“working capital management at tata steel”

“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

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�� 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

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�

�� 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

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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

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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.

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 as a motivator in my 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

programme. This is inclusive of the Finance & Accounts Department, 13th 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

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………………………………...………….….........................29

18) Working Capital Management…………………………………..………………......30

19) Credit Management Module…………………………………………………………38

20) Factoring or Bill Discounting……………………………..…....……………………42

21) O.E.Finance……………………….………………………..………………………..42

22) Receivable Purchases.……………………………………………………….............47

23) Letter of Credit and Bill 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………………………………………. .....................................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……………………………………………………………………...……… -a-

Bibliography…………………………………………………………………………….I

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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 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 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 openness, 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

1 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 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

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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 value-

added 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

• Skilled manpower and low unit labor costs

• High ash content of domestic coking coal

• Low labor productivity

Weaknesses:

• High costs of some basic inputs like power, coal, fuel, etc.

• High social costs

• Poor quality of basic infrastructure

• Distribution network

• Low IT usage in efficiency enhancement

• Fragmentation

Opportunities:

• Low per capita consumption

• Unexplored rural market

• 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 applications.

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 capacity.

• 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 STEEL

1. Tata Refractories Limited (TRL)………………………………………………51%

2. The Tinplate Company of India Limited (TCIL)…………………………..30.60%

3. Tata Yodogawa Limited (TAYO)………………………………………….36.53%

4. Tata Sponge Iron Limited (TSIL)…………………………………………..39.74%

5. Tata Pigments Limited (TPL)………………………………………………...100%

6. TRF Limited (TRF)…………………………………………………….…..34.77%

7. Stewarts and Lloyds of India Limited (S&L)………………………………99.99%

8. Tata Metaliks Limited (TML)……………………………………………...46.66%

9. Jamshedpur Injection Powder Limited (JAMIPOL)……………………….28.22%

10. Tata Ryerson Limited (TRYL)………………………………………………..50%

11. TM International Logistics Limited (TMILL)………………………………...51%

12. Metaljunction.com Private 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.

17

LANDMARKS OF TATA STEEL3

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.

3 Facts about Tata Steel, 2003

18

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 operation.

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.

24 April 2000 – Inauguration of the Cold Rolling Mill Complex.

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.

19

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 national 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 work of the department.

The following is the organizational chart of Tata Steel:

21

PRODUCT and SEGMENT OF APPLICATION 1) FLAT PRODUCT

• HR – LPG / Tubes / Cold 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

• SBQ – Auto

• HC / WR – Auto / Construction / Railways / Power

• LC / WR – Electrode / General Engineering

• MSWR – Construction / General Engineering

• Rebars – Construction

• Semis

• Others

4 Tata Steel Intranet Web Site

22

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. billets.5

FEW KEY CUSTOMERS IN TARGETED SEGMENTS KEY SEGMENT PRODUCT MARKET KEY CUSTOMERS HR for LM / CM Tata Motors, Ashok Leyland HR for MC / HC ASIL, Hero, TPI, ITW HR for CF Wheels India, Kalyani Lemmerz, Toyota CR for high end (Auto, Appliance) Tata Motors, Ashok Leyland, Maruti,

Mahindra & Mahindra, Hyundai CR for distribution Authorized Distributor Galvanized Corrugated (GC) Authorized Distributor HCWR Bansal, Ramswarup, Miki Wires, Arti Steel LCWR ESAB, Advani Oerlikon, Feero Wires TISCON (Re-bars) Gammon, DLF, Chevron Authorized

Distributors

CAPACITY OF FLAT PRODUCT IN THE MARKET6

SAIL 41%

TATA STEEL 20%

ESSAR 14%

LIOYDS 4%

ISPAT 9%

JVSL 10%

OTHERS 6%

5 Tata Steel Intranet Web Site 6 TBEM 2003, ‘Building Sustainability’ by Tata Steel

23

CAPACITY - FLAT PRODUCTS

41%

20%14%

4%

9%10% 6%

SAILTATA STEELESSARLIOYDSISPATJVSLOTHERS

CAPACITY OF LONG PRODUCT IN THE MARKET7

SAIL + IISCO 10%

TATA STEEL 3%

RINL 10%

OTHERS 77%

CAPACITY - LONG PRODUCTS

10% 3%10%

77%

SAIL + IISCO

TATA STEEL

RINL

OTHERS

KEY ENTERPRISE PROCESSES

• Leadership

• Strategic planning and risk management

• Market development

7 TBEM 2003, ‘Building Sustainability’ by Tata Steel

24

• 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

25

CUSTOMER SATISFACTION DETERMINATION TYPE OF DATA PARAMETERS TOOLS Opinion Data Feedback, Survey,

Complaints, Call Reports, Customer meets, Top executive customer meets

Customer satisfaction Index measurement, Complaint analysis, Visit reports

Behavior Data Repeat Business, Market Share

Repeat Business, market share in key markets

PROCESS FOR FOLLOW UP WITH CUSTOMERS ON PRODUCTS/SERVICES

FEEDBACK Close proximity of sales offices

Customer champions/ RVM workshops

Call centers

Planned customers visits by sales personnel

Concept of dedicated CAMs

Maintain adequate sales person per key customer Customer visits by

application engineers/plant personnel

Distributor monthly reports

26

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 visits 5. Call centers

Enterprise Accounts / Key Commercial Channel / Original Equipment Customers

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

CUSTOMER SATISFACTION DETERMINATION

TYPE OF DATA PARAMETERS TOOLS Opinion Data Feedback, Survey,

Complaints, Call Reports, Customer meets, Top executive customer meets

Customer satisfaction Index measurement, Complaint analysis, Visit reports

Behavior Data Repeat Business, Market Share

Repeat Business, market share in key markets

27

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 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.

28

STRATEGIC PLANNING PROCESS

LEVEL KEY PARTICIPANTS

TIME HORIZON COMMONLY USED STRATEGIC

PLANNING TOOLS Corporate Business Review

Committee of Tata Steel Top management (MD, DMD, VP’s) Key senior leaders

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

Business Unit (profit center/cost center)

Chief of Business Unit / VP’s Key senior leadership of business unit


Product Portfolio Matrix

Functional Unit Chief of functional unit Key senior leadership of functional unit


Focus Group Discussion: Scenario Analysis

Department Key senior leadership Key Operating Staff

Short term: Up to a quarter Long term: Up to a year, once a quarter

Decision Tree Analysis

29

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

• 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

30

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

31

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.

32

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 costs 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.

33

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 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 about 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.

34

The company has a wide variety of customers. These are from different categories of

business. They can be either public undertaking or government department or 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

35

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 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

36

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

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.

37

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.

38

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

39

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 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

40

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.

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

41

• 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

42

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 payment

• No legal cost as assignment of Legal Rights 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

43

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 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

44

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 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

45

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 (in case of audit) or in case of dispute / default.

46

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 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 of the invoices once a quarter 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.

47

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

48

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.

49

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 invoice-

wise 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 for money receipt.

The Master Dump looks like the following:

CUST.

NAME

BRANCH DOC.

NO.

INV.

DATE

NET

DUE

DATE

INV.

AMT.

INV.

NO.

DISC.

DATE

PAYMENT

DATE

INT.

DAYS

INT.

AMT.

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.

50

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.

51

• 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 by charging a certain interest for late payment.

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

52

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 1st

January, 2005 onwards. According to the agreement, Tata Steel would be discounting

only commercial invoices having 30 days 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

53

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

54

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 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)

55

• 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.

Overdraft days for different months in State Bank of India10

MONTH NO. OF TIMES AMOUNT (IN RS.) Sept.'04 0 0 Oct. '04 0 0 Nov. '04 1 28937061.97 Dec. '04 0 0 Jan. '05 0 0 Feb. '05 0 0 Mar. '05 2 23065575.95 Apr. '05 3 46728341.5

10 Bank Statement of State Bank of India

56

OVERDRAFT SCENARIO ON MONTHLY BASIS

0 0

1

0 0 0

2

3

0

0.5

1

1.5

2

2.5

3

3.5

Sept.'04 Oct. '04 Nov. '04 Dec. '04 Jan. '05 Feb. '05 Mar. '05 Apr. '05

MONTHS

NO

. OF

DA

YS

57

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

58

GROWTH OF CONSTRUCTION SECTOR

02468

101214

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

YEARS

IN %

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 Authority 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 www.google.com 13 www.ibef.org

59

• 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 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.

60

• 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

61

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

Current scenario in the auto sector16

• 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 15 www.steel.nic.in 16 www.google.com

62

• 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 www.ibef.org

63

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 would not suffer in case of adverse 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:

• Falling steel prices.

18 www.ibef.org

64

• 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.

65

Refrigerator Industry19

• 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 of 20% every year.

However, the penetration of this category is very 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 Refrigerators and a 20%

market share in washing machines. They 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

and the US.

• Electrolux is its global competitor

19 www.google.com

66

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 SECTOR

-20

-100

10

20

3040

50

60

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

YEAR

IN %

67

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 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.

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

68

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 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 over-

heated.

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

69

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

10.72-5.05 (A),4.47 (T)

GEN. ENG.

4.0416.82WHITE GOODS

52.000.63AUTO ANCILLARY

30.6315.9AUTOMOBILE

2.616.89CONSTRUCTION

% OF TOTAL EXPOSURE

CURRENTGROWTH

SECTOR

MATRIX SHOWING SECTORS WITH RESPECT TO GROWTH & EXPOSURE

LEVEL OF EXPOSURE

CU

RR

ENT

GR

OW

TH

HIGHLOW

LOW

HIG

H

AUTOANC.

CONST.

AUTO

WGA

GE (T)

GE (A)

70

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

6.81Total

11.68Gen. Engg.

6.16White Goods

6.47Auto Ancillary

6.03Automobile

3.98Construction

% overdue (in terms of outstanding)

Sector

71

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 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.

72

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

MARKET ATTRACTIVENESS

RIS

K

HIGHLOW

LOW

HIG

H

CONSTRUCTION

AUTO

AUTO ANCILLARY

GENERAL ENGG.WHITE GOOD APPL.

73

STEEL INDUSTRY – WORLD

GROWTH OF STEEL CONS. IN THE WORLD

-2.000

0.000

2.000

4.000

6.000

8.000

10.000

12.000

1996 1997 1998 1999 2000 2001 2002 2003 2004

YEARS

IN %

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.

74

STEEL INDUSTRY – CHINA

GROWTH OF STEEL IN CHINA

0.000

5.000

10.000

15.000

20.000

25.000

30.000

1996 1997 1998 1999 2000 2001 2002 2003 2004

YEARS

IN %

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 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.

75

• 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. The excise duty on all iron and steel items, which had been

falling, has increased from 12% to 16% in the 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 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

76

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,

77

cement, crude oil and petroleum products registered a lower average growth of 5.4 per

cent.20

STEEL SECTOR EXPANSION IN INDIA21

• 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.

20 www.ibef.org 21 The Iron and Steel Review, February 2005 issue

78

INDIA’S FINISHED STEEL CONSUMPTION

GROWTH OF STEEL IN INDIA

0.001.002.00

3.004.005.006.00

7.008.009.00

1996 1997 1998 1999 2000 2001 2002 2003 2004

YEARS

IN %

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 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 TILL 2010 (@5.68)

45.042.640.338.1

36.134.132.3

0.0

10.0

20.0

30.0

40.0

50.0

2004 2005 2006 2007 2008 2009 2010

YEAR

CO

NS

.(in

mm

t)

79

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.

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 OF CHINA

-4-202468

1012

1995 1996 1997 1998 1999 2000 2001 2002 2003

YEARS

IN %

80

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 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

81

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.

WORLD STEEL CONSUMPTION22

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

YEAR CHINA EU(15) CIS US S.KOREA JAPAN INDIA OTHERS TOTAL

1995 87.4 129.2 26.5 100 35.2 77.7 22.2 166.9 645.1 1996 100.7 113 25.2 107 37.4 75.8 22.8 167.1 648.9 1997 103.3 128.5 27.7 113.4 37.9 79.9 22.9 188.3 701.8 1998 110.7 139.6 24.5 119.8 24.7 70.3 23.2 179.3 692.1 1999 122.6 137.3 28.1 116.4 33.8 68.9 25.1 175.8 707.9 2000 124.6 143.8 35.6 120 38.3 76.1 26.3 193.6 758.4 2001 153.4 139.6 38.4 106.2 38.1 73.2 27.1 194.9 770.8 2002 185.6 138.1 36.7 107.4 43.7 71.7 28.9 208.7 820.9 2003 232.4 137.5 38.5 100.5 45.8 73.4 30.3 214.4 872.7 2004 265 145.7 52 115.9 47.2 76.9 32.3 232.9 967.9

CAGR 11.7 1.2 7.0 1.5 3.0 -0.1 3.8 3.4 4.1

COUNTRY CHINA EU(15) CIS US S.KOREA JAPAN INDIA OTHERS MKT SH. FOR 2004 27.4 15.1 5.4 12.0 4.9 7.9 3.3 24.1

REL. MKT. SH. 2.3 1.3 0.4 1.0 0.4 0.7 0.3 2.0

82

1 X10 X 0.1 X0.5 X5 X0%

10%

20%

5%

15%

Relative Market Share

Mar

ket G

row

th R

ate

STARS ?????

CASH COW DOG

U.S

CHINA

EU(15)

CIS

S.KOREA

JAPAN

INDIA

OTHERS

BCG MATRIX

From the above matrix, we can draw the following conclusions for the various countries:

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.

83

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 control.

Working Capital Management

58 57

38

25

4447

4137

55 53

38

16

0

10

20

30

40

50

60

70

FY'01 FY'02 FY'03 FY'04Years

Day

s of

Sal

e

DEBTORS

INVENTORY

NET WORKINGCAPITAL

84

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, Debt-

equity 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.

85

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 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

86

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 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:

87

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)).

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 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 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)).

88

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 of 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 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)).

Market Price of the share of Tata Steel as on 24th 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

89

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."

90

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

91

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

92

fall in interest from Rs 76.41 crores to Rs 57.02 crores for the second quarter of 2003-

2004. 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

93

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)).

94

INFORMATION TECHONOLGY SERVICES AT TATA STEEL

Information Technology Service has different computing technologies, networking

and infrastructure facilities:

• 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

ROLE OF IT

Enable and improve core

business processes

Act as a competitive

differentiator

Promote ‘Open and

Knowledge-based’ culture

95

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 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 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.

96

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 openness, 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

97

PROCESS OF EMPLOYEE MOTIVATION

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.

Identify Motivational Factors through: Communication

Informal Meeting Focused HR group discussion

Employee Satisfaction Index (ESI) feedbacks

Reinforce these in work

environment

Measure motivation

through ESI

Employee Motivating Factors Recognition by peers/seniors

Rewards Performance Management System

98

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 reasons.

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).

99

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

Create leaders who will build our future (Vision element)

Workers & supervisors training Preparing workers to occupy supervisory position Officers development through rotation & succession planning

Improve employee satisfaction & commitment (Vision element)

Reward high performance through variable pay To ensure ‘Parivesh’ – Annual plan to improve Health safety and environment.

100

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 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

101

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 Facts About Tata Steel, 2003 25 Facts About Tata Steel, 2003

- a -

EXHIBITS

EXHIBIT-1

STEEL MARKET PRICES (AS ON 01-01-05)

(Rs. per tonne)

ITEM KOLKATA DELHI MUMBAI CHENNAI Pig Iron 18875 20000 19200 18000 Billet 100mm 22250 25000 23600 22500 Blooms 150*150mm 22850 24000 23600 21500 Pencil Ingots 20125 21000 22700 22000 Wire Rods 6mm 25450 26200 26600 29000 Wire Rods 8mm 25350 26200 26200 28500 Rounds 12mm 24250 24500 28200 26500 Rounds 16mm 25250 24500 28000 25500 Rounds 25mm 24850 24500 28000 25500 Tar Steel 10mm 23900 27900 28000 26500 Tar Steel 12mm 23875 27500 27750 26000 Tar Steel 25mm 24100 27700 26500 27000 Angles 50*50*6mm 27450 29500 28000 30500 Angles 75*75*6mm 27500 28500 27650 30500 Joists 125*70mm 30450 31500 29500 32500 Joists 200*100mm 29650 31000 29500 32000 Channels 75*40mm 28050 29400 28250 30500 Channels 150*75mm 32000 29500 28250 30500 Plates 6mm 32325 31400 31800 31800 Plates 10mm 31900 31400 32250 32500 Plates 12mm 31750 31800 31750 31000 Plates 25mm 32125 32200 32750 32700 HR Coils 2.00mm 33100 34000 33100 33500 HR Coils 2.50mm 32625 31800 32625 32500 HR Coils 3.15mm 32150 31800 32100 32000 CR Coils 0.63mm 34600 34500 35750 35000 CR Coils 1.00mm 34000 33600 35000 35000 GP Sheets 0.40mm 37350 39000 38250 37000 GP Sheets 0.63mm 36225 36000 38000 36000 GC Sheets 0.40mm 37350 39400 38500 38000 GC Sheets 0.63 36400 36400 37750 38000 Melting Scrap H M S-I 16375 17800 15000 15800 Melting Scrap H M S-II 15775 17200 14600 15500 Sponge Iron (Coal Based) 12275 15800 14500 16500 Source: The Iron and Steel review, January 2005 issue

- b -

EXHIBIT-2

STEEL MARKET PRICES (AS ON 15-01-05) (Rs. per tonne)

ITEM KOLKATA DELHI MUMBAI CHENNAI

Pig Iron 18225 20000 19000 18200 Billet 100mm 21750 25000 23550 22600 Blooms 150*150mm 21900 24000 N.A. 21000 Pencil Ingots 20525 22300 22750 22000 Wire Rods 6mm 25550 27800 26300 29000 Wire Rods 8mm 25200 27800 26000 28000 Rounds 12mm 24400 26500 28200 26600 Rounds 16mm 24400 26500 28000 26500 Rounds 25mm 25000 26500 28000 25500 Tar Steel 10mm 24250 28700 28250 26500 Tar Steel 12mm 24050 28000 28125 26000 Tar Steel 25mm 24425 28200 26750 27000 Angles 50*50*6mm 27025 29500 27875 30000 Angles 75*75*6mm 27025 28500 27500 30000 Joists 125*70mm 31750 31500 29250 32000 Joists 200*100mm 30250 31500 30000 32000 Channels 75*40mm 28325 29400 28250 30000 Channels 150*75mm 32175 29500 29875 30000 Plates 6mm 32400 33000 32625 33000 Plates 10mm 31975 33000 32875 34000 Plates 12mm 31450 33500 32625 33000 Plates 25mm 32325 34000 33350 33500 HR Coils 2.00mm 33400 35000 33750 34500 HR Coils 2.50mm 32575 33000 33625 34500 HR Coils 3.15mm 32250 33000 33250 33500 CR Coils 0.63mm 34250 35200 36750 36000 CR Coils 1.00mm 34000 34600 35500 36000 GP Sheets 0.40mm 37450 41000 38750 37500 GP Sheets 0.63mm 35285 36600 38500 36500 GC Sheets 0.40mm 37450 41000 39000 38500 GC Sheets 0.63 35975 37500 38500 38000 Melting Scrap H M S-I 16450 17800 15500 16500 Melting Scrap H M S-II 15925 17200 15000 16000 Sponge Iron (Coal Based) 12850 15800 15000 17000 Source: The Iron and Steel review, February 2005 issue

- c -

EXHIBIT-3

LETTER OF CREDIT & BILL DISCOUNTING WITH HSBC

EXHIBIT-3(i)

LATE RECEIVAL OF CHEQUE BY THE BANKRATHI ISPAT (in %)

11

13

22

23

15

135 0-2 days

3,4 days

5,6 days

7,8 days

9,10 days

11,12,13,14,15 days

16 AND ABOVE days

EXHIBIT-3(ii)

LATE RECEIVAL OF CHEQUE BY THE BANKSHAH ALLOYS (in%)

4 4

17

13

417

39

0-2 days

3,4 days

5,6 days

7,8 days

9,10 days

11,12,13,14,15 days

16 AND ABOVE days

- d -

EXHIBIT-3(iii)

LATE RECEIVAL OF CHEQUE BY THE BANKJINDAL STAINLESS (in%)

0 611

14

1128

31

0-2 days

3,4 days

5,6 days

7,8 days

9,10 days

11,12,13,14,15 days

16 AND ABOVE days

EXHIBIT-3(iv)

LATE RECEIVAL OF CHEQUE BY THE BANKSTAINLESS INDIA (in%)

10

15

2530

5

15 0 0-2 days

3,4 days

5,6 days

7,8 days

9,10 days

11,12,13,14,15 days

16 AND ABOVE days

EXHIBIT-3(v) TOTAL SAVINGS SHOWN FOR DIFFERENT PARTIES SINCE 2005

CUSTOMER SAVING FOR 2005

RATHI 321041.0405 SHAH ALLOYS 248139.0777 JINDAL 161362.7016 STAINLESS INDIA 40788.32008 TOTAL SAVINGS 771331.1399

Source: Data collected from HSBC Bank

- e -

EXHIBIT-4

FUNDAMENTAL ANALYSIS

EXHIBIT-4(i)

Vertical analysis of Income statement

Year 2004 2003 2002 2001 2000 1999 Operating Income 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 Expenses Material Consumed 0.3109 0.2557 0.2603 0.2408 0.2458 0.2808 Manufacturing Expenses 0.1700 0.1928 0.2260 0.2344 0.2429 0.2397 Personnel Expenses 0.1237 0.1387 0.1616 0.1336 0.1554 0.1679 Selling Expenses 0.0075 0.0891 0.0932 0.0934 0.1047 0.1032 Adminstrative Expenses 0.0643 0.0878 0.0977 0.0618 0.0615 0.0596 Expenses Capitalised (0.0142) (0.0069) (0.0065) (0.0315) (0.0443) (0.0346) Cost Of Sales 0.6623 0.7571 0.8322 0.7324 0.7661 0.8165 Operating Profit 0.3186 0.2353 0.1549 0.2556 0.2230 0.1656 Other Recurring Income 0.0192 0.0075 0.0128 0.0120 0.0110 0.0178 Adjusted PBDIT( COPBT) 0.3377 0.2429 0.1678 0.2676 0.2339 0.1835

EXHIBIT-4(ii) Tax Rate

Year 2004 2003 2002 2001 2000 1999 Provision for Taxes 920.44 250.79 16.10 49.20 54.50 33.50 Deferred Taxes 0.26 11.69 30.60 0.00 0.00 0.00 Paid Taxes 920.70 262.48 46.70 49.20 54.50 33.50 Adjusted PBT( after write offs) 2828.36 1190.64 211.50 675.34 326.86 180.61 ETR 32.543 21.063 7.612 7.285 16.674 18.548 CTR 32.552 22.045 22.080 7.285 16.674 18.548

EXHIBIT-4(iii)

Avg Cash Tax rate % 19.86 Avg Cash Tax rate %( last 3 yrs.) 25.56

- f -

EXHIBIT-4(iv)

Future Cash Flow from investing activities

Year 2005 2006 2007 2008 2009 2010 Projected Investments in fixed Assets (1,200) (1,200) (1,200) (1,200) (1,200) (1,200) Projected Investments in securities (300) (300) (300) (300) (300) (300) Projected Replacements (625) (650) (700) (750) (800) (850) Interest & dividend earning 90 90 90 100 100 100 Projected CFIA (2035) (2060) (2110) (2150) (2200) (2250)

EXHIBIT-4(v) Depreciation

Year 2004 2003 2002 2001 2000 1999 Net block 7,094.21 7,342.72 7,213.55 7,042.39 5,504.58 5,779.03 Depreciation Expense 625.11 555.48 524.75 492.25 426.54 382.18 Net Purchases/Sell of assets (907.53) (411.65) (502.68) (597.65) (649.80) (1,118.72) Rate of Depreciation 0.0907 0.0793 0.0773 0.0946 0.0782 Avg. Dep. Rate 0.084 0.084 0.084 0.084 0.084 0.0840

EXHIBIT-4(vi)

Year 2005 2006 2007 2008 2009 2010 Reinvestments or Net purchases in asset 625 650 700 750 800 850 Future Net block 8919.21 10744.21 12644.21 14594.21 16594.21 18644.21 Depreciation 648.48 803.81 961.31 1125.11 1293.11 1465.31

EXHIBIT-4(vii)

Year 2005 2006 2007 2008 2009 2010 Projected W.C (%) 0.12 0.12 0.12 0.12 0.12 0.12 Projected Operating income 10908.41 12544.67 14426.37 16590.33 19078.88 21940.71 Projected W.C. 1254.47 1442.64 1659.03 1907.89 2194.07 2523.18 Changes in W.C. 24.27 188.17 216.40 248.85 286.18 329.11

- g -

EXHIBIT-4(viii)

Year 2005 2006 2007 2008 2009 2010 Operating Income( Projected) 11999.25 13199.18 14519.09 15971.00 17568.10 19324.91 COPBT 4052.15 4457.36 4903.10 5393.41 5932.75 6526.02 Depreciation 1151.41 1252.22 1353.03 1453.84 1554.65 1655.46 COPAT= (COPBT- Dep)*(1-T) 2030.52 2243.60 2485.05 2757.70 3064.67 3409.40

EXHIBIT-4(ix)

Year 2005 2006 2007 2008 2009 2010 Projected COPAT 2030.52 2243.60 2485.05 2757.70 3064.67 3409.40 Changes in W.C. 24.27 188.17 216.40 248.85 286.18 329.11 Projected CFIA (2035) (2060) (2110) (2150) (2200) (2250) FCFF 19.79 371.77 591.45 856.56 1150.85 1488.51 Value of firm in terminal year-2010, Rs crores 39482.96 Discounted Value 19.79 335.81 482.55 631.24 766.08 24634.70

EXHIBIT-4(x)

Present value of firm, Rs. Crore 26850.37 Present value of firm, $ billion 5.97 Fair Value of Firm/ share (Rs.) 424.18

Source: Calculations done on the basis of past financial statements

- h -

EXHBIT-5

EXHIBIT-5(i)

FINANCIAL HIGHLIGHTS

INCOME STATEMENT

Mar ' 04 Mar ' 03 Mar ' 02 Mar ' 01 Mar ' 00 Income : Operating Income 10,699.31 8,716.54 6,704.69 6,834.54 6,089.42 Expenses Material Consumed 3,391.82 2,246.06 1,767.90 1,665.77 1,513.16 Manufacturing Expenses 1,854.92 1,692.97 1,535.04 1,621.19 1,495.45 Personnel Expenses 1,349.59 1,217.72 1,097.60 924.34 957.07 Selling Expenses 81.9 782.96 632.67 645.78 644.92 Adminstrative Expenses 701.43 770.78 663.26 427.21 378.48 Expenses Capitalised -155.28 -60.79 -44.05 -217.76 -272.51 Cost Of Sales 7,224.38 6,649.70 5,652.42 5,066.53 4,716.57 Operating Profit 3,474.93 2,066.84 1,052.27 1,768.01 1,372.85 Other Recurring Income 209.1 66.07 87.13 83 67.54 Adjusted PBDIT 3,684.03 2,132.91 1,139.40 1,851.01 1,440.39 Financial Expenses 230.56 342.41 403.15 481.9 529 Depreciation 625.11 555.48 524.75 492.25 426.54 Other Write offs 0 44.38 0 201.52 157.99 Adjusted PBT 2,828.36 1,190.64 211.5 675.34 326.86 Tax Charges 920.44 250.79 46.7 49.2 54.5 Adjusted PAT 1,907.92 939.85 164.8 626.14 272.36 Non Recurring Items -201.47 26.26 33 -77.63 152.46 Other Non Cash adjustments 39.77 46.2 7.1 4.93 -2.23 Reported Net Profit 1,746.22 1,012.31 189.19 553.44 422.59 Earnigs Before Appropriation 2,053.67 1,228.13 419.66 742.37 513.09 Equity Dividend 368.98 295.19 147.11 196.09 154.86 Preference Dividend 0 0 2.07 0 0 Retained Earnings 1,637.42 895.12 270.27 524.76 341.19

Source: Annual Reports of past 5 years

- i -

EXHIBIT-5(ii)

BALANCE SHEET

BALANCE SHEET Mar ' 04 Mar ' 03 Mar ' 02 Mar ' 01 Mar ' 00 SOURCES OF FUNDS Owner's Fund Equity Share Capital 369.18 367.97 367.97 367.97 367.97 Share Application Money 0 1.21 0 0 0 Preference Share Capital 0 0 0 140 150 Reserves & Surplus 4,146.68 2,816.84 3,077.99 4,380.46 4,040.43 Loan Funds Secured Loans 3,010.16 3,667.63 4,056.93 4,129.96 4,140.91 Unsecured Loans 363.12 557.98 650.89 542.26 766.32 Total 7,889.14 7,411.63 8,153.78 9,560.65 9,465.63 USES OF FUNDS Fixed Assets Gross Block 12,505.83 12,192.71 11,412.29 10,762.47 8,746.53 Less : Accumulated Depreciation 5,411.62 4,849.99 4,198.74 3,720.08 3,241.95 Net Block 7,094.21 7,342.72 7,213.55 7,042.39 5,504.58 Capital Work-in-progress 763.64 201.08 330.15 495.7 1,919.48 Investments 2,194.12 1,194.55 912.74 846.92 803.1 Net Current Assets Current Assets, Loans & Advances 4,933.61 4,484.62 3,329.17 3,225.61 3,025.11 Less : Current Liabilities & Provisions 7,252.41 5,811.34 4,620.82 2,970.26 2,614.76 Total Net Current Assets -2,318.80 -1,326.72 -1,291.65 255.35 410.35 Miscellaneous expenses not written 155.97 0 988.99 920.29 828.12 Total 7,889.14 7,411.63 8,153.78 9,560.65 9,465.63 Note : Book Value of Unquoted Investments 1,878.43 752.67 485.12 465.54 460.75 Market Value of Quoted Investments 2,031.69 798.26 401.23 381.38 455.33 Contingent liabilities 2,669.02 1,580.70 1,309.84 1,454.37 1,584.59


- j -

EXHIBIT-5(iii) CASH FLOWS

Mar ' 04 Mar ' 03 Mar ' 02 Mar ' 01 Mar ' 00 Profit Before Tax 2,665.96 1,262.50 251 602.44 476.59 Depreciation 625.11 555.48 524.75 492.25 426.54 P and L On Sale Of Assets -32.17 -21.27 -27.68 -6.31 -142.22 P and L On Sale of Investments -1.24 -4.62 -22.83 -1.91 -10.22 Interest Income -21.31 -34.05 -31.22 -35.85 0 Interest Paid Net 140.81 342.41 403.15 412.39 -389.98 Interest Net 0 0 0 0 355.48 Dividend Received -98.34 -23.25 -49.62 -44.2 0 Dividend Net 0 0 0 0 -31.02 Misc. Income 0 -4.57 0 0 0 Amortisation Of Expenses 236.65 230.95 227.02 201.52 0 Payment towards VRS -267.75 -277.01 -189.35 -197.09 -166.11 Provision And WO Net 0 0 0 0 159.12 Provision For Dimunition In Investments 18.37 0.43 17.82 0.47 0 Provisions For BadDebts NPA 0 43 0 0 0 Trade And Other Receivables 364.73 148.88 268.86 -133.87 -19.21 Inventories -96.13 -24.28 -99.82 23.08 71.66 Trade Payables 305.98 127.9 -55.08 208.49 37.22 Tax Provision 0.7 0.6 0.6 0.2 0 Direct Taxes Paid -926.93 -229.95 -63.47 -66.16 -64.81 Net CashFlow-Operating Activity 2,914.44 2,093.15 1,154.13 1,455.45 703.04 Purchase Of Fixed Assets -960.33 -451.23 -534.95 -605.45 -1,148.27 Sale Of Fixed Assets 52.8 39.58 32.27 7.8 498.47 Purchase Of Investments -4,615.68 -1,773.26 -794.62 -52.82 -302.99 Sale Of Investments 3,470.24 1,368.51 657.02 0.03 80.21 Interest Received 24.99 30.54 33.94 34.6 44.43 Dividend ReceivedInvesActivity 98.34 23.25 49.62 44.2 31.02 Inter Corporate Deposits 48.56 -27.55 -3.49 -48.21 -12.16 Investment In Subsidiaries -1.55 0 0 0 0 Extraordinary Items 0 0 60.51 22.29 0 Net Cash Used In Investing Activity -1,882.63 -790.16 -499.7 -597.56 -809.29 Proceeds From Issue Of Pref. Captl 0 0 -140 -10 0 Proceed From Issue Of Cap. Incl. Sh. Prem. 0 0 0 0 150 Proceed from oth. LTerm Borr 318.71 593 1,178.95 462.25 1,046.10 Repayment Of Borrowings -1,036.04 -1,281.27 -1,143.35 0 0 Dividend Paid -292.8 -145.53 -185.96 -159.31 -154.86 Interest Paid -144.47 -341.29 -385.87 -411.92 0 Others From Fin Activity 0.41 25.23 1.77 4.2 0 Of Other LTerm Borr 0 0 0 0 -1,077.80 Repayment Of Short Term Borrow 0 0 0 -697.26 0 NetCash Used in Fin. Activity -1,154.19 -1,149.86 -674.46 -812.04 -36.56 Net Inc/Dec In Cash And Equivlnt -122.38 153.13 -20.03 45.85 -142.81 Cash And Equivalnt Begin of Year 373.12 219.99 239.23 193.38 336.19 Cash And Equivalnt End Of Year 250.74 373.12 219.2 239.23 193.38


- k -

EXHIBIT-6

Source: Calculations done on the basis of past financial data

FINANCIAL ANALYSIS

EXHBIT-6(i)

NET PROFIT (Rs.Crores)

282423

553

205

1012

1746

0200400600800

100012001400160018002000

1999 2000 2001 2002 2003 2004

YEAR

NE

T P

RO

FIT

EXHIBIT-6(ii)

EARNINGS PER SHARE

7.67 11.2614.64

5.51

27.43

47.32

0

10

20

30

40

50

1999 2000 2001 2002 2003 2004

YEAR

EPS

- l -

EXHIBIT-6(iii)

TURNOVER (Rs. Crores)

63366943

7810 7683

9844

12070

0

2000

4000

6000

8000

10000

12000

14000

1999 2000 2001 2002 2003 2004

YEAR

TU

RN

OV

ER

EXHIBIT-6(iv)

RETURN ON AVERAGE NETWORTH

7.65 11.51 14.386.38

35.8846.28

01020304050

1999 2000 2001 2002 2003 2004

YEAR

RE

T. O

N A

VG

. NW

EXHIBIT-6(v) DEBT-EQUITY RATIO

1.37 1.32 1.18

1.92

1.33

0.77

00.5

11.5

22.5

1999 2000 2001 2002 2003 2004

YEAR

D/E

- m -

EXHIBIT-6(vi) ASSET TURNOVER RATIO (in %)

55.44 58.47 63.59 63.2878.16

89.96

020406080

100

1999 2000 2001 2002 2003 2004

YEAR

AT

R

EXHIBIT-6(vii) PRICE-EARNING RATIO

13.5110.3

8.36

17.72

4.887.25

0

5

10

15

20

1999 2000 2001 2002 2003 2004

YEAR

P/E

RA

TIO

EXHIBIT-6(viii)

NET WORKING CAPITAL (Rs. Crores)

1426

1197 1138 1086958

84

0

200

400

600

800

1000

1200

1400

1600

1999 2000 2001 2002 2003 2004

YEAR

NE

T W

C

- n -

EXHIBIT-6(ix) CURRENT RATIO

1.79 1.65 1.55 1.541.36

1.02

0

0.5

1

1.5

2

1999 2000 2001 2002 2003 2004

YEAR

CU

RR

ENT

RA

TIO

EXHIBIT-6(x)

RESRVES & SURPLUS (Rs. Crores)

3796.5 4040.44380.5

3078.0 2816.8

4146.7

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

1999 2000 2001 2002 2003 2004

YEAR

R&

S

EXHIBIT-6(xi)

INVESTMENTS (Rs. Crores)

585.44803.1 846.92 912.74

1194.55

2194.12

0

500

1000

1500

2000

2500

1999 2000 2001 2002 2003 2004

YEAR

INV

EST

ME

NT

S

- o -

EXHIBIT-6(xii)

CASH FLOW FROM OPERATING ACTIVITY (Rs. Crores)

481.9 703.041043.53 1154.13

2093.15

2914.44

0500

100015002000250030003500

1999 2000 2001 2002 2003 2004

YEAR

CF

OA

EXHIBIT-6(xiii)

CASH FLOW FROM INVESTMENT ACTIVITY (Rs. Crores)

792.51 809.29597.56 499.7

790.16

1882.63

0

500

1000

1500

2000

1999 2000 2001 2002 2003 2004

YEAR

CF

IA

EXHIBIT-6(xiv) CASH FLOW FROM FINANCING ACTIVITY (Rs. Crores)

217.3936.56

400.12674.46

1149.86 1154.19

0

500

1000

1500

1999 2000 2001 2002 2003 2004

YEAR

CF

FA

- p -

EXHIBIT-6(xv)

DIVIDEND PAYOUT RATIO (in %)

57.86

40.68 39.32

72.91

32.923.84

0

20

40

60

80

1999 2000 2001 2002 2003 2004

YEAR

DPR

EXHIBIT-6(xvi) INTEREST COVERAGE RATIO

2.05 2.32 2.6 1.685.14

22.82

05

1015

2025

1999 2000 2001 2002 2003 2004

YEAR

INT.

CO

VER

RA

TIO

EXHIBIT-6(xvii)

AVERAGE DEBTORS TO TURNOVER (in %)

20.1417.81

15.86 15.48

10.386.75

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004

YEAR

DE

BT

OR

/TU

RN

OV

ER

- q -

EXHIBIT-6(xviii)

AVERAGE INVENTORY TO TURNOVER (in %)

12.3910.73

9.01 8.957.72 7.37

0

5

10

15

1999 2000 2001 2002 2003 2004

YEAR

INV.

/TU

RN

OV

ER

EXHIBIT-6(xix)

PBT/TURNOVER (in %)

5.49 7.75 8.743.7

14.39

24.59

05

1015202530

1999 2000 2001 2002 2003 2004

YEAR

PRT

/TU

RN

OVE

R

- r -

EXHIBIT-7

EXHIBIT-7(i)

DIVISION-WISE INVENTORY

DIVISION 2004-05 2003-04 LONG PRODUCTS 130.84 94.94 FLAT PRODUCTS 425.70 419.07 RM & IM 203.86 250.94 SHARED SERVICES 28.44 38.00 SUPPLY CHAIN (MRO) 67.27 65.65 TOTAL STEEL DIVISION 856.11 868.60 INTERNATIONAL TRADE 19.79 30.68 FERRO ALLOYS & MINERALS 113.70 78.09 WIRE DIVISION 36.67 32.68 TUBE DIVISION 85.84 79.65 RINGS & AGRICO 30.41 21.78 BEARINGS DIVISION 29.32 25.92 SECONDARY PRODUCTS 10.16 18.20 TCIL CONVERSION 13.02 13.40 GROWTH SHOP 4.53 6.85 OTHERS (TM & SS) 0.45 0.56 TOTAL 1200.00 1176.41

Source: Tata Steel Intranet Web Site

EXHIBIT-7(ii)

CATEGORY-WISE INVENTORY

CATEGORY AVERAGE 2004-05 AVERAGE 2003-04 FINISHED & SEMI-FINISHED 796.84 584.50 RAW MATERIALS 323.56 255.98 STORES & SPARES 338.56 319.31 GRAND TOTAL 1458.96 1159.79


- s -

EXHIBIT-7(iii)

DIVISION-WISE DEBTORS

DIVISION AVG. DEBTORS TARGET DEBTORS 2004-05 2004-05 LONG PRODUCTS 42.04 60.34 FLAT PRODUCTS 247.19 189.23 RM & IM 65.67 63.11 TOTAL STEEL DIVISION 354.9 312.68 INTERNATIONAL TRADE 66.65 34.29 FERRO ALLOYS & MINERALS 80.19 57.99 WIRE DIVISION 64.74 51.5 TUBES DIVISION 33.36 52.78 RINGS & AGRICO 10.72 10.72 BEARINGS DIVISION 15.14 17.14 SECONDARY PRODUCTS 3.85 4.31 TCIL CONVERSION 32.87 14.98 GROWTH SHOP 14.11 13.33 TKM DIVISION 3.97 1.52 TOWN & POWER SERVICES 34.15 24.51 OTHERS 9.61 4.25 TOTAL 724.26 600


EXHIBIT-7(iv)

LONG PRODUCTS – GROSS WORKING CAPITAL

PERIOD Inv. Amt. (Rs. Crores)

Inv. Days

Debtors Amt. (Rs. Crores)

Debtors Days

Inv.+Debtor Amt.

Inv.+Debt. Days

Avg. 2003-04 97.85 21 64.15 14 272.25 35 Target 2004-05 115.00 60.34 175.34 1-Apr-04 94.94 20 42.20 9 137.14 29 1-May-04 93.66 20 42.04 9 135.70 29 1-June-04 118.44 26 50.86 11 169.30 37 1-July-04 119.75 26 32.08 7 151.83 33 1-Aug-04 122.37 27 41.47 9 163.84 36 1-Sept-04 146.54 32 50.32 11 196.86 43 1-Oct-04 125.16 25 39.55 8 164.71 33 1-Nov-04 134.02 25 37.85 7 171.87 32 1-Dec-04 153.38 30 41.18 8 194.56 38 Avg. 2004-05 123.01 27 41.98 9 165.00 36


- t -

EXHIBIT-7(v)

FLAT PRODUCTS – GROSS WORKING CAPITAL

PERIOD Inv. Amt.

(Rs. crores) Inv. Days

Debtors Amt. (Rs. crores)

Debtors Days

Inv.+Debtor Amt.

Inv.+Debt. Days

Avg. 2003-04 200.69 33 102.12 17 302.81 50 Target 2004-05 188.96 - 64.75 253.71 1-Apr-04 187.10 31 85.73 14 272.83 45 1-May-04 187.87 31 79.36 13 267.23 44 1-June-04 228.17 36 88.62 14 316.79 50 1-July-04 242.17 38 82.09 13 324.26 51 1-Aug-04 237.95 37 90.54 14 328.49 51 1-Sept-04 242.33 39 86.28 14 328.61 53 1-Oct-04 232.60 38 85.64 14 318.24 52 1-Nov-04 243.63 40 78.33 13 321.96 53 1-Dec-04 280.63 48 63.80 11 344.43 59 Avg. 2004-05 231.07 37 83.20 13 314.28 50


EXHIBIT-7(vi)

FERRO ALLOYS & MINERALS DIVISION – GROSS WORKING CAPITAL

PERIOD Inv. Amt. (Rs. crores)

Inv. Days

Debtors Amt. (Rs. crores)

Debtors Days

Inv.+Debtor Amt.

Inv.+Debt. Days

Avg. 2003-04 82.00 43 60.91 32 142.91 75 Target 2004-05 113.70 57.99 171.69 1-Apr-04 78.09 41 67.99 36 146.08 77 1-May-04 92.67 47 72.98 37 165.65 84 1-June-04 109.89 54 58.76 29 168.65 83 1-July-04 115.60 51 60.66 27 176.26 78 1-Aug-04 134.40 56 96.57 40 230.97 96 1-Sept-04 132.07 53 95.01 38 227.08 91 1-Oct-04 122.46 44 95.69 34 218.15 78 1-Nov-04 140.58 48 87.08 30 227.66 78 1-Dec-04 139.74 45 81.53 26 221.27 71 Avg. 2004-05 119.57 59 80.19 40 199.76 99


- u -

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

Tata Management Development Center Leading personalities of society Culture Associates

Locations Working in small towns and Metros

Rural Development Social Work Environment

Tata Steel Rural Development Society Social Services & Family Initiatives Non-Government Organizations

Women Empowerment and Assertiveness Driving Heavy Vehicles & Crane

Women Empowered training programme Sexual harassment issues training Tejaswani Effort

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

Tribal Cultural Society Shavak Nanavati Technical Institute

Registered Relations Create opportunity for induction

Basic Plant Training Shavak Nanavati Technical Institute

Source: TBEM 2003, ‘Building Sustainability’ by Tata Steel

I

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