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Program & Batch: PGDM 2016-18

Term: Term 5
Course Name: Financial Statement Analysis
Name of the faculty: Dr. Avinash Chandra
Analysis of business and strategy of Tata
Topic/ Title : Steel
Original or Revised Write-up: Original
Group Number: 9 -Section B(Finance)
Contact No. and email of Group Coordinator: 9910749575
fn16akshitgarg@imt.ac.in
Group Members: Sl. Roll No. Name
1 160102009 Akshit Garg

2 160102108 Rohan Choudhary


3 160102014 Amiya Roy
4 160101055 Mayank Singhal
5 160101048 Karan Gambhir
Annual report of TATA STEEL for the period 2015-2016 was the first integrated report
presented by the company. Our analysis is based on chairmans statement, directors report,
MD&A and publicly available information.

Salient Features of the Chairman's statement and its implications:

The world economy is yet to recover from the effects of the recession, before it can return
to a stable and healthy state. Decline in the prices of commodity as well as oil prices has
been a deterrent to growth of commodity producing countries like India, which in turn
has hurt the steel industry including Tata Steel.

The various initiatives actively taken by the Government of India to further liberalise the
economy and special focus on the influx of investments in the social sector to build both
hard and soft infrastructure in the country is very good news for the Indian steel
companies.

Government's initiative to rank and assess the various states of the country on the metric
of ease of doing business will help in promoting India as an attractive investment
destination for new and old businesses alike, from both inside and outside the country,
priming the steel company to serve this impending need for commodity. Tata Steel plans
to position itself on banking on this potential future need.

The steel industry has been impacted with the geographical oversupply of steel which
resulted in a decline in demand for the commodity. This was further aggravated by the
falling market spread between steel prices and raw materials. Untimely volatile currency
movements have also affected the steel industry.

Most of the above issues are structural in nature as the world is adjusting to lower
commodity prices and slow growth, to counter these effects restructuring the supply side
would greatly help balance the current demand-supply equation in the market.

For the steel industry to remain relevant and competitive would call for consolidation of
businesses and promoting investments in product innovation, technology and elimination
of supply chain inefficiencies.
The business scenario in India is further affected by the unfairly priced imports, mainly
Chinese steel imports, which hurt the local business, consequently reducing sales. In
addition to this, the Indian Government is increasing the levies, duties and regulatory
costs of the mining sector in India, further increasing the costs.

Plant performance wise, Jamshedpur operations achieved the highest ever crude steel
production and sales. This has been achieved by structurally enhancing the plant's
performance by rightsizing manpower, thereby increasing employer productivity and
operating improvement initiatives. Also, a new state-of-the-art 3 MnTPA greenfield
project in Kalinganagar, Odisha has completed project execution.

Due to the oversupply of steel in China and the subsequent decline in demand and price,
Tata Steel has best seen fit to exit from the entire Chinese market. Focusing on South east
Asia and the Indian Subcontinent, where performances of its subsidiaries have seen
improvement through Natsteel, Tata Steel Thailand and others. Performance of Tata
Steel's other subsidiaries and joint venture companies like Tata Metaliks and Tata Steel
Processing and Distribution has also improved.

The business scenario in Europe has worsened over the past few years for the company,
accompanied by drops in spread between steel prices and raw material price basket and
volatile currency movements, this alone is responsible for deeply affecting the
consolidated financial statement of Tata Steel. This led to the restructuring of the
company through divestment of Long Products business in Europe.

On the European front, Netherland proved to be the saving grace for Tata Steel, as it
generated the bulk of operating earnings there. Netherland seems promising for the
company in the coming years in generating business.

Top management in Tata Steel Europe has also seen some reshuffling, with the oust of
the then CEO and the recruitment of a new Executive Director and CEO.

Tata Steel has been having problems with its benefits scheme in UK, where there has
been strong opposition by the workers on being given the option between layoffs or
reduced pensions. Tata Steel proceeded to handle the issue by negotiating with the
workers a one-time pension payoff package.
Tata Steel is generating 24.5% of its revenue from operations in India and delivering 26.8% of its
product(ton).

Revenue

382

1172

world india

In FY17, 31 new products were launched in India and 20 were launched in Europe. EBITDA was
at Rs 17025 crore for FY17. Steel deliverables stood at a total of 10.97 million tonnes as per Ind
AS.

92 % of the revenue is being contributed by the steel value chain. Main customers of steel are in
construction and automotive sectors.

Revenue distribution

steel raw materials other business


EFFECT OF MACRO FACTORS ON GLOBAL BUSINESSES
With the risk of global recession receding and economic performance improving across most
regions, a number of geopolitical changes still create some concern. US policy uncertainties,
Brexit, the rising populist wave in current European elections and the potential retreat from
globalization and free trade under the pressure of rising nationalism adds a new dimension of
uncertainty in investment environments. To balance this, risks from ongoing conflicts in the
Middle East and in Eastern Ukraine appear to be reducing.

In the capital markets, the probable US FED interest rate increase and any appreciation of the US
dollar is likely to have global impact. In particular, it may provoke capital outflows from the
emerging economies and place a risk on corporate debt in the developing countries, which has
climbed significantly over the last few years.

The pickup in oil prices in 2016 helped the fiscal position of oil producing countries. In 2017-18
oil prices are expected to show a moderate gain but any spike in oil prices to the levels seen in
2010-12 seems unlikely despite the recent OPEC agreement on oil production cuts. Other
commodity prices also rebounded due to stronger activities in China, but no further hikes are
envisaged. The mildly rising oil prices may stimulate investment in economies worldwide.

Globally, the steel industry is affected by significant oversupply. Sharp currency depreciation of
some of the steel exporting countries has further compounded the problem. Due to this, the Tata
Steel UK plant was suffering which resulted in Tata Steel UK completing the sale of its Specialty
Steels business for a total consideration of 100 million

On the raw material front, there has been a steep fall especially in iron ore prices where it
reached an eight-year low of $40/ton. Declining raw material prices and surging imports have
put significant pressure on steel prices (almost at 2002-03 levels in dollar terms) impacting
profitability of steel producers.
Tata Steel Europe was adversely affected by the general economic conditions, cyclical nature of
steel industry and increased competition within Europe and around the world. Tata Steel
Thailand reported a growth of 2.8% as compared to the previous year. Consolidated PAT from
continuing operations for the group stood at INR 4020 crore for the FY17 as compared to the
loss of INR 1948 crores in FY16. Exceptional items resulted in the PAT loss of 4169 crore for
the FY17. Europe operations saw a 5% decline in production due to the focus on higher value
sales. South East Asian revenues grew by 26% to INR 2275 crore due to improved deliveries at
TATA Steel Thailand. Consolidated gross debt was reduced by INR 1700 crore to INR 83014
crore on March17.

INDIAN BUSINESS
Company sees India as a good opportunity for expansion as per steel consumption is very low at
61 kg. With government initiatives such as smart cities and more people moving to urban areas,
company expects that there will be an increase in demand for public infrastructure, housing and
transportation that will create steady demand for its products. Also high quality, low cost raw
materials are available (constitute majority of steel costs) near the plants. It also acknowledges
that its employee productivity is low with respect to industry average but it is more focusing on
increasing automation.

The company achieved its highest ever B2C sales including products like Tata Tiscon and Tata
Shaktee. Highest Sales were recorded in the LPG segment. Kalinganagar steel plant was being
established in two modules of 3mt p.a. It will have the largest operating LD converter in India
with a capacity of 310 tonnes. It is designed in a way to ensure minimum water footprint.

The Ferro Alloys and Minerals segment is the market leader in Ferro Chrome in India with
operations spanning across two continents. Tubes SBU is the largest manufacturer of steel tubes
in India. Tata Steels bearings division is Indias largest quality bearing manufacturer with a
capacity of 37 million bearings per annum. It is the only bearing manufacturer to be felicitated
by TPM Award (2004) from Japan Institute of Pant Maintenance.

Kalinganagar Steel plant crossed 1.5 million tonnes of Hot Rolled Coil production and 2.2
million tonnes of Hot Metal production since commissioning in May16. There was a YOY
growth of 9% in automotive sales. Operating profit of INR 1165 crore was recorded by Ferro
Alloys and Minerals division. Tata Steel Jamshedpur achieved a lowest ever coke rate of 360
kg/tonne of hot metal and highest PCI rate of 181 kg/tonne of hot metal in FY17.

COMPANYS MANAGEMENT AND STRATEGIES


The board of directors of Tata steel group is led by Mr. Natarajan Chandrasekaran(former CEO
and MD of TCS) and consists of six independent directors and two non-executive directors. The
members of the board is vastly experienced in diversified fields and many of them is associated
with the tata group for more than 10 years.

It has divided its business activities into four parts- RM mining and beneficiation, iron making,
steel making and rolling and finishing and downstream. Input is divided into six parts- financial,
intellectual, manufactured, human, social and relationship and natural capital. It has improved in
efficiency in most inputs but has failed to improve in intellectual and social and relationship
capital. Also, it has a well-defined strategy process consisting of two phases- development and
deployment. The strategies and objectives are converted into long term actionable plan and
achievement and outcomes are measured using 4 student analysis tool. Each strategy objective
range from medium to long term and its impact is measured in terms of input capitals. The
medium term strategic goals and objectives are

1) Maintain leadership position in profitability this is to be done by keeping cost


competitiveness and operational excellence by a plan called Shikhar-25. This aims to
achieve 25% EBITDA in 2-3 years
2) Grow in the emerging economy - Steel demand is better in emerging economies, so,
growth in these economies is crucial and recently they got the approval of crude steel
production for Jamshedpur plant in India to 11 MTPA.
3) Focus on Chosen segments and Product & Service Differentiation

To manage the enterprise risk, it has a developed a framework consisting of five steps and a
Group risk review committee consisting of senior management which are responsible for
uniform deployment of the framework. Risk committee has identified operating, strategic and
legal and compliance risk. It has evaluated various areas that might be affected by these risks and
have also developed risk response strategies. The focus area of the company going forward will
be to integrate and implement ERM throughout the company and to automate it.

AUDITORS PERSPECTIVE OF ANNUAL REPORT


In the Auditors opinion, the standalone financial statements give the information required by the
Act and give a true and fair view of the state of affairs of the Company as at 31st March 2016
and its profit and its cash flows for the year ended on that date in conformity with the accounting
principles generally accepted in India.

For the Internal Financial Controls, in the auditors opinion the Company has in all material
respects, an adequate internal financial controls system over financial reporting and such internal
financial controls over financial reporting were operating effectively as at 31st March. 2016
based on the internal control over financial reporting criteria established by the Company
considering the essential components of internal control stated in the Guidance Note on Audit of
Internal Financial Controls over Financial Reporting issued by the Institute of Chartered
Accountants of India.

In the auditors opinion, taxes, statutory dues, inventories all have been in compliance.

The company is in compliance with the Companies Act, 2013 and also it has not defaulted on
any loan repayments and all term loans taken have been put in use for what they were intended.
The company has not entered any non-cash transaction with its directors or directors of its
holding subsidiary or associate Company or persons connected with them.

Insights from Publicly available information:

As per a recent interview of TV Narendran, MD of Tata Steel, Tata Steel is reportedly done with
most of the big expenditures which will pave the way for better cashflows, bringing down the
debt.

With the unexpected increase in the demand of steel in China, steel exports are expected to be
less this year, which in turn will help stabilise the demand-supply balance of steel.
There has been a surge of demand for steel in India in the highway sector along with
transmission and railways as the government is increasing their investments in these areas.

With increase in Government expenditure on infrastructure, the year on year demand growth is
likely to be between 5 and 6 percent, increasing the likelihood of India to become a net exporter
of steel. This in turn will greatly help Tata Steel grab a major market share as operations in their
Kalinganagar plant has already been initiated.