Financing Strategy at

TATA STEEL
Q1. Why does TSL need to raise capital? Explain.

Tata Steel needs to raise capital because of the following reasons:

• Tata steel has maintained very low debt equity multiple during its entire lifecycle. 
• TSL made biggest deals so far by any Indian company, the Corus acquisition for
$12b, in order to finance this acquisition TSL had borrowed bridge loans, for
repaying the debt TSL has to raise capital on a regular basis. 
Seizing opportunities:
• Tata Steel had been proactively seizing opportunities for their financial strategy
after Corus deal.
• TSL also had plans to expand its Jamshedpur facility, which again needed some
capital investments.
• TSL had also acquired a coal venture owned by Riversdale Mining Limited in the
Tete province of Mozambique (Benga project), TSL had a 50% stake in it in the
year 2007.
• TSL also had a 50-50 JV with L&T to develop a deep sea port in Orissa, to enhance the
company’s import and export capabilities in India.
• TSL acquired a 80% stake in a Canadian iron ore project- New Millennium Capital in the year
2010, for which a significant amount was spent.
• By 2010, the net debt position of Tata Steel reduced considerably from that of 2007. But it
is very high.
• Tata steel also raised equity whenever it could.
• Seizing opportunities involve re-negotiating terms, exchanging securities, raising money at
lower costs and/or longer tenures well before the commitments fell due.
• According to Koushik Chatterjee, Tata steel’s CFO, the best time to raise capital is when they
don’t need money immediately so that they have negotiating power. There has to be a long-
term deployment strategy in place to make this happen.
• Growth opportunities are increasing within India and it is possible to capture these
opportunities through capital. 
• The global steel industry is volatile and uncertain and it is important to keep an adequate
liquidity buffer.
Q2. What securities make sense for TSL in
early 2011? Why?

• Tata steel has to issue securities that do not cause short time cash burden on the
company and provide necessary finances.
• Characteristics that are required for the securities to be issued in 2011:
• These securities should be able to generate sufficient finances for the company.
• These securities should have a long term deferred payment with no coupons in
the short duration which could prevent the immediate outflow of cash from the
company.
• These securities should not provide any ownership or stock privileges to prevent
the dilution of the shares.
• The maturity period of these securities should be of longer duration which could
be indefinitely extended at company’s discretion.
The fund can be raised through the followings:
• As TSL was constantly raising money through private equity and debentures, the
company’s plan to offer 57m equity shares to public was not a surprise.
• With respect to the recent financing, public equity seemed to be the better
option since the amount to be raised was quite significant, Rs. 34.77 billion.
• TSL had constantly reduced its debt, it was still quite high, given that raising
capital through public equity will have a significant impact on the debt-equity
ratio, public equity seemed to be the right instrument this time around.
• Securities like CARS had been useful in lengthening its debt maturity profiles and
stretching payments, thereby lowering costs with coupon rate of 1% paid semi-
annually.
• Also, the ECA backed buyer’s credit which was long-term being paid over 10
years was very useful in rotating credits and worthy purchase during this high
debt bearing period.
Q3. How has TSL performed in the
recent past?
• Tata steel has overpaid for the Corus acquisition but it seems to have performed well in
the recent past.
Performance Indicators:
This is reinforced by the following factors:
• Tata steel has expanded its operations in India, Europe and Asia Pacific. It has gathered a
global footprint.
• They have increased the production capacity from 5 mtpa to 27.2 mtpa for meeting the
global demand.
• It has successfully featured among the top 10 steel producers of the world.
• Tata steel has its own captive mines in India and has acquired several other coal and iron
ore mines in the other parts of the world to maintain its low raw material cost advantage
with a higher quality of steel, giving it a competitive edge.
• The Corus acquisition helped TSL achieve greater economies of scale and cost
efficiencies. In addition, the strategic partnerships with the ports and other
distribution channels make way for a smooth growth in the future
• Through the acquisition of Corus, the company has expanded its range of
products, lowered the cost and increased reliability by integrating the best
capabilities of both the companies
• Even though the Net sales was higher in 2008 & 2009, the expense was also quite
high, TSL had always a higher EBITDA/ton vis-à-vis domestic peers.
• The years 2009 and 2010 had negative growth, and in the year 2010 the net profit
was negative, given the decrease in demand of steel, TSL managed to get through
these turbulent periods due to its liquidity and high debt-equity ratio, mainly
done through raising capital at regular intervals.
• Though the year 2010 was a very low period for the Global steel industry, the
year 2011 had positive forecast, with the net profit coming back to positive
figures
Q4. How would you explain the company’s
choice of securities in the recent years?
Choice of securities:
• Over the years, the net debt position of TATA steel reduced considerably,
it was still quite high. Following the acquisition of Corus, TATA steel was
seizing opportunities to either re-negotiate terms or exchange
securities, or raise money at lower costs. It had also raised equity
whenever it could. Also novel-fund raising options like CARS.
• By 2010, the company had a debt of about US$10.7 billion out of which
US$5.32 billion was in lieu of loans for expansion of Indian operations.
The outstanding debt included a part of US$4.58 billion loan for
acquisition of Corus.
The company financing history in the recent years are as follows:

Year Instrument Amount

2009-10 Term loan Rs 1.99 billion (7years)

2009-10 Term loan Rs 6.50 billion (10years)

2009-10 Non-convertible debentures Rs 21.50 billion (10 years)

2009-10 Term loan Rs 20.00 billion

2009-10 Buyer’s credit Rs 264.00 million

2009-10 Rupee term loan Rs 93,390.00 million

2009-10 CAR - FCCB CAR – US$439 million

2010-11 Global Depository Receipts US$500 million

2010-11 Non-convertible debentures Rs 30 billion (20 years)

TSL’s approach:
• TATA steel assumed that increase in size was expected to provide the scale
economies and cost advantage.
• Also TATA steel sought proprietary access to raw materials in order to avoid
cyclical fluctuations and reduce volatility in cost.
• Therefore, Tata Steel had focussed on a long-term financial strategy and hence
juggling a variety of securities with varying principal and interest payments and
used revolving credit for closure of loans.
Why these securities?
• Since, growth of global steel production within its markets was high owing to growing demand, TSL started
acquiring end to end from mining, production and logistics companies extending their control on entire value
chain.
• This strategy of inorganic growth would help TSL in raw material supplies, leverage on technology, shorten
delivery delays and forecast demand effectively.
• Since differentiation amongst competition was low, Tata Steel had to become the first-mover in these mergers
and gain synergies with scale.
• This demand created a consistent need for Tata Steel to burn cash financed using these securities based on
requirement. 
• They had tried to control their financing by securities exchange at lower costs and renegotiate with leeway of
time in hand having gone heavy on debt post Corus acquisition.
• In the acquisition, TSL had created a wholly owned subsidiary for raising debts using SPV located in Netherlands.
This eliminated the cumbersome approval process and circumvent any delays. SPVs were created to prevent any
recourse going beyond the immediate borrower as per Dutch law and served cushion for TSL.
• Despite all this efforts, TSL couldn’t manage to remain in good books as their Price-earnings, return on equity,
Equity per share had fallen down, stock price plunged below Rs.200 (Jan, 2009) and debt to equity ratio were in
order of 0.78.
• Though, Tata being a large entity and goodwill, fetched credit requirements from banks who were keen to
handle their investment finances.
In light of the facts presented in the case would
you invest in the company? Why or why not?
• Global steel industry is cyclical and demand-supply is growing with demand from infrastructure,
automobile industries etc., especially in emerging markets where Tata steel started operations.
• Yes, I would invest in the company because of the following factors:
• Tata steel had always remained profitable firm among its global competitors.
• TATA steel had their strengths like
• Global Scale: operations in India, Europe and Asia-pacific to attract multinational customers
• Cost competitiveness: Had iron ore and coal mine to insulate from volatility of raw material, very
low labor cost. Consequently, it had highest EBITDA/ton.
• Strong market position: Strong position in flat and long products in India with less competition.
Also Europe accounted for 46% of TSL’s sales.
• Economies of scale: Regular acquisitions to manage its supply chain by reducing logistics and
procurement costs and to increase bargaining power with supplier.
• Continuous growth in steel consumption in 2009 towards emerging markets like China, India in
order of 48.1% and 4.9% respectively. On other hand, major contributors like US, EU27 and Japan
were facing huge decline in their steel consumption.  
• Over the past decade, steel production had continued to shift, from its traditional base in heavily
industrialized countries to fast-growing developing markets such as China and India.  
• Though, Corus was acquired at an unattractive price of 608 pence per share, acquisitions of raw
material suppliers, and ports shipping for logistics were all key to growth for TSL reinforcing
investor confidence.
• TATA steel sought proprietary access to raw materials in order to avoid cyclical fluctuations and
reduce volatility in cost.
• In spite of high debt, still TSL’s debt-equity ratio (0.78) is less compared to domestic peers.
• Tata Steel has raised financing through a number of securities like GDS (Global Depository
Receipts), Warrants, Non-convertible debentures, CARS (Cumulative Alternative Reference
Securities), ECA backed long-term buyer’s credit, term loans and several unsecured loans in order
to reduce their debts, investments at Jamshedpur and for general corporate purposes.
• Tata steel had worked prudently post the debacle in controlling their costs through renegotiations
with bankers, exchanging securities, taking concession on pre-payment penalties, and
dynamically changing their funding structure.
• TSL was also trying to sell its noncore assets and improve its liquidity situation.
Undertake a multiples valuation of the company’s shares
using the data in the case. What does your analysis suggest?

Following is the data extracted from the Exhibit 4

  2007 2008 2009 2010 2011E 2012E

EPS 64.60 177.00 67.80 -22.70 47.40 73.10

Book Value 229.10 493.10 390.70 318.40 354.70 457.50

Price/Book Value 2.70 1.20 1.60 1.90 1.70 1.40

Market Price 618.57 591.72 625.12 604.96 602.99 640.50

EV/EBITDA 4.70 4.80 4.80 11.90 7.00 5.40

P/E 9.58 3.34 9.22 -26.65 12.72 8.76

Analysis based on P/E Ratio:

EPS P/E

GM of EPS till 2009 Industry Mean High Low

91.86 10.9 16.3 1.8

Industry Mean
  Price(Rs.) High Price(Rs.) Low Price(Rs.)

But the market price for TATA shares during 2009 was ranging as high as
Expected Share Price 1001.317 1497.383 165.36

Rs.620+ and low as Rs.150 and in Jan 2010 it is trading at Rs.621. This
indicates that the shares of TATA are undervalued and could be
expected to increase in the coming months.
From the Exhibit 9a and the above table we can also see that,

Year 2009-10 P/E EPS

TATA Steel 9.22 57.30
JSW Steel 13.50 10.00
SAIL 12.20 10.00
Bhushan Steel 11.40 2.00

Industry Composite Average: 10.9

Which again shows that the shares of TATA Steel are trading at a lower P/E ratio compared
to its competitors indicating that they are undervalued.
Valuation based on EV/EBITDA Ratio:

2007 2008 2009 2010 2011E 2012E

EV/EBITDA 4.7 4.8 4.8 11.9 7 5.4

EBITDA 7888.2 18567.3 18127.7 8042.7 13972.1 17542.2

Book Value debt 24925.5 53624.8 59900.5 53396.5 51546.5 48196.5

Value of equity 12149.04 35498.24 27112.46 42311.63 46258.2 46531.38

Value of equity has been increasing every year. This could be indication to
increase in the share price in the coming days. But as a individual investor, one
has to look into price multiples rather than enterprise multiples unless a big
stake is planned in the company.
As Anuj what recommendation
would you give? Why?
• Based on multiples valuation, using P/E and EV/EBITDA valuation Values are
well above the current stock price range of Rs. 594-610. This shows that TSL is
undervalued.
TSL’s situation:
• Tata Steel is currently stuck in the middle from the business strategy point of
view. As mentioned, growth trajectory for steel industry is through
consolidating.
• Tata steel is adding investments that offers synergies to their current
operations.
• They had performed well even though the industry had always remained
volatile in pricing and demand.
Key recommendations to TSL:
• Tata steel to increase its market share and reduce costs. TATA Steel Share is 11%, SAIL 32%
and JSW 19%. Total crude steel production in India for 2010 was around 69 million tonnes.
• At a broad level, Tata Steel should focus on optimizing the utilization of its current
production capacity (reduce downtime, wastages, etc.), boost quality perception to lure
customers away from competitors, reduce costs to increase margins and invest in expansion
plans to keep up with the growth rate of the Indian economy.
• It should build a reputation of having the latest technological updates in production
techniques, machinery and personnel. 
• Tata Steel should continue its growth plans for the Jamshedpur and Orissa plants to maintain
and grow its market share. 
• TSL should see that so much of production doesn’t create over supply of steel in the market
as it will drive down the prices, rather it can aim at making Specialty Steels products like
stainless steels, Tool Steels, Die Steels, Valve Steels etc.
• Verdict:
• Therefore, as an analyst, I would recommend the investors to BUY TSL shares as current
stock is below its intrinsic value.
 Value the company’s equity by the sum-of-
the-parts valuation methodology
• Given:
• EBITDA (TATA Steel) : 125,626M
• EBITDA (Corus) : 41,231M
• EBITDA (Asian Subsidiaries): 3,842M
• Net Debt: 416,029M
• No. of Shares Outstanding: 914.85M
• Exchange Rate: $1=Rs.45
 2007 2008 2009
EV/EBITDA 4.7 4.8 4.8
GM 4.77

  Tata Steel Corus Asian Subsidaries

EBITDA(Rs.Million) 125626 41231 3842
EV/EBITDA(GM) 4.77
EV (Rs.Million) 599236.02 196671.9 18326.34
Total EV(Rs.Million) 814234.23
Net Debt(Rs.Million) 416029
Equity Value 398205.23
Outstanding Shares (millions) 941.85
Price Per Share (Rs.) 435.27
Value the company by the free cash flow valuation methodology.
Assume
Rf=7% Rm-Rf=9%, Beta=1.2, rd=11% Tax Rate=30%
2010 2011E 2012E
EV/EBITDA 11.9 7 5.4
EV 95708.13 97804.7 94727.88
Book value of Debt 53396.5 51546.5 48196.5
Debt/Value of firm 0.56 0.53 0.51
Equity/Value of firm 0.44 0.47 0.49
EBITDA 8042.7 13972.1 17542.2
Less: Depreciation 4491.7 4673.2 5173.1
EBIT 3551 9298.9 12369.1
Less: Tax @30% 1065.3 2789.67 3710.73
EBIT(1-T) 2485.7 6509.23 8658.37
Add: Depreciation 4491.7 4673.2 5173.1
Less: Change in WC -9126.7 -777.7 4246.4
FCF 16104.1 11960.13 9585.07
Terminal Growth 5%(assumed) 10064.32
Cost of Equity(%) 17.08
Cost of Debt(%) 11
Cost Of capital(%) 11.85% 12.14% 12.31%
PV 14398.35 9511.359 6766.566
PV of terminal value 7104.894
NPV 37781.17
Outstanding Shares (millions) 914.85
Price per Share 41.30