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Financial Management: A Company Report of
Financial Management: A Company Report of
Financial Management: A Company Report of
A COMPANY REPORT OF
COMPANY OVERVIEW
Established in 1907, Tata Iron and Steel Company Ltd (Tata Steel), after it had acquired
Corus became the world’s sixth largest steel Company, with proforma crude steel
production of 27 mn tones in FY07.
Corus acquisition, which was concluded on April 2, 2007, propelled the Company onto the
global platform. The combined entity has a diverse presence in both emerging and
developed economies.
Tata Steel's product range includes hot and cold rolled coils and sheets, galvanised sheets,
tubes, wire rods, construction rebars, rings and bearings. The Company is trying to decommoditise
steel by launching specific brands like Tata Steelium (Cold Rolled Steel), Tata
Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico
(hand tools and implements), Tata Wiron (galvanised wire products), Tata Pipes (pipes for
construction) and Tata Structura (a contemporary construction material).
Corus, now Tata Steel’s subsidiary, was established on October 6, 1999 as a result of the
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merger of British Steel with Koninklijke Hoogovens. It is Europe’s second largest and the
world’s ninth largest steel producer, having a crude steel capacity of 21.2 mn tonnes in the
UK and the Netherlands. It has four business segments: Strip Products, Long Products,
Distribution & Building Systems, and Aluminium. The Strip Products division manufactures
hot rolled steel strip, cold rolled steel, tubes and pre-finished steels. The Long Products
division manufactures plates, sections, wire rods, slabs and billets. The Distribution &
Building division offers further material processing, building systems, tailored solutions and
consultancy services to the steel industry.
The Company has developed a presence in south-east Asia through the acquisitions of
NatSteel Asia Pte. Ltd and Tata Steel (Thailand) Public Co. Ltd. (formerly Millenium Steel) in
2005 and 2006 respectively. Of late Tata Steel expanded its presence into Vietnam, entering
into MoU with Vietnam Steel Corporation for proposed steel and mining projects in
Vietnam.
RISK ASSESSMENT
1. Corus Acquisition Financing
During FY 2007-08, the financing structure of the Corus transaction has been reorganised
to achieve fiscal unity in the Netherlands and consequent tax efficiencies. The Corus
businesses in UK and Netherlands are now organised under fully owned subsidiaries of Tata
Steel Netherlands B.V., which in turn is an indirectly fully owned subsidiary of Tata Steel
Limited.
2. THE MITTAL FEAR
Tata Group has a holding of approximately 34 % in Tata Steels, which exposes it to the fear
of being taken over by any global steel producer. We all know what has happened in the
past (refer to Mittal – Arcelor story) and there is a great chance that there can be a hostile
bid by Mittal-Arcelor or some other company like Nippon, Posco etc.
Hostile bids are a new trend nowadays which makes it a even bigger threat, one of the most
recent hostile takeover bid has been that of BHP (The world’s biggest Mining Company) for
Rio Tinto which stood at $147 billion.
3. Land acquisition problem
Due to its ongoing Greenfield and Brownfield in states like Orissa, Chhattisgarh and
Jharkhand, Tata steel requires huge chunk of land. Sudden spree of other big corporate
houses for grabbing land makes the situation even more competitive some reports also
suggests that there is a vicious circle working intentionally delaying the project. In this
regard it can be compared with Singur, drama as mentioned by some top Tata executives.
4. Cyclical nature of the steel industry
The steel industry is highly cyclical, receptive to general economic conditions and reliant on
the condition of a number of other industries, including the automotive, appliance,
construction and energy industries. If these industries experience a downturn, Tata Steel
too would too take a hit, thus negatively impacting its rating.
5. Raw material price fluctuations
Corus follows the policy of entering into long term supply contracts with raw materials
vendors. Thus there can be a huge time gap between variation in prices under purchase
contracts and the time when Corus can make a corresponding price change under its sales
contacts with its consumers.
Moreover, Corus may not be able to pass on the increased raw materials costs to its
customers. Such developments would lead to a downside in our rating.
6. Increasing energy costs
Steel production processes are energy dependent and price movements in the energy
market would accordingly affect Tata Steel’s bottom line, and thus affecting our rating.
7. High Capacity expansion from the competition
All the major domestic competitors like SAIL, ESSAR, JSW, JSPL have announced massive
expansion plans recently:
SAIL has announced that it will achieve production capacity of 40 Million Tons by 2020.
JSW plans to expand its production to 32 Million Tons by 2020
Other players such as JSPL, ESSAR have similar production expansion plans which will
contribute in overall achievement of 200 Million Tons steel production by the year 2020.
8. Cost of Integration of Corus:
Tata Steel became 6th biggest Steel Producer in the World after acquiring Corus, but the cost
of the integration goes much more beyond the financial aspect. There are other factors such
as which will add to overall integration costs such as:
Cross Cultural Integration
Employer-Employee Relationship
General tendency of Human Beings to resist change in the environment around them
9. GLOBAL POLITICAL SCENARIO:
Tata committed a huge amount of investment in politically unstable country like
Bangladesh, Iran, Mozambique and Thailand. The entire process of setting up plans getting
delayed in question of gas supply (in Bangladesh) , Iron or mine lease in Iran is escalating the
project cost.
10. SLOWING ECONOMY OF EUROPE
Due To Subprime Crisis in USA an subsequent tremor all along the world, specially in
developed market in Western Europe make the vulnerable position of Corus even more
riskier. UK, Germany, Netherland the main market for Corus products are facing the fear for
recession on negative growth.
11. “TATA” Ethically Wrong?
Tata, the world over is respected for its ethical practices, CSR (not just for the name sake)
but in true sense. It is very difficult to find any issues in TATA’s hundred year old history
regarding unethical practices or behavior.
12. High interest cost
Corus acquisition is being financed by a substantial amount of debt. This puts pressure on
the Company’s bottom line, and should the business environment deteriorate, the necessity
to service this debt could restrain Tata Steel in its future investment and capacity expansion
plans. In addition it could also limit the Company’s inorganic growth options.
13. Exchange Rate Fluctuations
Corus derives the significant amount of its revenue from Europe (including the UK) with
81% of the group’s total turnover coming from Europe in 2006. Steel prices in Europe,
including the UK, are set in Euros, where as the bulk of Corus’s costs in the UK are not
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influenced by the GBP-EUR exchange rate. Thus fluctuations in the GBP-EUR exchange
rate impact Corus’ UK earnings considerably.
14. Post Acquisition Integration Risk
Post Acquisition, Tata Steel recognises that there could be considerable risk emanating
from a possible lack of adequate alignment of management on strategic issues and in
common functional areas.
15. Technology Risks:
Tata Steel with its modernisation plans has ensured that it deploys the best
technologies to ensure quality, cost-efficiency and environment friendly processes. Through
acquisition of Corus and with new Greenfield ventures, Tata Steel has ensured that it has
diversified the concentration risk in single technology of Iron & Steel making. Moreover the
Research & Development team of Corus addresses the need for greater R&D capability of
the company.
16. Regulatory & Compliance Risks:
The Government plays a key role in the economics of a Steel industry. It has a role as
a resource allocator (the mining policies of the Government), as Competitor (the public
sector steel companies) and as Regulator. In volatile times the regulatory risk rises with
measures like reduction in import duties, levy of export duties and withdrawal of DEPB
benefits, threats of price curbs etc. Tata Steel counters this risk by being a role-model
corporate citizen and playing an important role in contributing to the Nation building.
RISK CONCLUSION
In the past, the Company’s Risk Management framework was based on the Tata
Business Excellence Model (“TBEM”). This framework has served us very well as the
Company modernised, pursued the goal of being one of the lowest cost producers of steel
and adopted an approach of Value Based Management in order to maximise the
shareholders’ value. Given the pace and complexity of the current growth with its
associated risks, Tata Steel now is in the process of implementing a more structured
approach in the form of Enterprise Risk Management (ERM).