Working Capital Management at Tata Steel

Working Capital Management at Tata Steel
A
Report submitted to
INDIAN BUSINESS ACADEMY
On 27
th
June 2005
In
Partial Fulfillment of Requirements for the
Post Graduate Diploma in Business Management
By
Priyanka Agarwal
FP46/129
(.1.O. (ci{i.vc
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

Lakshmipura, Thataguni Post
Kanakpura Main Road,
Bangalore 560 062
INDIA
Tel: +91-80-28435931/32/33/34
Fax: +91-80-28435935
Icvn. (ci{i.vc

or
Prof. Ramesh G Tagat, Dean, Indian Business Academy

Bangalore 560 062
INDIA
Tel: +91-80-28435931/32/33/34
Fax: +91-80-28435935
^cno. (ci{i.vc

or
Prof. George Thomas, Internal Mentor, Indian Business Academy

Bangalore 560 062
INDIA
Tel: +91-80-28435931/32/33/34
Fax: +91-80-28435935
^vvcn Ic.[vvion
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.

Bangalore 560 062
INDIA
Tel: +91-80-28435931/32/33/34
Fax: +91-80-28435935
- 1 -
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.
- 2 -
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, 13
th
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 Analysis10
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 Module38
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 Management55
25) Reduction of days sales outstanding for Flat Product.....57
26) Predictions for 201071
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 Steel96
37) Future Outlook.100
Exhibits... -a-
Bibliography.I
i
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 doesnt 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 companys 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 customers
days sales
oustandings and manage the overdue that accrues to them.
ii
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.
TATA STEEL
MISSION
Consistent with the vision and values of the Founder Jamshedji Tata, Tata Steel
strives
to strengthen Indias 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.
3
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.
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.
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.
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.
7
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 Groups

1
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
8
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
9
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.
10
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.
11
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
12
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.
13
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%
14
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.
15
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.
16
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 STEEL
3
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 Ministers 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:
20
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
Galvanized Plain Spangled
Galvanized Plain with differential coating
Galvanized Plain zero spangle
Galvanized Plain skin passed
Galvannealed (GA)
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
22
The Long Products Department was created in the year 1999-2000. It is
the outcome of
Tata Steels relentless trust towards customer-oriented organization. The
department
generates around 35% of works 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 MARKET

6
SAIL 41%
TATA STEEL 20%
ESSAR 14%
LIOYDS 4%
ISPAT 9%
JVSL 10%
OTHERS 6%
5
6
TBEM 2003, Building Sustainability by Tata Steel
23
CAPACITY - FLAT PRODUCTS
41%
20%
14%
4%
9%
10%
6%
SAIL
TATA STEEL
ESSAR
LIOYDS
ISPAT
JVSL
OTHERS
CAPACITY OF LONG PRODUCT IN THE MARKET

7
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
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 Steels 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, VPs)
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 / VPs
Key senior
leadership of
business unit
Short term: Up to
within a year
Long term: Over a
year, up to 5 years
Product Portfolio Matrix
Functional Unit Chief of functional
unit
Key senior
leadership of
functional unit
Short term: Up to
within a year
Long term: Over a
year, up to 5 years
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-grittys 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 customers 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 customers 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
customers
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
customers 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 customers 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 formula
8
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 CAMs following up for payment
No legal cost as assignment of Legal Rights will be on Bank
Overdue interest is charged on the Banks 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 Steels 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 Steels and the customers 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 Steels 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 Banks 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 Banks 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
Steels
account, to the extent of the rejected amount.
47
9. On the due date, HDFC Bank will receive the payment by debiting the customers
account.
10. In case the customers 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 Steels 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 Steels 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 openers 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 customers 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 1
st
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 customers 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 customers 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 HSBCs 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 Steels 4 prime customers,
the company can
save an amount of Rs. 771331.1399
9
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
customers 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 customers bank for documentation.
Tata Steel should make all sales on the condition that the customers
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 India

10
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
N
O
.
O
F
D
A
Y
S
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
0
2
4
6
8
10
12
14
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
YEARS
I
N
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 follows
13
:
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 industrys
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 sector

16
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 DaimlerChryslers 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 Industry
19
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
-10
0
10
20
30
40
50
60
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
YEAR
I
N
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.
4.04 16.82 WHITE GOODS
52.00 0.63 AUTO ANCILLARY
30.63 15.9 AUTOMOBILE
2.61 6.89 CONSTRUCTION
% OF TOTAL
EXPOSURE
CURRENT
GROWTH
SECTOR
MATRIX SHOWING SECTORS WITH RESPECT TO GROWTH & EXPOSURE

LEVEL OF EXPOSURE
C
U
R
R
E
N
T
G
R
O
W
T
H
HIGH LOW
L
O
W
H
I
G
H
AUTO
ANC.
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
6.81 Total
11.68 Gen. Engg.
6.16 White Goods
6.47 Auto Ancillary
6.03 Automobile
3.98 Construction
% 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
R
I
S
K
HIGH LOW
L
O
W
H
I
G
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
I
N
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
I
N
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.
showing the
growth figures are very fluctuative, rather increasing, in nature. There
are a few dips in
the growth rates.
Chinas 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
governments 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 Ministrys 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 INDIA

21
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
INDIAS FINISHED STEEL CONSUMPTION
GROWTH OF STEEL IN INDIA
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
1996 1997 1998 1999 2000 2001 2002 2003 2004
YEARS
I
N
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.
showing the
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)
45.0
42.6
40.3
38.1
36.1 34.1
32.3
0.0
10.0
20.0
30.0
40.0
50.0
2004 2005 2006 2007 2008 2009 2010
YEAR
C
O
N
S
.
(
i
n
m
m
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
-2
0
2
4
6
8
10
12
1995 1996 1997 1998 1999 2000 2001 2002 2003
YEARS
I
N
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 companys strength in that market segment. A relative market
share
of 0.1 means that the companys sales volume is only 10% of the
leaders. 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 years cons. / first years 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 CONSUMPTION
22
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 X
10 X
0.1 X 0.5 X 5 X
0%
10%
20%
5%
15%
Relative Market Share
M
a
r
k
e
t
G
r
o
w
t
h
R
a
t
e
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 doesnt 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
44
47
41
37
55
53
38
16
0
10
20
30
40
50
60
70
FY'01 FY'02 FY'03 FY'04
Years
D
a
y
s
o
f
S
a
l
e
DEBTORS
INVENTORY
NET WORKING
CAPITAL
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 6
th
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 worlds 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 years 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 6
th
year onwards we use summation with
the help of the infinite series, the actual formula being
Projected FCFF for 6
th
year onwards = Projected FCFF of the 6
th
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 24

th
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 companys 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 companys 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 1
st
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
- 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 BANK
RATHI ISPAT (in %)
11
13
22
23
15
13
5
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)
SHAH ALLOYS (in%)
4
4
17
13
4
17
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)
JINDAL STAINLESS (in%)
0 6
11
14
11
28
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)
STAINLESS INDIA (in%)
10
15
25
30
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
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
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)
282
423
553
205
1012
1746
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1999 2000 2001 2002 2003 2004
YEAR
N
E
T
P
R
O
F
I
T
EXHIBIT-6(ii)
EARNINGS PER SHARE

7.67
11.26
14.64
5.51
27.43
47.32
0
10
20
30
40
50
1999 2000 2001 2002 2003 2004
YEAR
E
P
S
- l -
EXHIBIT-6(iii)
TURNOVER (Rs. Crores)
6336
6943
7810
7683
9844
12070
0
2000
4000
6000
8000
10000
12000
14000
1999 2000 2001 2002 2003 2004
YEAR
T
U
R
N
O
V
E
R
EXHIBIT-6(iv)
RETURN ON AVERAGE NETWORTH
7.65
11.51
14.38
6.38
35.88
46.28
0
10
20
30
40
50
1999 2000 2001 2002 2003 2004
YEAR
R
E
T
.
O
N
A
V
G
.
N
W
EXHIBIT-6(v)
DEBT-EQUITY RATIO
1.37
1.32
1.18
1.92
1.33
0.77
0
0.5
1
1.5
2
2.5
1999 2000 2001 2002 2003 2004
YEAR
D
/
E
- m -
EXHIBIT-6(vi)
ASSET TURNOVER RATIO (in %)
55.44
58.47
63.59 63.28
78.16
89.96
0
20
40
60
80
100
1999 2000 2001 2002 2003 2004
YEAR
A
T
R
EXHIBIT-6(vii)
PRICE-EARNING RATIO
13.51
10.3
8.36
17.72
4.88
7.25
0
5
10
15
20
1999 2000 2001 2002 2003 2004
YEAR
P
/
E
R
A
T
I
O
EXHIBIT-6(viii)
NET WORKING CAPITAL (Rs. Crores)

1426
1197
1138
1086
958
84
0
200
400
600
800
1000
1200
1400
1600
1999 2000 2001 2002 2003 2004
YEAR
N
E
T
W
C
- n -
EXHIBIT-6(ix)
CURRENT RATIO
1.79
1.65
1.55 1.54
1.36
1.02
0
0.5
1
1.5
2
1999 2000 2001 2002 2003 2004
YEAR
C
U
R
R
E
N
T
R
A
T
I
O
EXHIBIT-6(x)
RESRVES & SURPLUS (Rs. Crores)
3796.5
4040.4
4380.5
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)
585.44
803.1
846.92
912.74
1194.55
2194.12
0
500
1000
1500
2000
2500
1999 2000 2001 2002 2003 2004
YEAR
I
N
V
E
S
T
M
E
N
T
S
- o -
EXHIBIT-6(xii)
CASH FLOW FROM OPERATING ACTIVITY (Rs. Crores)
481.9
703.04
1043.53
1154.13
2093.15
2914.44
0
500
1000
1500
2000
2500
3000
3500
1999 2000 2001 2002 2003 2004
YEAR
C
F
O
A
EXHIBIT-6(xiii)
CASH FLOW FROM INVESTMENT ACTIVITY (Rs. Crores)
792.51 809.29
597.56
499.7
790.16
1882.63
0
500
1000
1500
2000
1999 2000 2001 2002 2003 2004
YEAR
C
F
I
A
EXHIBIT-6(xiv)
CASH FLOW FROM FINANCING ACTIVITY (Rs. Crores)
217.39
36.56
400.12
674.46
1149.86 1154.19
0
500
1000
1500
1999 2000 2001 2002 2003 2004
YEAR
C
F
F
A
- p -
EXHIBIT-6(xv)
DIVIDEND PAYOUT RATIO (in %)
57.86
40.68 39.32
72.91
32.9
23.84
0
20
40
60
80
1999 2000 2001 2002 2003 2004
YEAR
D
P
R
EXHIBIT-6(xvi)
INTEREST COVERAGE RATIO
2.05 2.32 2.6
1.68
5.14
22.82
0
5
10
15
20
25
1999 2000 2001 2002 2003 2004
YEAR
I
N
T
.
C
O
V
E
R
R
A
T
I
O
EXHIBIT-6(xvii)
AVERAGE DEBTORS TO TURNOVER (in %)
20.14
17.81
15.86 15.48
10.38
6.75
0
5
10
15
20
25
1999 2000 2001 2002 2003 2004
YEAR
D
E
B
T
O
R
/
T
U
R
N
O
V
E
R
- q -
EXHIBIT-6(xviii)
AVERAGE INVENTORY TO TURNOVER (in %)
12.39
10.73
9.01 8.95
7.72
7.37
0
5
10
15
1999 2000 2001 2002 2003 2004
YEAR
I
N
V
.
/
T
U
R
N
O
V
E
R
EXHIBIT-6(xix)
PBT/TURNOVER (in %)
5.49
7.75
8.74
3.7
14.39
24.59
0
5
10
15
20
25
30
1999 2000 2001 2002 2003 2004
YEAR
P
R
T
/
T
U
R
N
O
V
E
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.+Debto
r 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.+Debto
r 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.+Debto
r 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
The Financial Express
The Economic Times
The Investors Guide
www.google.co.in
www.ibef.org
www.steel.nic.in
www.equitymaster.com

Working Capital Management at Tata Steel

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Working Capital Management at Tata Steel

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Working Capital Management at Tata Steel

This is to certify, that Miss Priyanka Agarwal is a bonafide student of Indian

Mr. Manish Jain, CEO, Indian Business Academy

INDIAN BUSINESS ACADEMY

This is to certify, that Miss Priyanka Agarwal is a bonafide student of Indian

Prof. Ramesh G Tagat, Dean, Indian Business Academy

INDIAN BUSINESS ACADEMY

This is to certify, that Miss Priyanka Agarwal is a bonafide student of Indian

INDIAN BUSINESS ACADEMY

I, Miss Priyanka Agarwal, the undersigned, a student of Indian Business

Miss Priyanka Agarwal, B.Sc (Economics), PGDBM 2004-06.

INDIAN BUSINESS ACADEMY

I would like to express my gratitude towards thanking the following people:

Mr. George Thomas, Internal Mentor, Indian Business Academy, Bangalore,

Mr. S.N.Banerjee, Head Marketing and Finance, Kolkata, who supported

Mr. Shankarnarayanan Head of Finance, Bangalore, who made it possible

Mrs. Debjani Dasgupta Manager Accounts, Kolkata, who actually helped me

Finally, I am highly thankful to my parents and my entire family, who

Executive Summary ...... i

Tata Steel, a steel manufacturing company in India, was rated amongst

A company of a turnover of Rs. 12070 Crores is expected to have a good management

Management of Working Capital includes various sub-components at the

Overall, the company seeks to scale heights of excellence in all that

Create a culture of continuous learning and change.

We are committed to create value for all our stakeholders by continually

The steel industry is generally a stable industry except for the

INDUSTRY STRUCTURE: INDIA

Four Major Strategic Groups

1) The Integrated Steel Producers:

3) Mini Steel plants

1. Tata Refractories Limited (TRL)51%

1882 At the age of 43 Jamshetji Nusserwanji Tata read a report by a German

14 November 1900 Jamshetji was in England seeing the Secretary of

24 February 1904 P N Bose, an Indian Geologist who discovered the

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

5 March 1920 Jamshedpur Labour Association formed. The principle of

8 August 1925 Mahatma Gandhi, Chittaranjan Das and CF Andrews visited

20 December 1955 Agreement signed with Kaiser Engineers for two

19 April 1993 Mr. Ratan Tata took over as the Chairman.

16 September 1997 Received Prime Ministers Trophy for the best

24 April 2000 Inauguration of the Cold Rolling Mill Complex.

3 December 2003 Placed second in Leadership Development among companies in Asia

FEW KEY CUSTOMERS IN TARGETED SEGMENTS

KEY SEGMENT PRODUCT MARKET KEY CUSTOMERS

CAPACITY OF FLAT PRODUCT IN THE MARKET

CAPACITY OF LONG PRODUCT IN THE MARKET

SAIL + IISCO 10%

CAPACITY - LONG PRODUCTS

KEY ENTERPRISE PROCESSES

POSITIVE REFERRALS FROM CUSTOMERS

Customers giving positive referrals for Tata Steels products:

CUSTOMER SATISFACTION DETERMINATION

TYPE OF DATA PARAMETERS TOOLS

PROCESS FOR FOLLOW UP WITH CUSTOMERS ON PRODUCTS/SERVICES

DETERMINATION OF CUSTOMER CONTACT REQUIREMENTS

CUSTOMER GROUP PROCESS FOR CAPTURING

CUSTOMER SATISFACTION DETERMINATION

TYPE OF DATA PARAMETERS TOOLS

STRATEGIC CHALLENGES FACED BY TATA STEEL

1. Operational: Operational challenges includes some of the following i.e.