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INSTITUT TEKNOLOGI BANDUNG
SCHOOL OF BUSINESS AND MANAGEMENT
INDONESIA BUSINESS CASE CENTER (IBCC)
083-05-03-12
Krakatau Steel (B) : Global Competition
Currently Krakatau Steel has been claimed as the biggest steel company in Indonesia. Even all
Indonesia’s citizen presumes Krakatau Steel as one of the valuable asset for Indonesia. However
being the biggest local steel company is not enough. Going global is another step that Krakatau
Steel must take. Having corporation with POSCO, the biggest steel company in South Korea to
make a joint venture which requires 388 hectares land, has shown that Krakatau Steel is ready
to go to the next level. Therefore Anto, a financial analyst in PT Krakatau Steel, would like to
see the position and the opportunity of PT Krakatau Steel to compete with other global steel
companies. This assessment will also be used as a mean to find an appropriate company as a
benchmark.
Anto will use three reputable global steel companies which come from different region in the
world. Those three steel companies are Arcelor Mittal (Luxembourg), POSCO (Pohang Iron and
Steel Company, South Korea) and U.S Steel (United States Steel Company). Besides Anto will
also use PT Gunawan Dianjaya Steel Tbk and PT Jaya Pari Steel Tbk as a local comparison.
Moody’s Corporation is a reputable company which provides credit ratings, research, tools and
analysis that contributes to transparent financial markets. Moody’s also creates financial rating
for steel industry that is used to measure the financial performance of steel industry globally.
This methodology encompasses companies whose revenue is generated from selling and
producing semi-finished and finished steels. It first published in 2005 and it keeps on updating
towards the conditions and dynamics of the global steel industry nowadays. This measurement
is made to help investors and others to assess the financial performance, specifically the credit
risk of a steel company. Using moody’s global steel measurement people can also assign rating
to each company and rank it.
This case was written by Raharsi Dethirafuri under the supervision of Subiakto Soekarno from School of Business
and Management – Institut of Teknologi Bandung. It was prepared solely to provide material for class discussion.
The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author
may have disguised certain names and other identifying information to protect confidentiality.
IBCC prohibits any form of reproduction, storage or transmittal without its written permission. To order copies or
request permission to reproduce materials, contact IBCC at School of Business and Management – ITB Bulding. J
Ganesha No. 10, Bandung. P. +6222-2531923 F. +6222-2504249 or e-mail to ibcc@sbm-itb.ac.id
Copyright  2012, Indonesia Business Case Center (IBCC)

INDONESIA BUSINESS CASE CENTER (IBCC)

083-05-03-12
To assess the Moody’s assessment, financial statements of 2008, 2009 and 2010 ar
Some of the ratios in Moody’s Global Steel measurement are using data of three year
other ratios only use the data of 2010.
In this rating methodology, there are four categories that Moody is focusinThose categories
are:
1. Size and Business Profile

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2. Operating Performance and Volatility
3. Financial Policies
4. Financial Strength
The four categories will be broken down into ten sub factors. Below are the key rating
including the weight score of each category:
Rating factors/sub-factors weighting
Broad Sub-
CategoriesRating Broad RatingRating factor
Factor Weighti
Factor Weighting Sub-factor ng
1. Net Consolidated Sales ($USD billions)
(most recent year-end or LTM period) 25%
2. Operational Diversity
Size andBusiness 3. Regional Diversity
1 Profile 35% 4. Import Threat/Export Reliant 10%
Operating 1. EBIT Margin (3 year average) 10%
Performance and 2. Return on Average Tangible Assets
2 Volatility 25% (3 year average) 5%
3. Volatility based on the Coefficient of Variation of
CFO/Net Sales 10%
1. Debt/Capital
3 FinancialPolic 25% (most recent year-end or LTM period)
2. Debt / EBITDA (3 year average) 10%
1. EBIT/Interest (3 year average)2 5%
4 FinancialStre 15% 2. CFO-Div/Debt (3 year average) 5%
3. FCF / Debt (3 year average) 5%
Total 100% 100%
To analyze using Moody’s there are seven rating categories. Those categories vary
Aaa. Caa is the worst rating that a company can achieve while the Aaa rating is the h
Score attached for each rating is also vary, from zero to six. Below are the indicated r
categories in Moody’s.
Aaa Aa A Baa Ba B Caa
6 5 4 3 2 1 0
2

INDONESIA BUSINESS
083-05-03-12
Exhibit 1
Moody’s Global Steel Methodology Factor Grid
Sub-
Broad factor
Categ Rating Rating Weig
ories Factor Sub-factor hting Aaa Aa A Baa

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1. Net Consolidated Sales ($USD

billions) Aaa ≥ 25 ≤ Aa < 15 ≤A < ≥ 5 Baa <
(most recent year-end
25%
, year
35 2010) 35 25 15
Size and 2. Operational Diversity
Business 3. Regional Diversity
1 Profile 4. Import Threat/Export
10%Reliant
Aaa=8 Aa=7 A=5 or 6 Baa=3 or 4
Aaa ≥ 20%≤ Aa <15% ≤ A < 8.0% ≤ Baa
1. EBIT Marg 10% 30% 30% 20% < 15%
Operating 2. Return on Average Tangible
Aaa ≥ Assets15%≤ Aa <10% ≤A < 5%≤ Baa <
Performance and
(3 year average) 20% 20% 15% 10%
Volatility
3. Volatility based on the Coefficient of
Aaa < 15%≤ Aa <25%≤ A < 40%≤ Baa
Variation of 10% 15% 25% 40% < 60%
2 (3 years data)
1. Debt/Capital Aaa < 20%≤ Aa <30%≤ A < 40% ≤Baa
FinancialPolic(most recent year-end, year20%2010) 30% 40% < 50%
Aaa < 0.75x ≤Aa 1.25x ≤A 2.0x ≤ Baa
3 2. Debt / EB 10% 0.75x < 1.25x < 2.0x < 3.0x
Aaa ≥ 10x≤ Aa < 7x ≤A < 4.0x ≤ Baa
1. EBIT/Inter 5% 15x 15x 10x <7.0x
Financial Aaa ≥ 45%≤ Aa <35%≤ A < 25% ≤ Baa
Strength 2. CFO-Div/D 5% 55% 55% 45% < 35%
Aaa ≥ 20%≤ Aa <14% ≤A < 8% ≤ Baa
4 3. FCF / Deb 5% 30% 30% 20% < 14%
Total 100%

INDONESIA BUSINESS CASE CENT

083-05-03-
Exhibit 2
Size and Business Profile
Jaya
Size and Business
Krakatau Gunawan Pari Arcelor
Profile (score)
Steel Dianjaya Steel POSCO Mittal
Net Consol
Sales (must be in USD billion)
Operational
Regional Di
Import Thre 5 3 2 7 7
Export Reli
For the Business Size and Profile (the net consolidates Sales), the currency used is USD.
And 1 USD is assumed to be 8555 IDR.
For the EBIT Margin, it is derived from Average EBIT of three years (2008-2010) is divided by

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Average Revenue of three years. For the EBIT itself it is gotten from Income before tax - EBT –
gain on foreign exchange + interest – Interest Income - gain on investment - gain on assets.
While for the return average tangible asset, Anto uses EBIT/(Total asset-other asset).
Exhibit 3
Collected Data of Three Local Steel Companies
(in IDR Krakatau Steel Gunawan Dianjaya Steel Jaya Pari Steel
million) 2008 2009 2010 2008 2009 2010 2008
206314 1691353 1485615 302053 164155 171013 73270
Revenue 31 5 6 0 5 2 3
179153 1572814 1262137 246075 182935 141325 61731
COGS 67 6 6 5 9 1 9
271606 - 11538
gross profit 4 1,185,389 2,234,780 559,775 187804 296,881 4
Operating 135567
Exp 6 1,159,449 1,241,851 142,573 85,622 90,757 17,033
Operating 136038 -
Income 8 25,940 992,929 142,573 273426 206,124 98,351
-
net income 459,571 494,672 1,062,683 83,070 150055 171,428 49,158
153,660
EBIT - 413,494 1,298,480 261,010 145,676 211,234 92,819
153744 1279580 1758405 209278 107457 39934
Asset 27 3 9 0 970,737 0 4
Debt 9,934,666 6,989,965 8,290,144 1,919,567 496,452 428,856 129,633

INDONESIA BUSINESS CASE CENTER (IBCC)

083-05-03-12
6 7

Equity 5439761 5805838 9293915 173213 474285 645713

CFF -7468 -184001 2663432 10 -98851 −
CFO 607123 883379 848429 213874 -52402 -34995
CFI -203210 -18216 -1028399 -90 -542 -1336
Exhibit 4
Collected Data of Three Global Steel Companies
POSCO Arcelor Mittal
(in USD mil 2008 2009 2010 2008 2009 2010 2008
3314 3164 5343 12493 2375
Revenue 1 9 0 6 65110 78025 4
2404 2456 4303 10001 1972
COGS 8 7 5 0 58019 66689 3
1039
gross profit 9093 7082 5 24926 7091 11336 4031

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Operating 3398 3760 5339 12690 8769 7731 962
Operating
Income 5695 3322 5056 12236 -1678 3605 3069
net income 3454 2764 3684 9399 118 2916 2112
EBIT 5127 3702 5276 14053 -2741 3434 3176
3728 4320 5986 13308 12769 13090 1608
Asset 4 6 9 8 7 4 7
1532 1666 2912 1119
Debt 1 3 2 77890 66652 68474 2
2196 2654 3074
Equity 3 3 7 55198 61045 62430 4895
CFF 2474 740 5004 -2132 -6347 -7 -305
CFO 2971 7389 1784 14652 7278 4015 1658
-
CFI -4607 -8344 -6071 12428 -2784 -3438 -1032

INDONESIA BUSINESS
083-05-03-12
Exhibit 5
Other Collected data of Six Steel Companies
Jaya
Three YearsKrakatau Gunawan Pari Arcelor U.S
Average (2008-
Steel Dianjaya Steel Posco Mittal Steel
2010) in million
(IDR) (IDR) (IDR) (USD) (USD) (USD)
Depreciati 353292 29116 933 2215 4935 481
interest E 360295 40877 802 423 1930 174
Other Asse 256230 6692 74 797 11299 279
Free Cash -415816 110098 60343 2220 916 116
Exhibit 6
Aggregate Weighted Factor Score
Factor Numeric
Indicated Aggregate Weighted
Rating Factor Score
Aaa x > 5.5
Aa1 5.2 < x ≤ 5.5
Aa2 4.8 < x ≤ 5.2
Aa3 4.5 < x ≤ 4.8
A1 4.2 < x ≤ 4.5
A2 3.8 < x ≤ 4.2
A3 3.5 < x ≤ 3.8
Baa1 3.2 < x ≤ 3.5
Baa2 2.8 < x ≤ 3.2
Baa3 2.5 < x ≤ 2.8

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Ba1 2.2 < x ≤ 2.5
Ba2 1.8 < x ≤ 2.2
Ba3 1.5 < x ≤ 1.8
B1 1.2 < x ≤ 1.5
B2 0.8 < x ≤ 1.2
B3 0.5 < x ≤ 0.8
Caa1 0.0 < x ≤ 0.5
6

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esia. However

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assign rating

karno from School of Business

material for class discussion.
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Management – ITB Bulding. Jl.
@sbm-itb.ac.id

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Ba B Caa

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1≤B<
2.5 ≤ Ba <52.5 Caa < 1

Ba=2 B=1 Caa=0

5.0% ≤ Ba 2.0%≤ B Caa <
< 8.0% < 5.0% 2%
2.5% ≤ Ba 1%≤ B Caa <
< 5% < 2.5% 1%

Caa <
60%≤ Ba <75%≤ B
75% < 90% 0%
& ≥ 90%
50% ≤ Ba 75% ≤ B Caa ≥
< 75% < 90% 90%
3.0x ≤ Ba 4.0x≤ B Caa ≥
< 4.0x < 5.5x 5.5x
2.5x ≤ Ba 1.0x ≤ B Caa <
<4.0x <2.5x 1.0x
15%≤ Ba <10%≤ B Caa <
25% < 15% 10%
4%≤ Ba < 0% ≤ B Caa <
8% < 4% 0%

U.S
Steel

USD.

divided by

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tax - EBT –
assets.
t).

Jaya Pari Steel

2009 2010
30286 42779
8 2
26746 37205
0 9

35,408 55,733

15,103 17,314

20,305 38,419

1,917 28,445

21,724 41,276
35395 41128
1 2
82,262 120:J1248
4

3 8

269711 271689 300134

− − −
116895 9626 48826
-4676 -99900 -37220

U.S Steel
2009 2010
1104 1737
8 4
1159 1625
7 9

-549 1115

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1135 1226

-1684 -111
-1401 -482
-1686 -190
1542 1535
2 0
1074 1149
6 9

4676 3851
938 335
-61 -379

-374 -583
5

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Collected Data of Three Local Steel Companies
(in IDR Krakatau Steel Gunawan Dianjaya Stee
million) 2008 2009 2010 2008
Revenue 20,631,431 16,913,535 14,856,156 3,020,530
COGS 17,915,367 15,728,146 12,621,376 2,460,755
gross profit 2,716,064 1,185,389 2,234,780 559,775
Operating
Exp 1,355,676 1,159,449 1,241,851 142,573
Operating
Income 1,360,388 25,940 992,929 142,573
net income 459,571 494,672 1,062,683 83,070
EBIT 1,536,600 413,494 1,298,480 261,010
Asset 15,374,427 12,795,803 17,584,059 2,092,780
Debt 993,466 6,989,965 8,290,144 191,956
Equity 5,439,761 5,805,838 9,293,915 173,213
CFF - 7,468 - 184,001 2,663,432 10
CFO 607,123 883,379 848,429 213,874
CFI - 203,210 - 18,216 - 1,028,399 - 90

Collected Data of Three Global Steel Companies

POSCO Arcelor Mittal
(in USD million)
2008 2009 2010 2008
Revenue 33,141 31,649 53,430 124,936
COGS 24,048 24,567 43,035 100,010
gross profit 9,093 7,082 10,395 24,926
Operating Exp 3,398 3,760 5,339 12,690
Operating
Income 5,695 3,322 5,056 12,236
net income 3,454 2,764 3,684 9,399
EBIT 5,127 3,702 5,276 14,053
Asset 37,284 43,206 59,869 133,088
Debt 15,321 16,663 29,122 77,890
Equity 21,963 26,543 30,747 55,198
CFF 2,474 740 5,004 - 2,132
CFO 2,971 7,389 1,784 14,652
CFI - 4,607 - 8,344 - 6,071 - 12,428

Collected Data of Three Local Steel Companies

Krakatau Steel Gunawan Dianjaya Stee
(in USD million)
2008 2009 2010 2008
Revenue 2,411.62 1,977.04 1,736.55 353.07
COGS 2,094.14 1,838.47 1,475.32 287.64
gross profit 317.48 138.56 261.23 65.43
Operating
Exp 158.47 135.53 145.16 16.67
Operating
Income 159.02 3.03 116.06 16.67
net income 53.72 57.82 124.22 9.71
EBIT 179.61 48.33 151.78 30.51
Asset 1,797.13 1,495.71 2,055.41 244.63
Debt 116.13 817.06 969.04 22.44
Equity 635.86 678.65 1,086.37 20.25
CFF - 0.87 - 21.51 311.33 0.00
CFO 70.97 103.26 99.17 25.00
CFI - 23.75 - 2.13 - 120.21 - 0.01
Gunawan Dianjaya Steel Jaya Pari Steel
2009 2010 2008 2009 2010
1,641,555 1,710,132 732,703 302,868 427,792
1,829,359 1,413,251 617,319 267,460 372,059
- 187,804 296,881 115,384 35,408 55,733

85,622 90,757 17,033 15,103 17,314

- 273,426 206,124 98,351 20,305 38,419

- 150,055 171,428 49,158 1,917 28,445
145,676 211,234 92,819 21,724 41,276
970,737 1,074,570 399,344 353,951 411,282
496,452 428,856 12,963 82,262 11,114
474,285 645,713 269,711 271,689 300,134
- 98,851 - - - -
- 52,402 - 34,995 116,895 9,626 48,826
- 542 - 1,336 - 4,676 - 99,900 - 37,220

Arcelor Mittal U.S Steel

2009 2010 2008 2009 2010
65,110 78,025 23,754 11,048 17,374
58,019 66,689 19,723 11,597 16,259
7,091 11,336 4,031 - 549 1,115
8,769 7,731 962 1,135 1,226

- 1,678 3,605 3,069 - 1,684 - 111

118 2,916 2,112 - 1,401 - 482
- 2,741 3,434 3,176 - 1,686 - 190
127,697 130,904 16,087 15,422 15,350
66,652 68,474 11,192 10,746 11,499
61,045 62,430 4,895 4,676 3,851
- 6,347 - 7 - 305 938 335
7,278 4,015 1,658 - 61 - 379
- 2,784 - 3,438 - 1,032 - 374 - 583

Gunawan Dianjaya Steel Jaya Pari Steel

2009 2010 2008 2009 2010
191.88 199.90 85.65 35.40 50.00
213.84 165.20 72.16 31.26 43.49
- 21.95 34.70 13.49 4.14 6.51

10.01 10.61 1.99 1.77 2.02

- 31.96 24.09 11.50 2.37 4.49

- 17.54 20.04 5.75 0.22 3.32
17.03 24.69 10.85 2.54 4.82
113.47 125.61 46.68 41.37 48.08
58.03 50.13 1.52 9.62 1.30
55.44 75.48 31.53 31.76 35.08
- 11.55 - - - -
- 6.13 - 4.09 13.66 1.13 5.71
- 0.06 - 0.16 - 0.55 - 11.68 - 4.35