 400 kg in Developed Countries
Source:- Joint Public Commission, IBEF
State No. of MoUs Capacity (mmt)
Orissa 49 75.66
Jharkhand 65 104.23
Chhattisgarh 74 56.61
West Bengal 12 21
Other States 22 18.20
Total 222 275.70(app.)
‘Capacity Expansion to fulfill the increased demand from Automobile and Infrastructure Sector’
• 222 MoUs have been signed with various States for planned capacity of around 276 mn ton• Major investment plans are in the States of Orissa, Jharkhand, West Bengal, Karnataka, Gujarat and Maharashtra• The Capacity expansion has been planned so as to meet the increasing demand for steel by the growing automobile and infrastructure sector• SAIL is planning to set up a 12-million tonne plant in Jharkhand
• Contribution of Indian Iron & Steel industry to India’s GDP : ~2.0%
• Steel Industry weight in the IIP index is 6.2%
• MoS expects India to become the 2nd largest producer of crude steel in the world by 2015-16
• ‘Tata BlueScope Steel’ has been formed for coating and painting facility whose demand is around 3 mn tonnes.
• Tata's set up a joint venture with Nippon Steel for production of auto grade cold rolled products with a capacity of 6,00,000 tonnes.
• SAIL with the technological help from Posco will produce higher grades of electrical steel for electrical equipment sector
Highlights of Steel Sector in India:
Section II:-Market Segmentation
Market segmentation – Product – End User wise
Steel
Alloy Steel (AS)
Stainless Steel (SS) Others
Non Alloy Steel (NAS)
Long Products (LP)
Flat Products (FP)
Corrosion resistant steel
Tool Steel Heat Resistant Steel
Billets Bars & Rods Structurals Rails & Wires
Hot Rolled Products Plates & Sheets Coils Strips
Cold Rolled Products Sheets Coils Strips
Construction
Automotives
Aerospace
Consumer Goods
Material Handling
Energy & Power
Rail
Engineering
Shipbuilding
Packaging
Product Wise End user wise
Long Products constitute 57% of total finished steel (NAS) production & Flat products constitute 43%
55% of the total finished steel produce is consumed by Infrastructure, 30% by automotives & reaming 15% by rest of the sectors like Aerospace, Packaging etc
Segmentation:-
‘Steel Industry = Strategic/Key Industry given the inherent structure & cyclical demand’…
Direct Reduced Iron
Iron Ore Pig Iron
CokeSecondary Steel
Production
Primary Steel Production
Standardized Steel Products
Specialist Steel Products
Finished Steel Products
Mining Industry Steel Industry End User
Recycling Industry
Traders, Brokers, Project Finance &
exchanges
Stockholders
Equipment, Transport & support services
Iron ore along with Coke are the main inputs for manufacturing steel. Pig Iron & DRI are intermediate products with varying carbon content. Intermediate products are heated at high temperatures & varied kinds of alloyed & non alloyed steels are produced. Forms of Crude Steel: Primary steel - Steel produced directly from iron ore, Secondary - Steel produced out of basic scrap from the process. Saleable Steel: Crude Steel is processed further into flat products, long products, specialist steel
Section III:- Competitive Landscape
‘Steel Industry is more or less consolidated as top 3 players command 44% of total production in India’
26%
13%
5%16%
40%
Market Share in terms of Production (%)
SAIL
Tata Steel
RINL
Major Producers
Mini Producers
Major Producers Mini Producers
JSW Steel EAF – 33 units
Essar Steel IF – 970 units
Ispat Industries MBF – 2 units
Jindal Steel & Power
N-Firm (4 firms) ratio for the Industry is 86% & HHI is 2470 both implying that there is an oligopoly in the industry & medium to high concentration Private Sector
Private sector contributes around 72% to total crude steel production Tata Steel is the largest private player with 13% market share & ranks among top 10 producers of steel in
the world. Its is also the lowest cost producer of steel in the world due to captive iron ore & coal mines Public Sector
Public sector contributes 28% to total crude steel production & SAIL is the largest player with 26% market share
Source:- MoS,2008-09
Competitor’s Landscape
TATA STEEL SAIL JSW STEEL VISA STEEL ESSAR STEEL
BHUSHAN STEEL
Mkt share (in production)
13.0 26.0 12.0 1.0 6.8 3.0
Mkt. Cap (rs in crore)
51,931.3 8O,749.3 22,381.5 458.7 5,904.2 8062.5
Free Float (%)68.7 14.2 55.0 27.0 10.0 30.8
FII (%) 16.8 4.4 31.1 4.8 2.3 1.9
FY’10 FY’10E FY’10 FY’10 FY’10E FY’10
Sales turnover (Rs in crore)
26,757.6 49,331.5 19,456.6 1,198.3 12,703.9 5,640.4
Revenue growth (YoY) (%)
(30.9) (6.0) 19.7 12.9 10.1 5.2
EBITDA (Rs in crore)
10,146.6 10,944.2 4,747.8 197.6 1,930.1 912.5
Net Profit 5046.8 6174.8 2022.7 47.4 185.2 421.3
EPS (Rs in crore) 56.4 14.9 106.6 4.3 1.6 99.2
% Chg (YoY) (103.2) 10.6 681.5 (24.3) (119) 38.2
ROCE (%) 13.7 31.4 18.4 14.3 10.9 10.7
ROE (%) 14.2 24.2 23.3 12.44 6.3 28.2
Equity dividend (%)
80.0 26 95 10 0 25
D/E 0.8 0.2 1.3 3.6 1.5 3.2
Source:- Company filings. & mkt cap & float figures are as reported on company website as on Sept. 2010Note: 1- Estimates from Edelweiss report, Jun 18, 2010
‘Competitor Landscape in Steel Industry’
‘TATA Steel largest private player but going through a rough time’
• The revenue growth of Tata Steel has declined by 30% for FY10 which was mainly due to increase in competition and slow down of economy.
• Although Sales Turnover of Tata Steel is almost half of SAIL, its Net Profit (50.5 mn) is close to SAIL Net Profit(61.8). • However Net Profit of Tata Steel was less than what was estimated which was due to increase in interest Expenses.
• EBITDA was 101.5 mn which was much less than what was estimated. This was due to increase in cost of raw material.
• ROCE (13.7%) Of Tata Steel was less than its Competitor which means company is not able to make best use of its capital.
• ROE (14.2%) of Tata Steel was less which means company is not able to generate sufficient cash internally as compare to their competitors.
• Tata Steel is largest Private player of steel and it enjoy’s good market share and it is expected that world steel consumption is going to increase in future which is good sign for Tata Steel.
Section IV:- PEST Analysis
Economic FactorsGDP growth rate: Higher GDP growth &increasing demand of steel has led Indian steel industry to new high. India is 5th largest producer of the Steel. Tax & other rates: Taxes on specific products and services as well as other rates like Interest rate and exchange rates.
PEST
PEST Analysis
Section V:- Regulatory Environment
• National Steel Policy formulated in 2005.• Iron and Steel made top Priority items.• Targets 119million tons production by 2019-20.• Aims at removing supply constraints for Iron Ore.• Focuses on Public Private Partnership for Development.• Consider setting up of an organization like International Iron and Steel Institute.• Proposal for Dedication of Rs.25Crore to Ministry of Steel for 11th five year plan.• The Steel companies have to necessarily obtain an environmental clearance before setting
up of the factory.• The above rule holds true for Iron ore industry also.
Changes brought in Regulations
National Steel Policy
•Price & Distribution control removed completely.•Foreign Direct Investment allowed up to 100%.•No restrictions on import of steel items in terms of value or quantity.•Subsidy provided for the sale of Steel to State Small Industry Corporation.•Floor prices for support have been abolished.•The competition law prohibits the formation of cartel.•Introduction of Export taxes @Rs.300/350per ton on Iron ore.
Section VI:-Growth Drivers
61%
8%
11%
3%
5%
12%
Sector Wise Consumption Pattern in India
Construction Autos Capital Goods Consumer DurablesPackaging Others
Growth Drivers
•Key Growth Drivers: Construction, Automobiles, Infrastructure, Consumer durable, oil and Gas• Huge source iron ore, Cheap Labour, quality man power• Reduction in custom duty in respect of non-alloy steel production• The Counter Veiling Duty on the TMT roads and bars reduced from 14% to Nil• The ministry of steel has approved 59 R&D projects costing Rs.408 crores•Mergers and Acquisitions - major growth driver in the industry leading to economic of scale
Source:- MoS Annual Report, IBEF
•The major consumers of steel In India is the Construction industry with 61 per cent share• Capital goods follow next with 11% share and automobile sector with 8% share in the total consumption of steel
‘Major Contributors to the Steel Consumption’
• The demand for steel majorly in construction, automotive, even housing, steel tubes, pipes and packaging.
• Steel demand in India is primarily driven by the construction and automotive industry.
• The demand for long products mainly bars and rods is expected to grow strongly as 57.7 % of the total planned investment
• According to the eleventh five year plan, major steel requirement is towards electricity, telecommunication and railways.
• In addition demand revival of Auto and domestic appliances segment would drive demand for flat product as well
‘India’s Steel Industry to grow by 10% in next 2 years’
• Construction Opportunities: Eleventh Five Year Plan - Increase the installed generation capacity by 79 GW
Power
•The combined spend of road and railways is close to 142 USD bn, indicating huge demand for steel in construction industry.
• Infra & construction sector consume about 55% of the total steel produce & is a major consumer of long products.
• In the 11th five year plan (2007-2012), budgeted allocation of ~$500bn has been made to infrastructure sector & a target GDP contribution of 9% has been aimed
• Allocation of INR 39.7 bn in 2009-10 budget for improvement & provision for housing & basic amenities
Roadways and Highways
• National Highway Development Program plans to construct and upgrade more than 50,000 km of national highways by December 2015 bodes well for the industry
‘Infrastructure development to be the major growth driver’
Railways• Railways connectivity projects and other Capacity-Augmentation projects handled by
Rail Vikas Nigam Limited bring big construction opportunities.
• The Dedicated Rail Freight Corridor (DRFC), privatization of railway stations, metro rail and signaling are the largest construction opportunities available in the railways.
Come Back of the Automobile Sector
• Automobile consumes around 30% of the total steel produce in India & is a major consumer of flat steel products
• India is set to become a global automobile hub, especially in the small car segment.
• India’s passenger vehicle (PV) sales grew at a CAGR of 11.5%, commercial vehicle (CV) sales grew at a CAGR of 8.1% during FY04–09
• Automobile sales in India have picked up Y-o-Y since April 2009. The auto sector constitutes ~10% of domestic steel demand.
‘Infrastructure development to be the major growth driver’
Section VII:-Challenges for Steel Industry
Coking Coal one of the major hindrance
• Coal produced in India contains higher ash but lower sulphur compared to the coal available in the international market
• India does not have enough prime quality hard coking coal resource required in steel making
• Only 2% of coal found in India is of coking variety and that too with high ash content. So, India has to look outside and depend on imports
• India requires 27 MT of coking coal for 60 MT of steel production
• At a conservative estimate, India would require 150 MT of coking coal to produce 200 MT of steel by 2020
• Australia is the major producer of coking coal and accounts for 60% of the production
• Increased demand for coking coal is staring at acute shortage In the near future
Source:- Economic Times, Sept. 6, 2010
‘Key Challenges for Steel Sector in India’
• Limited with multiple use• Local Issues – Social & Political• Overlapping responsibilities between State and Central Government
Land
Mining
• Slaughter mining - lack of conservation and unscientific mining methods remains characteristic of large areas of the industry• Amount of time and long procedure for leasing and renewing the lease for mines• Indian Coal with high ash has limitations in terms of CO2 emissions• Distribution of minerals in the areas known is uneven and varies drastically from one region to another
Others
• Low Level of R&D in steel in India, High Cost of Debt•Low Productivity, Inadequate Infrastructure• India mostly in seismological zone-Additional costs, earthquake resistant structures.• Rising cost of inputs materials –may not be compensated by rise in steel prices. • Delays and costs involved in land acquisition, Raw Material linkages, Statutory clearances and shortfalls in development of infrastructure could adversely affect project viability.
‘Key Challenges for Steel Sector in India’
TATA Steel
Section I:-Company Overview
Features of TATA Details
Company Name TATA Steel
Parent Group TATA Group
Companies under TATA Steel Group TATA Steel IndiaTATA Steel EuropeTATA Steel South East Asia
Inception Founded in 1907
Listed BSE, NSE, Singapore, London and Luxembourg Stock Exchanges
Registered Office Bombay House, 24 Homi Mody Street, Fort, Mumbai
No. of Employees 81,269 (2010)
TATA Steel: A Glimpse
•World’s 10th largest steel company & 2nd Most geographically diversified
•Crude steel capacity of 27 mn tonnes
•Global presence in 50 markets and Manufacturing Operations in 26 countries
•Group turnover=US $ 23.05 Bn
•Group EBITDA= US $ 2.08Bn
•Capital Employed= US $ 18 Bn
TATA Steel: Geographical Presence
Tata Steel India• Company’s ambitious 3 Mtpa Brownfield expansion at Jamshedpur is on schedule
• Domestic steel demand shows strong momentum driven by strong recovery in steel intensive sectors such as auto, construction and infrastructure.
• Indian steel market remains tight in 2010
• Declining Chinese exports in 2H 2010, raises higher possibility of regional price rise on tighter demand and supply balance
Tata Steel India
June, 2009 March, 2010 June, 20100
0.20.40.60.8
11.21.41.61.8
Production & Delivery of TATA Steel
ProductionDelivery
in M
n M
etric
Ton
nes
• Marketing sales and distribution teams aligned directly with key market sectors
• Pan-European integrated supply chain
• Steel production organized around three hubs with manufacturing optimized throughout Europe
• Pilot launched in Long EU operations hub
Tata Steel Europe
Supply Chain Project
Operations Efficiency
Positioning for the future” one company”- Tata Steel Europe Customer first
Section II:-Products and Services
UK- Three production facilities production capacity 11.5 mt Distribution centers
Netherlands- one production facilities production capacity 6.9 mt Distribution centers
India- one production facilities production capacity 6.8 mt Distribution centers
South East Asia- one production facilities production capacity .678 mt Distribution centers Finishing capacity in 7
countries
EU( except UK)- distribution centres&US
Global Facilities & Diverse Product Mix
Tata Steel Products
Hot & Cold Rolled Coils &
Sheets
Wire and Rods
Construction Bars Pipes
Structurals and Forging Quality Steel
Business Description
Energy & Power
Shipbuilding
AerospaceConsumer Goods
Packaging Rail
Engineering
Security & Defence
Materials Holding
Customer Segments
Section III:-Company History and Milestones
2004• Award for energy conservation• Tie up with Canadian Minnaean Building Solutions based on housing and
construction• Ranked among global companies in the world's most respected companies
survey for CSR• Signed definitive agreement to form a 50:50 joint venture with L&T for
setting up a port at Dhamra in Orissa on October 29, 20042005• Joint Venture Agreements with Iranian Mines and Mining Industries
Development and Renovation Organization• Signed a memorandum of understanding with Nippon Steel Corporation of
Japan2006• Set up Jiggling and Hydro-Cyclone Plant • Set up a processing unit at Noamundi mine
Landmarks
2007• Signed a MoU with Vietnam Steel Corporation• Signed a MoU with Riversdale Mining Ltd.• Signed a Joint Venture Agreement for Mount Nimba Iron Ore deposits
in Ivory Coast, West Africa. 2008• Best Establishment Award by the President of India, Mrs. Patibha Patil • Signed a contract with CMI FPE Ltd2009• Joint Venture Agreement on 6th November 2009 with New
Millennium Capital Corp• Tata Steel - Corus signed MoU on Teesside sale with Marcegaglia and
Dongkuk • Entered into a Joint Venture Agreement with New Millennium, Canada
Landmarks (Contd…)
• In August 2004, Tata Steel entered into definitive agreements with Singapore based NatSteel Ltd to acquire its steel business for Singapore $486.4 million (approximately Rs 1,313 crores) in an all cash transaction
• In 2005, Tata Steel acquired 40% Stake in Millennium Steel based in Thailand for $130 million (approx. Rs 600 crores)
• On 31 January 2007 Tata Steel won their bid for Corus after offering 608 pence per share, valuing Corus at £6.7 billion
Acquisitions
Section IV:-Financial Highlights
Tata Steel: Financial Highlights
1-Jun
1-Oct
1-Feb
1-Jun
00.5
11.5
22.5
33.5
44.5
Production and delivery of Tata Steel (in mmt)
ProductionDelivery
In M
n m
etri
c to
nnes
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
-1000
-800
-600
-400
-200
0
200
400
600
EBIT & PAT (in Rs. Bn)
EBIT PAT
In R
s. B
illio
ns
• Raised `1,069.20 Crs (US$ 230 Mn) through preferential allotment issue of shares and warrants to Tata Sons in July’10
• Tata Steel Europe prepaid £112.5 Mn in May’10 • Repaid `1,020 Crs (US$ 220 Mn) in Q1 FY11
• Contracted US$ 350 Mn loan for working capital purposes• Finalized commitment to raise ` 3,000 Crs ( US$ 646 Mn), 20 year Non• Convertible Debentures to fund the growth projects• Steps taken to refinance part of Tata Steel’s Group debt
Financing Portfolio and Capital Raising
Equity Raising -
Debt-
Fund Raising
• NatSteel Holdings Pte. Ltd. has sold its entire 27.03% stake in Southern Steel Berhad, Malaysia to Signal and Sdn Bhd at a total consideration of ~US$ 72 Mn
•RML is raising capital of A$ 337 Mn through private placement of A$ 102 Mn and non- renounceable rights issue of A$ 235 Mn
• Tata Steel maintains its holding at the pre-rights level of 21.15% by subscribing to its share in private placement and the rights issue at an investment of around A$ 72 Mn
• RML is taking steps which will find long term solutions to logistics
Portfolio Review-
Other Developments-
Financing Portfolio and Capital Raising
Section V:-Segmental Results Analysis
‘TATA Steel – Segments according to Products & Geographies’…
•Primary Segmentation - Segments have been identified taking into account the nature of the products, the differing risks and returns, the organisational structure and internal reporting system:
Steel BusinessOthers: Comprise of Tubes, Bearings, Refractories, Pigments, Port operations,
town services and Investment activitiesUnallocable
•Secondary Segmentation - Done according to geographiesTata Steel – EuropeTata Steel – ThailandNatSteel Holdings: It is a wholly-owned subsidiary of Tata Steel. It is one of the
top steel providers in the Asia-Pacific with over 3,500 employees in Singapore, Australia, China, Malaysia, Philippines, Thailand and Vietnam Others: It includes Tata Refactories Limited, Tata Metalinks, Tata Steel(KZN)(Pty) Limited, Tata Steel Holding Pte Limited
FY08 FY09 FY10 FY08 FY09 FY10
Steel Business
134649.88
149384.58
107879.37
Growth Rate
4.56 0.1094297299039
55
-0.2778413273980
49
10,000.00
50,000.00
90,000.00
130,000.00
-50%50%150%250%350%450%
Steel Segment: Annual Revenue
Re
ve
nu
e
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY10 Q2FY10 Q3FY10 Q4FY10
Steel Business
23727.09
27046.91
27808.59
29296.78
Growth Rate
0.095 0.139916862961282
0.028161442471617
0.0535154784906389
2,500.00
12,500.00
22,500.00
32,500.00
1%
5%
9%
13%
Steel Segment: Quarterly Revenue
Re
ve
nu
e•The growth rate increase to 11% in FY 08-09. However, the growth rate reduced to -28% in FY 09-10. •The out burst of recession made most companies to put a hold on investments on new projects due to cash crunch situation.• This caused immediate impact on the steel industry & there was the sharp decline in volume due to the lack of credit among customers. As a consequence steel prices across the world declined significantly.•The South East Asian economies too witnessed a demand contraction in 2009, partly due todomestic issues.•Sales volumes and prices remained well below those experienced in the first half of 2008-09.•Impact of high scrap prices in the last quarter depressed margins.•However, a significant improvement was observed during the second half of FY 10
‘Steel Business Segment’s dropping growth saw improvement in Q4 of FY 10 ’…
FY08 FY09 FY10 FY08 FY09 FY10
Others
15828.93 16561.29 10877.13
Growth Rate
4.18 0.04626718293655
99
-0.34321964049901
9
1,000.005,000.009,000.00
13,000.0017,000.00
-50%50%150%250%350%450%
Other Segments: Annual revenue
Rev
enu
e
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY10 Q2FY10 Q3FY10 Q4FY10
Others
2777.49 2621.96 2601.98 2875.7
Growth Rate
0.773400000000001
-0.055996601247889
4
-0.007620253550778
81
0.105196811658814
2,475.002,525.002,575.002,625.002,675.002,725.002,775.002,825.002,875.00
-5%5%15%25%35%45%55%65%75%85%
Other Segments: Quarterly Revenue
Rev
enu
e
•The trend in the Others Segment was similar to that of the Steel Business during the three years.•The fall in growth rate was mainly because of the inertia which was triggered during FY 08-09 (as mentioned earlier) which started improving during the second half of FY 09-10•Looking at individual quarters in FY 09-10, we can see that the growth rate reduced to -6% in Q2 and there after started rising.•The Tubes Division recorded a 10% growth in sales over last year.•The Bearings Division registered a growth of 23% while its production increased by 8% driven primarily by the revival in the domestic auto segment demand.•This implies that the growth rate of the ‘Others’ Segment has been good in this year, especially in the last quarters and would probably continue to rise in the coming FY 10-11
‘Others Segment - recovering from the losses due to downturn and showing a continuous growth’…
•Contribution to total revenue by the segments over the last three years has marginally changed. •This could imply that the changes are natural and related to economic changes i.e., they are mainly due to market forces of demand•Also, it shows that the contribution of these segments is not related to a particular Segment Focus by TATA steel
‘Steel Business Contribution to Total Revenue’…
FY08 FY09 FY10 88.20
88.40
88.60
88.80
89.00
89.20
89.40
89.60
89.80
90.00
Contribution of Steel Business Segment in Total
Revenue
Perc
enta
ge o
f Tot
al S
ales
FY08 FY09 FY10 8.00
8.50
9.00
9.50
10.00
10.50
11.00
Contribution of Others Segment in Total Revenue
Perc
enta
ge o
f Tot
al S
ales
•Corus was acquired in 2008, so the sales figure are 0. Europe saw a steep decline in growth rate from 9% (FY09) to 4% which was due to bad Market Conditions in Europe. •Recessionary conditions of second half of the previous year continue to affect the most part of FY10. There was a decline of consumption to around 45% during the first half of 2009 driven by extremely weak activity in the steel using sectors and continuing sharp de-stocking.•However, Steel Market saw early signs of recovery in the second half of FY10.•The Revenue and growth rate of Tata Steel Thailand declined from (-3%) (FY09) to (-20%) (FY10) •The main reasons were negative steel consumption, depressed prices due to recession and high metallic input cost which resulted fall in revenue for FY10.
‘TS Europe saw a steep decline & TS Thailand also saw a slight decline in the growth rate ’…
FY08 FY09 FY10 FY08 FY09 FY10
TS Eu-rope
1002180 1095700 658430
Growth Rate
0 0.09331656987766
68
-0.39907821483982
9
100000300000500000700000900000
1100000
-45%
-25%
-5%
15%
Revenue TS Europe
Reve
nue
in M
n
Grow
th R
ate FY08 FY09 FY10 FY08 FY09 FY10
TS Thailand
40770 39650 31570
Growth Rate
0.575956706609973
-0.027471179789060
6
-0.203783102143758
250012500225003250042500
-25%-5%15%35%55%
Revenue TS Thailand
Reve
nue
in M
n
Grow
th R
ate
• NatSteel Holding’s growth rate declined from 76% (FY09) to (54%) ( FY10).•This was mainly due to high cost of inventory bought prior to crisis and price pressure from competitors.• Revenue has also declined in FY10 due to fall in domestic demand and weak export to Australia.•Tata Steel geographical segmentation of Others include Tata Refactories Limited, Tata Metalinks, Tata Steel(KZN)(Pty) Limited, Tata Steel Holding Pte Limited etc.• The growth rate has been increase from 38% (FY09) to 116% (FY10). •It was mainly due to proper planning of inventory which resulted into low input prices and increase in profit.
‘Steel Business Contribution to Total Revenue’…
FY08 FY09 FY10 FY08 FY09 FY10
Others
33270 46060 99440
Growth Rate
0.266945925361767
0.384430417793808
1.15892314372558
1000030000500007000090000
110000
10%30%50%70%90%110%130%
Revenue of Others
Reve
nue
in M
n
Grow
th R
ate
FY08 FY09 FY10 FY08 FY09 FY10
Nat-Steel Holding
76580 134680 62540
Growth Rate
0.74203821656051
0.758683729433273
-0.535640035640036
10000
50000
90000
130000
-70%
-30%
10%
50%
90%
Revenue NatSteel Holding
Reve
nue
in M
n
Grow
th R
ate
•The growth rate of Tata Steel has declined from 23% in FY09 to 3% in FY10.•The major reason for this was due to global economic slowdown.•There was also an increase in competition mainly in UK and other European Nations. •Increase in Interest Expenses added to reduce in profit of Tata Steel than what was estimated.•The prices and volume reduced to a great extent in this Financial Year. •Impact of high scrap prices in the last quarter depressed margins.
‘Geographical Segmentation Analysis’…
FY08 FY09 FY10 FY08 FY09 FY10
Tata Steel 196910 243160 250220
Growth Rate 0.12186645396536 0.234878878675537
0.029034380654713
2500075000
125000175000225000275000
3%
8%
13%
18%
23%
Revenue TATA Steel
Tata Steel Growth Rate
Reve
nue
in M
n
Grow
th R
ate
• Tata Steel has had a joint venture project with Canada’s New Millennium Capital Corp (NML) for developing a direct shipment ore project in Canada. •The project is expected to start its first shipments in the second quarter of 2011.
• As per the deal, once Tata Steel decides to develop the project on completion of a feasibility study, it will arrange to fund the entire project cost of $300 mn (Rs 1,310 Crores) and have a 80% stake in the JV. NML will hold the remaining 20%.
•This project will help Tata Steel to give Corus, Tata Steel’s European subsidiary, a major raw material push as the 20 mn tonne capacity.
•This is because the company has no major raw material integration as of date.
•This will also help Corus and Tata Steel’s European Subsidiary to increase their profitability.
‘New Geography Venture of Tata Steel’s in Canada’…
Section VI:-Peer Group Analysis
Peer Group Analysis
Particulars Tata Steel SAIL JSW Steel
FY10 FY09 FY08 FY10 FY09 FY08 FY10 FY09 FY08
EBITDA 113.1 115.9 110.2 101.54 111.7 155.6 60.9 35.2 49.0
Market Cap 607.1 450.9 506.4 763.4 603.5 656.7 261.1 157.2 132.4
Total Assets 134.3 120.5 381.7 402.8 359.9 274.7 56.5 48.59 32.2
Revenues 267.6 268.4 221.9 439.0 487.2 459.9 194.6 151.8 126.3
PAT 50.5 52.1 46.9 67.5 61.7 75.4 20.2 4.6 17.3
Net debt 252.4 269.4 180.1 165.1 75.6 30.5 115.9 112.8 75.5
Net debt / equity ratio
0.78 0.78 0.67 0.39 0.21 0.18 1.29 1.2 0.88
Net Worth 622.0 571.2 453.2 498.3 357.1 261.1 212.9 192.3 152.2
Peer Group Analysis
Source: Annual Reports of the respective companies and the Market cap. as per the last audited Balance Sheet
•SAIL has the highest market share amongst the peers of TATA Steel which in Rs. 763.4 bn and also the revenues are almost double of TATA Steel.• TATA Steel has the highest EBITDA levels Rs. 113.1 bn and also net worth of Rs. 622 bn amongst its peers.
1QFY10 2QFy10 3QFY10 4QFY10 1QFY11 2QFY110
50000
100000
150000
Quarterly RevenueAll figures in Mn
Sail Jindal steel JSW steel Tata steel
Sail is the largest player revenue wise followed by Tata Steel
1QFY10 2QFy10 3QFY10 4QFY10 1QFY11 2QFY110
5000
10000
15000
20000
25000
Quarterly PAT
Sail Jindal JSW Tata steel
1QFY10 2QFy10 3QFY10 4QFY10 1QFY11 2QFY11-5000
0
5000
10000
15000
20000
25000
30000
35000
Quarterly EBITDA
Sail Jindal Tata steel JSW
Quarterly PAT and EBITDA is highest for Tata steel & is growing steadily except 1QFY11
Peer Group Analysis
Section VII:-Stock Chart Analysis
Oct , 2009-Q2FY10 results announced, net profit slipped 49.5%
Dec, 2009-Corus got a 350 mn Euro (USD510 million) contract to supply rail tracks to French operator SNCF & from December 2009
July, 2010-Tata steel announced its Q1FY11 results with a significant increase in its production
Apr, 2010-Goldman Sachs fraud causes a fall in Asian market & BSE
Jan, 2010-Barack Obama’s comments on banks; & BSE traded below 17000 & TATA steel prices started decreasing.
Sep , 2009 -Strong domestic performance & recovery at its European operations
1-Sep-0
9
1-Oct-
09
1-Nov-0
9
1-Dec-0
9
1-Jan-1
0
1-Feb-1
0
1-Mar-
10
1-Apr-1
0
1-May
-10
1-Jun-1
0
1-Jul-1
0
1-Aug-1
0
1-Sep-1
0
1-Oct-
10400
450
500
550
600
650
700
TATA Steel Stock Price Movements
stock Price(close)-Tata steel
Tata Steel Stock Price Movement
Sept, 2010-Increasing global and domestic demand
•Tata steel share price has shown stock movement close to base price (1st sep 2009)•JSW ‘s stock movement is nearly same as the Tata Steel’s stock•SAIL’s stock has shown an upward movement after February 2010 as compared to Tata steel and JSW
1-Sep-09
16-Sep-09
1-Oct-
09
16-Oct-
09
31-Oct-
09
15-Nov-09
30-Nov-09
15-Dec-0
9
30-Dec-0
9
14-Jan-10
29-Jan-10
13-Feb-10
28-Feb-10
15-Mar-1
0
30-Mar-1
0
14-Apr-1
0
29-Apr-1
0
14-May-10
29-May-10
13-Jun-10
28-Jun-10
13-Jul-1
0
28-Jul-1
0
12-Aug-10
27-Aug-10
11-Sep-10
26-Sep-1080
100
120
140
160
180
200
220Stock Price Movement of TATA Steel, SAIL and JSW
TATA STEEL SAIL JSW
TATA Steel & Peers SAIL And JSW
Apr, 2010-European shares drifted lower in volatile trade on unease over euro zone sovereign debt levels. Metal stocks declined
Sept, 2009-Fears of a slowdown in global growth had hit the metal sector in India but soon the index picked up due to recovery in steel demand globally
1-Sep-09
1-Oct-
09
1-Nov-0
9
1-Dec-0
9
1-Jan-10
1-Feb-10
1-Mar-
10
1-Apr-1
0
1-May
-10
1-Jun-10
1-Jul-1
0
1-Aug-1
0
1-Sep-10
1-Oct-
1012000
13000
14000
15000
16000
17000
18000
19000Metal Index Movement
metal(Close)
Metal Index
Dec, 2009 -Major metal companies in India have paid higher advance tax in the Q3FY10 compared to the same period last year. By gaining 0.74 percent Sept, 2010 – Reviving global economy
and increasing demand for metals
1-Sep-0
9
13-Sep-0
9
25-Sep-0
9
7-Oct-
09
19-Oct-
09
31-Oct-
09
12-Nov-0
9
24-Nov-0
9
6-Dec-0
9
18-Dec-0
9
30-Dec-0
9
11-Jan-1
0
23-Jan-1
0
4-Feb-1
0
16-Feb-1
0
28-Feb-1
0
12-Mar-
10
24-Mar-
10
5-Apr-1
0
17-Apr-1
0
29-Apr-1
0
11-May
-10
23-May
-10
4-Jun-1
0
16-Jun-1
0
28-Jun-1
0
10-Jul-1
0
22-Jul-1
0
3-Aug-1
0
15-Aug-1
0
27-Aug-1
0
8-Sep-1
0
20-Sep-1
0
2-Oct-
1080
90
100
110
120
130
140
150
160
170
180 Movement of SENSEX, Metal Index and TATA Steel
sensex(Close) metal(Close) stock Price (close)-TATA STEEL
SENSEX, Metal Index and TATA Steel
•TATA steel stock and metal index are lower from August, 2010 levels.•SENSEX has shown more steady movement in comparison to Metal Index and TATA Steel stock price movements.•TATA Steel stock price and Metal Index movement are almost same from 1st September, 2009 to 31st August, 2010.
Section VIII:-Board of Directors & Shareholding Pattern
Shareholders %
Indian Bodies Corporate 32.37
Trust 0.11
Mutual Funds/UTI 3.70
Financial Institutions/Banks 0.25
Government 0.01
Insurance Companies 22.26
FII 15.57
Foreign bodies DI 0.01
FII-DR 0.55
Non-Institution Bodies Corporate 3.41
Individual shareholders holding nominal share capital up to Rs. 1 lakh
18.40
Individual shareholders holding nominal share capital in excess of Rs. 1 lakh
2.88
Shares held by Custodians and against which Depository Receipts have been issued
0.64
32%
5%
22%
16%
3%
21%
Shareholding Pattern
Indian Bodies Corporate
FI's/Banks/MF's/Trust
Insurance Companies
FII
Non-Institution Bodies Corporate
Public Shareholding
Shareholding Pattern
•The major stockholding is of Indian bodies Corporate in TATA Steel to an extent of 32.37 per cent.•Insurance Companies hold 22.26 per cent.•The individual investors hold 20 per cent of the shares in TATA Steel.
Source: moneycontrol.com
• Ratan N. Tata Chairman / Chair Person• H M Nerurkar Managing Director• Ishaat Hussain Non-Executive Non-Independent Director• Kirby Adams Non-Executive Non-Independent Director• B Muthuraman Vice Chairman• Nusli N. Wadia Independent Non-Executive Director• Subodh Bhargava Independent Non-Executive Director
Source: Annual Report FY 2010
Board of Directors
Section IX:-SWOT Analysis
StrengthsResources and capabilities (People and Raw Material)Vast experience (steel and automobiles)The business model. (TBEM is a model determining the quality movement in the group).
ThreatT
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POS
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SWOT
SWOT Analysis
Financial Model: TATA Steel
Section I:-Assumptions
Steps of Revenue Model• Calculated India’s steel production which will be 147 million MT by 2016
growth rate of the sector at an average of 8.37% over last 5 years• Forecasted India’s population growth till 2016 by WHO’s estimate and
multiplied it with per capita consumption which we forecasted by taking average of last 5 years. The PCC is at around 67 kg and multiplying that by population figure we get Indian consumption at 87 MMT in 2016
• Indian Steel export average growth rate for last 5 years stands at -6.49% • Calculated Tata Steels market share and found out capacity increases to
know the total expected production by 2016 at 44.97 MMT• Found out the current price of coking coal and iron ore and their future
price increases to find out production cost at Rs 25400 and we have estimated it to increase to Rs 27000 by 2016 due to increase in raw material cost
Revenue Model Assumptions
• Found out the current market price of steel at Rs 42800 and we estimated it to increase to Rs 44340 by 2016
• We have increased market price with the increasing production cost• Calculated revenue by multiplying production with price• Growth forecasted by increase in revenue year on year• We have forecasted revenue at conservative estimates because we do
not believe that the per capita consumption target set by GOI will be met and due to no significant increase in our steel exports the company may not produce at full capacity.
• Cost forecasted on the basis of historical costs
Revenue Model Assumptions
Section II:-Historical and Projected Financials
Historical Balance Sheet
Fiscal Year Ending-------> FY 08 FY09 FY10ending Mar Mar Mar
Consolidated Consolidated ConsolidatedAudited Audited Audited
Equity Capital 730.8 730.8 887.4 2% Convertible Preference Capital 5,472.7 5,472.7 - Reserves and Surplus 21,097.4 23,972.8 36,074.4 Net Worth 27300.88 30176.26 36,961.8 Minority Interest - - - Loans Secured 3,520.6 3,913.1 2,259.3 Unsecured 14,501.1 23,033.1 22,979.9 Total Loans 18,021.7 26,946.2 25,239.2
Deferred tax Liability 681.8 585.7 867.7 Provision for Employee compensation 1,071.3 1,033.6 957.2 Foreign Currency Monetory Item - - 207.0 Warrants Issued by a Subsidiary - - - Total Liability 47,075.7 58,741.8 64,232.8 Application of funds Fixed Assets Gross Block 20,847.0 23,544.7 26,149.7 Depreciation 8,123.0 8,962.0 10,037.6
Impairment 100.5 100.5 106.1 Net Block of Fixed Assets 12,623.56 14,482.22 16,006.03 Investments Long term investments 3,066.4 39,102.5 43,260.4 Current Investments 1,036.8 3,269.3 1,719.2 Total Investments 4,103.2 42,371.8 44,979.7
Historical Balance SheetFiscal Year Ending-------> FY 08 FY09 FY10
ending Mar Mar MarConsolidated Consolidated Consolidated
Audited Audited AuditedForeign Currency Monetory Item - 471.7 - Deferred Tax Assets - - - Goodwill - - - Net Current Assets Current Assets Stores and Spare parts 557.7 612.2 623.8 Stock in Trade 2,047.3 2,868.3 2,454.0 Sundry Debtors 543.5 636.0 434.8 Interest accrued on investments 0.2 - 0.3 Cash and Bank Balances 465.0 1,590.6 3,234.1 Loans and Advances 33,348.7 4,561.0 5,499.7 Total Current Assets 36,962.4 10,268.1 12,246.7 Less: Current Liabilities and Provisions Current Liabilities Sundry creditors 3,243.4 3,842.8 4,086.7 Subsidiary companies 115.7 1,358.1 1,514.3 Interest accrued but not due 231.1 506.7 676.7 Advances received from customers 226.0 297.4 335.0
Liability towards Investors Education and Protection Fund under Section 205C of the Companies Act, 1956 39.0 34.9 40.5 Total Current Liabilities 3,855.3 6,039.9 6,653.1 Provisions 2,913.5 2,917.2 2,346.5 Total Current Liabilities and Provisions 6,768.8 8,957.1 8,999.6 Net Working Capital 30,193.66 1,311.04 3,247.08 Miscellaneous Expenditure 155.11 105.07 - Total Assets 47,075.5 58,741.8 64,232.8
Historical Profit & Loss A/CFor the Period--------> FY2008 FY09 FY10 ending Mar Mar Mar Standalone Standalone StandaloneAll figures in crores Audited Audited AuditedREVENUES Sale of products 21392.39 25,945.45 25,755.52 Sale of power and water 546.33 566.31 656.80 Income from town , medical and other services 40.66 40.7 40.3 other operating income 210.17 291.32 305.16Total gross sales 22189.55 26843.73 26,757.80 less excise duty 2498.52 2527.96 1735.82Net sales 19691.03 24315.77 25,022.0 EXPENSES
purchase of finished and semi finished steel 387.94 358.9 169.1 raw materials consumed 3355.2 5709.91 5494.74payments and provisions for employees 1815.95 2,305.8 2,361.5 operation and other expenses 5141.10 6213.58 6813.33administrative and other expenses 1152.56 937.82 1557.37total manufacturing expenses 11852.75 15525.99 16,396.0 Earnings Before Interest, Depreciation, Taxes and Amortization(EBITDA) 7838.28 8789.78 8,626.0 depreciation less expenses transferred to capital account 659.11 629.75 757.1 EBIT 7179.17 8160.03 7,868.9
other income 242.8 308.3 853.8 Total Income 7421.97 8,468.3 8,722.7 Net finance charges 786.5 1,152.7 1,508.4 EBT 6635.47 7315.61 7214.30profit from exceptional items 430.89 0 0taxes 2379.33 2113.87 2167.5PAT 4687.03 5201.74 5046.80
Projected Balance SheetTata Steel FY 2011E FY 2012E FY 2013E FY 2014E FY 2015E FY 2016E(INR in millions) 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeksAssets Current assets: Cash & cash equivalents -7,373.2 -3,656.8 4,950.8 12,655.1 29,024.3 48,826.0Short-term investments 0.0 0.0 0.0 0.0 0.0 0.0Receivables, net 197.6 719.0 825.9 972.9 1,571.3 2,097.2Merchandise inventories 1,952.0 3,471.5 3,987.9 4,697.7 7,587.2 10,126.6Prepaid expenses & other current assets 4,807.6 6,162.4 7,079.2 8,339.1 13,468.3 17,976.2
Total current assets -416.0 6,696.1 16,843.8 26,664.8 51,651.1 79,026.1 Investment properties 25.2 25.2 25.2 25.2 25.2 25.2Property and equipment, net 7,167.5 41,840.4 49,096.0 57,767.1 69,377.9 90,075.2Other assets 25.3 25.3 25.3 25.3 25.3 25.3
Total assets 6,776.8 48,561.8 65,965.1 84,457.2 121,054.2 169,126.5 Liabilities and shareholders' equity Current liabilities: Accounts payable 806.5 1,150.9 1,322.2 1,557.5 2,515.4 3,357.4Accrued expenses & other current liab. 1,975.7 2,434.2 2,796.3 3,293.9 5,320.0 7,100.6
Total current liabilities 2,782.2 3,585.1 4,118.4 4,851.4 7,835.4 10,458.0 Long-term debt 25,239.2 25,239.2 25,239.2 22,782.0 22,782.0 22,782.0Other long-term liabilities 24.1 24.1 24.1 24.1 24.1 24.1
Total current and long-term liabilities 28,045.5 28,848.4 29,381.7 27,657.4 30,641.5 33,264.0 Shareholders' equity 6,532.9 21,060.7 37,930.7 58,147.1 91,760.1 137,209.8Total liabilities and shareholders' equity 34,578.4 49,909.1 67,312.4 85,804.5 122,401.5 170,473.8
Projected Profit & Loss A/CTata Steel FY 2011E FY 2012E FY 2013E FY 2014E FY 2015E FY 2016EQuarterly & Annual Financials 31 Mar 11 31 Mar 12 31 Mar 13 31 Mar 14 31 Mar 15 31 Mar 16(INR in millions) 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeksIncome statements Total revenue 31,524.6 37,590.9 43,064.9 50,729.4 81,932.3 109,654.8Y/Y Growth (%) 10.6% 19.2% 14.6% 17.8% 61.5% 33.8% COGS & occupancy costs 7,767.2 9,773.6 11,196.9 13,189.7 21,302.4 28,510.3Gross profit 23,757.4 27,817.3 31,868.0 37,539.8 60,629.9 81,144.6Gross profit margin (%) 75.4% 74.0% 74.0% 74.0% 74.0% 74.0% Operating expenses operation and other expenses 6,508.8 8,270.0 9,474.3 11,160.5 18,025.1 24,124.1 administrative and other expenses 1,382.5 1,654.0 1,894.9 2,232.1 3,605.0 4,824.8 Operating profit 15,866.1 17,893.3 20,498.9 24,147.2 38,999.8 52,195.7 Operating profit margin (%) 50.3% 47.6% 47.6% 47.6% 47.6% 47.6% Other income (expense), net 5,694.6 -1,697.3 -1,691.7 -1,609.4 -1,527.1 -1,527.1Income tax provision (benefit) 2,050.5 1,668.2 1,937.1 2,321.4 3,859.7 5,218.9Net profit 19,510.1 14,527.8 16,870.0 20,216.4 33,613.0 45,449.7Net profit margin (%) 61.9% 38.6% 39.2% 39.9% 41.0% 41.4% Weighted average basic shares 90.2 88.7 88.7 88.7 88.7 88.7 Weighted average diluted shares 90.2 88.7 88.7 88.7 88.7 88.7 Basic EPS 216.3 163.7 190.1 227.8 378.8 512.2Diluted EPS 216.3 163.7 190.1 227.8 378.8 512.2
Section III:-DCF Model
DCF ModelTata Steel WACC & DCF Valuation (INR in millions) Value per common stockValue of operations Sum of PV of FCFF 35,930.7PV of terminal value 53,751.7Mid year Adjustment 1.10Value of operations 98,833.8Less
Net debt 27,532.0 Minority interest 0.0 Other liabilities net of assets 24.1 Unfunded pension obligation 0.0
Value available to common stockholders 71,277.7 Total diluted shares 90.2 Value per share INR 790.03
Terminal valueNOPAT for FY 2016 46,662.3 WACC 16.1%Perpetual growth rate (g) of NOPAT 11.5%ROIC selected (Manual input) 13.0%Terminal value FCFF/(WACC-g) 131,421.5 Discounting factor 40.9%PV of terminal value 53,751.7
Weighted average cost of capitalMarket value of equity Total shares outstanding (mln) 90.22 Market price per share SAR 661.25Total market value of equity 59,658.6Market value of debt 27,585.7Market value of equity 59,658.6Total capital (debt+equity) 87,244.4Cost of debt Average pre-tax interest cost of debt 11.0%Average tax rate 10.0%Average post-tax interest cost of debt (kd ) 9.9%Debt/(Debt+Equity) (Wd ) 31.6%Weighted average cost of debt (Wd × kd ) 3.1%Cost of equity (CAPM) Risk free rate (Rf) 8.0%Market rate of return (Rm) 14.0%Beta (β) 1.82 Risk premium β(Rm-Rf) 10.9%Cost of equity (ke ) 18.9%Equity/(Debt+Equity) (We ) 68.4%Weighted average cost of equity (We × ke ) 12.9%WACC [Wdkd + Weke] 16.1%
DCF Model
PV of FCFFFY FCF Gr. (%) FCFF PV2010 1,892.1 2011 57.2% 2,975.2 2,563.42012 70.2% 5,064.1 3,759.02013 96.5% 9,950.8 6,363.92014 15.0% 11,439.4 6,303.12015 53.7% 17,581.7 8,346.42016 19.5% 21,014.3 8,594.9
Sum of PV of FCFF 35,930.7
ROIC selection
1 Manual input ROIC
1 Manual input 13.0%
2 Last year ROIC
3 WACC 16.1%
Sensitivity Analysis Weighted average cost of capital Step 0.50%
Perpetual
growth
790.03 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5%
3.3% 4,353.88 3,937.02 3,579.47 3,269.68 2,998.93 2,760.46 2,549.01
3.5% 4,425.35 3,989.84 3,618.34 3,297.98 3,019.13 2,774.41 2,558.10
3.8% 4,502.49 4,046.39 3,659.64 3,327.82 3,040.27 2,788.87 2,567.39
4.0% 4,586.06 4,107.14 3,703.65 3,359.38 3,062.43 2,803.88 2,576.92
4.3% 4,676.99 4,172.64 3,750.71 3,392.85 3,085.73 2,819.51 2,586.69
4.5% 4,776.39 4,243.53 3,801.19 3,428.43 3,110.29 2,835.80 2,596.74
4.8% 4,885.58 4,320.58 3,855.54 3,466.40 3,136.25 2,852.84 2,607.08
Step 0.25%
Section IV:-Key Ratios
Ratio 2008 2009 2010EPS 96.52 122.50 -4.93Dividend / share 15.12 16.26 14.86Book Value / Share 474.38 391.84 267.25
Return on equity per share 43.10 21.80 -9.30
Dividend Payout Ratio 0.08 0.24 0.62EPS Growth NA -62.42 -138.56Dividend Growth NA 26.59 10.99Dividend Per Share Growth NA 20.89 -2.14Gross Margin 54.2% 50.5% 56.9%EBITDA Margin (Without adjustment) 0.18 0.09 0.06
Key Ratios
Ratio 2008 2009 2010Net Margin 9.4% 3.3% -2.1%
Return on assets 13.4% 5.3% -2.7%
Sales per employee 15.02 17.02 12.60
Total Asset Turnover 1.43 1.61 1.28
Return on Common Equity 5.18 0.25 0.37
Quick Ratio 1.22 1.13 0.90Current Ratio 1.87 1.78 1.46Interest Coverage Ratio 5.0 3.0 1.6
Fixed charge coverage ratio 0.29 0.14 0.11
Key Ratios
Section V:-IFRS Convergence
Section V:-IFRS Convergence
Topic IGAAP IFRS Impact of IFRS Current Treatment in
company
Impact on Tata Steel
Abandonment cost
No guidance for estimation of costs.
Full eventual liability to be recognized in the beginning at the discounted present value.
Decrease in fixed assets and liabilities and higher finance costs due to unwinding of the discount.
The company makes provision yearly till the end of the mine life under specific guidance by IGAAP.
The company will have to make provisions for assets like mines initially itself by discounting the value of liability to its present value.
Exploration & evaluation expenditure
Successful effort or full cost method.
Moving towards successful effort method.
Profitability to be negatively impacted as cost pertaining to unviable discoveries will have to be expensed in the year.
The company follows successful efforts method and capitalizes all evaluation and efforts expenditure and depreciates them over the life of the assets.
Under IFRS the company will have the choice to either capitalize the expenses or to charge them directly to the income and expenditure statement.
IFRS Convergence
Section V:-IFRS Convergence
Topic IGAAP IFRS Impact of IFRS Current Treatment in
company
Impact on Tata Steel
FCCBs No clear guidelines on separation of components.
Mandatory to segregate each component such as debt and derivative and fair value changes on conversion option recognized in P&L.
Increases earnings volatility due to fair value changes in the conversion options. Also interest expense may increase as cost of issuance and redemption premium is included in interest expense.
The premium on redemption or the discount on issue are treated separately in the books of accounts and are not spread over the tenure of the bonds.
The huge FCCB exposure of Rs.22.3Bn which has to be redeemed at a premium of 23% will have a huge impact as the premium will now be distributed over the life of the bonds.
IFRS Convergence
Annexure
Section I:-Major News
GLOBAL STEEL MARKET• Steel using sectors likely to slow in coming quarter as inventory adjustment
boost and fiscal stimulus wanes• Increased uncertainty around near term outlook in China and further
slowdown is expected with policy tightening having an impact EUROPEAN ECONOMY UNCERTAIN • Sovereign debt and fiscal crisis not fully resolved and large spending cuts
pending/ underway• Unemployment is high• Bank lending remains weak• UK auto production is forecast to grow by 24% in 2010MACRO RISKS• Slowdown in China will impact European engineering exports• Construction at further risk from Government spending cutsMARKET UPDATE • Imports into EU remain relatively low and import share has fallen• EU27 remains a net exporter, which helping to support capacity utilisation
News Highlights
OUTLOOK INDIA & S.E ASIA: India• 10 Mtpa Brownfield expansion in Jamshedpur on track• India’s finished steel demand to grow at 12% CAGR over FY10-13, led by strong
demand growth from Autos, Consumer Durables and Engineering sectors• Threat of Chinese imports delay price increases in domestic market• India to remain a net steel importer over FY11-13, as demand likely to outpace
supply South East Asia• China, Australia and Vietnam, where NatSteel operates are expected to register
positive GDP in 2010 on the back of strong demand from the construction sector
• The construction sector in Singapore is projected to witness strong growth in the range of 8-10% in this year and the following year
• Thai Government has approved increased budget for public sector construction• Private investment in Thailand is projected to grow at a high rate, supported by
high capacity utilization and growth in export – oriented industry such as motor vehicles , electronic parts and electrical appliances
News Highlights
PROJECTS UPDATE 3 Mtpa Brownfield expansion at Jamshedpur: • Capex incurred till Sep’10 : Rs 5,732 Crs (US$ 1,276 Mn), H2 FY11 Capex planned : Rs. 2,963 Crs (US$ 659
Mn)• Project progression as per planned. Commissioning in H2 2011-12• Product Mix – 2.54 Mtpa Hot Rolled Coil and 0.3 Mtpa SlabsTata Steel Processing & Distribution Ltd (TSPDL): • 100% subsidiary of Tata Steel since July 2009• Leadership position in steel service centre business in India with current processing capacity of over 1.25
million tonnes per annum• Acts as strategic partner for Automobile players in IndiaTata BlueScope: • Tata BlueScope Steel Limited(TBSL) a 50:50 JV with BlueScope Steel Limited• Engaged in the business of manufacturing building products & solutions such as roll formed roofing, wall
claddings and Pre-Engineered Buildings (PEBs) from metal & colour coated steel.• Existing operations include three state of the art facilities with a total installed capacity of 136,000 TPA in
Pune, Bhiwandi and Sriperumbudur, to manufacture building products• Presently implementing a green field project for setting up of upstream metal coating (capacity of 250,000
MT) and colour coating (150,000 MT) facilities at Jamshedpur, to be operational by April 2011• A strong brand for Pre-Engineered Buildings (PEBs)
News Highlights
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