Valuation of Tata Steel after the Corus Acquisition

Overview Tata steel is one of the largest private sector steel company. The company's products include steel bearing rings, forgings, flanges, steel tubes, cold rolled strips , seamless tubes and metallurgical machinery. The company’s strengths are its strong market position , acquisition of corus and vertical integration . It faces considerable threat from consolidation in steel industry , economic /industry downturn and environmental

regulations. The company has launched the Customer Value Management initiative with the objective of creating complete understanding of customer problems and finding solutions jointly. The company's Retail Value Management addresses the needs of distributors, retailers and end consumers. The company has also launched India's first 1

Additionally. and exports the finished product to various customer destinations.Tata Steel Global Holding in Singapore.steel retail store – steel junction – for making steel shopping a happy and memorable experience. the company is setting up High Carbon Ferro Chrome plant at Richards Bay. Singapore and Africa. The company will have a stake of 65% in the above project . Tata Steel and Riversdale Mining. whereby Tata Steel would become a strategic investor in Riversdale's Mozambique Coal Project by acquiring a 35% stake in it for a sum of AUD100 million $86. a company listed in Australian Stock Exchange.500 tonne capacity in first phase .entered into a MoU.5 million tonnes per year. signed a memorandum of understanding (MoU).8 million. 2 . signed a joint venture agreement with Vietnam Steel Corporation and Vietnam Cement Industries Corporation for a steel complex in Ha Tinh province in Vietnam. The business model of the plant includes taking high quality Chrome Ore from India and elsewhere. convert it into Ferro Chrome in Richards Bay. Tata Steel and SODEMI (a state owned company for mineral development) entered into joint venture agreement for the development of Mount Nimba Iron ore deposits in Ivory Coast (West Africa). Further. A Vietnam-based steel company.with Tata Steel Group in steel making for a proposed steel complex with capacity of 4. Group’s Expansion Plans : Expansion Oversees The group has been expanding its operations in countries like Vietnam . South Africa with 134.

The joint venture would identify. Thus. the company is valued somewhere between $456 and $489 ( values derived by the ReoI and FCF Valuations respectively) .000 million (approximately $3.Tata Steel Group’s expansion in foreign countries would further increase the geographic reach of its product and services. its share price has been hovering between $480 and $520. Recommendation : Buy/Sell/Hold As per our calculation.Jamshedpur works unit as part of the INR140. acquire. we feel the stock is overpriced. Tata Steel signed a joint venture pact with Jasper Industries to establish a coalbased power plant in the eastern state of Orissa. our recommendation is to sell stocks of Tata Steel . While in the last week.The group’s expansion in India would help it to generate additional revenues.477. Expansion in India Tata Steel Group is also expanding its operations in India. Tata Steel and Steel Authority of India (SAIL) signed an agreement to establish a 50:50 joint venture company for coal mining in India. and develop coal blocks in India. In January 2008. Also. This is supported by a mix of negative trends that the industry and firm in going through currently. 3 .6 million) brownfield expansion to augment its production capacity to 10 million tonne in over two years. in June 2008.

CAGR 18.6% growth forecasted for Europe for the steel industry. tata Steel will decrease its Net working capital by increasing liabilities. April 2009. After that the growth slows down linearly till it hits 6% in 2025 (GDP growth rate in a mature economy). Sales and profits tumbled because of the global economic crisis (contraction in demand from the automotive and construction sectors). We are assuming that with slow down. For 2009-10. 4 . Therefore. We have assumed terminal growth rate to be 4% due to rising costs and competitive factors 2.KEY ASSUMPTIONS TAKEN FOR VALUATION We have arrived at the valuation using the following assumptions : 1. Tata Steel posted a 49. we have assumed peak growth in 2013.5% fall in consolidated profits. This is reflected in the NEGATIVE COI in 2009-10. According to data monitor report.

23% (http://pages. Re is at 22.nyu.pdf) 5. Risk free rate at 8.36% . at 22 april 2009. 2. assuming no increases or decreases.html 4.4% source www.3.5% from P&L sheet.52% using formula Rf + B* Rm 6.74% 1. This new Debt generates 640 Million dollars in annual interest charges which works out to be 8 & annual interest Effective tax rate assumed to be 39. Profit margins & ATO have been considered at 2009 levels on a conservative basis. Profit margins are derived from those of comparables companies in mature economies – Arcelor mittal – 8. Calculations for WACC are shown in the excel model tab labeled WACC 8. 7. The same has been financed with Corus cash flows. Rd is taken at 8% since Tata steel’s new debt amounted to 8 Billion dollars due to the CORUS acquisition. Industry beta 1.stern. Pricing Basis and Risks: 5 .edu/~adamodar/New_Home_Page/datafile/Betas. Nucor Steel – 7.nyu. Market Risk premium for Indian Companies assumed at 9.53 http://pages.stern.debtonnetindia.

• Increased Chinese production and resultant sluggish steel prices with falling net realisations to adversely impact profitability.The investment demand is strong and rising.5%. it had taken huge debt to finance corus acquisition . • In August 2009. as this could take away benefits of strong growth and pricing from steel players in domestic market. due to prospects of further slowdown in profit growth amid declining steel prices and rising iron ore & coal costs • Other Industry threats are Rising interest rates . automobiles and consumer durables are increasing the demand for steel specially in developing countries. the index for basic metals has recorded growth rate of 8.6% compared to last year’s 6. The steel producers need to be careful on dumping of steel in India. high cost of energy . Corus product range is concentrated on 6 . However. This could harm its abilitiy to refinance itself for existing loans.. thus strengthening its position in the steel industry. We find that there is subsequent rises in the in steel prices. We can expect long steel prices too to go up. The production has grown 7. We see that this demand is going to grow in the next few years.Industry trends: • Growing Sectors like Infrastructure. • Overall steel sector outlook has dampened (also depicted by fall in market price).6 . cyclical nature of steel industry and deficit infrastructure • Big ticket investment by POSCO and Mittal could swallow the market (specifically export) Acquisition of Corus : Its acquisition of corus in April 2007 has resulted in improvements in operating efficiencies and reduction in cost . But the recent rupee appreciation can dampen the pricing power of the players. construction.

engineering . raw material selfsufficiency has decreased from 80% to 17%. • The company expects staff cost of Corus to reduce in 2011 due to reduction in number of workers. • • Equity dilution from acquisition of Corus would reduce its earning per share. This will depend on rate at which Europe recovers from the slowdown. Also. corus growth has been slow. higher priced coking coal inventory (in absence of new contracts) and loss-making Teesside operations further subdued results • With Corus acquisition. automotive and construction. . ii) higher energy costs still plaguing the company’s UK operations . Currently Corus is not getting benefits of government scheme to share 50% of the employee cost as some of other companies in this sector majorly due to regulations in UK .highly specalised requirement of aerospace. Tata Steel has intended to reduce the cost by sourcing raw material from the source of 7 . • Corus’ subdued performance was mainly on account of: i) unwillingness of the UK government to support employee expenses (thereby placing European players at an advantage. • The management expects Corus to turn EBITDA positive by third quarter of 2010. • The prices in Europe has bottomed but reduction in annual raw material prices would help them maintain/increase their margins. Its integration to main business group is still underway • The cost of production per tonne of steel for Corus is very high on account of inaccessibility raw material (iron ore and coal) and high labor costs. given that Corus has huge employee base in UK . Its products are priced at a premium as compared to Tata Steel’s product. • Since last year . It is operating at a capacity of 80 percent and has reduced capacity by 30%. The estimated synergies will take time to materialize.The management has guided 2010 capacity utilization of 67-68% .

origin. valued at $725 per ton. However.Real demand from Europe and US has not yet recovered. the measures echo Management’s view on non-profitability of steelmaking in the UK. We believe this is a positive development for Tata Steel. Though there is immense difference in the profitability of both.000 employees) and restructuring operations are masked as strategic initiatives to save costs. its profitability is highly sensitive to prices of coal and iron ore. • TATA Steel has successfully negotiated with its lenders on the debt covenants and the lenders have unanimously agreed on the freezing of covenants till March 2010 and would be relaxed thereafter. robust demand in India and better pricing environment. • The company is exposed to increase in raw material prices due to The deal values Corus at $751 per ton on EV basis. Global Developments : • Due to decline in cooking coal and iron ore costs by 60% and 33% . acquisition. its operating environment remains challenging . new contracts have been negotiated globally which would help performance of TATA Steel. • Since Corus does not have any captive source of raw material . 8 . • While rightsizing (dropping 5.Its India operations will benefit by strong volume growth . which is slightly higher than Arcelor-Mittal deal. there may be sharp jump in iron ore prices. • Shipments and average steel selling price are expected to be higher in fourth quarter than in third quarter . With nearly 90% of globally traded iron ore concentrated in top 5 producers.

• Whole sector has witnessed higher cost of production due to higher iron ore and coking coal prices.• Slowdown in the steel cycle is a key risk . out of which 15 bn has been already spent. FY10 capex is 30 bn .9 mn tpa by FY12 at a Capex of USD 3 bn .which will continue to pain steel companies. Earnings are under pressure due to poor shipments and high input cost . With the acquisition of Corus. Demand has significantly weakened due to economic down cycle triggered by financial crisis. These are some major investments in Tata Steel’s Books for coming 2 years. 9 . Also. tata steel is financially and operationally leveraged than its counter parts. The cost is relatively high in overseas operation than domestic operation. Financial Outlook : • Expansion in Jamshedpur and Raw material Linkage Tata Steel is expanding capacity by 2. Any major policy change will have an impact in global steel and iron ore industry. The total capex of project is USD 450 mn for developing mining capacity of 7-10 mn tpa. • European steel production witnessed severe decline of 40% for last seven months and according to us Europe will take more to recover. 50 bn capex will be spent in FY11 and the rest in FY12 Tata Steel has taken 35% stake in high value benga coal project. the global steel cycle is currently dependent on China for its fortunes. • Long steel prices have been relatively more volatile than flat steel due to higher sensitivity to construction . The prices have remain low due to lower construction activity.

they would lose their tax leverage . If debt to equity ratio decreases for tata steel . However this doesn’t mean higher current ratio is good. 10 . inventory which again may result in inventory carrying cost. Also. A current ratio of 2:1 is always considered as optimum means that there is a 50 % safety margin in terms of assets to cover its current liabilities.81. Ratio Analyses Current Ratio = Current Assets/Current Liabilities Presently.Tata steel underwent a restructuring by converting bonds worth $870 mn for new convertible bonds. wacc will increase . • The Greenfield projects announced by the company may take more time to commence production than company’s estimate. hence it will change with change in wacc. The company reported one time charge of restructuring . interest cost surged 60%. The company has a liquid cash of 61 bn which could be used to reduce debt Recently . This reduced its overall debt liability and increased the maturity of its existing debt while benefiting investors by giving them an annual coupon . TATA STEEL has a current ratio of 0.• The company is evaluating its debt profile and restricting high cost debt . These factors led to decline in profits. This would reduce interest cost from FY11 onwards . • Tata Steel’s profit declined in FY09 due to huge decline in net realization although its sales volume increased. impairment and disposal. Our valuation is sensitive to wacc . It may signify higher unused cash.

basically after the acquisistion of Corus .jsp 5.capitaline. REFERENCES 1.7. Datamonitor 11 . Thus .com/blog/wpcontent/uploads/2008/06/financia_ratio_analysis_of_jindal_steel_with_tata_steel. Asset Turnover Ratio: Gross Income/Net Operating Assets The Tata Steel Group has a healthy Asset Turnover Ratio of TATA Steel has a D/E =1. For future projections.2 in 2009 and 1.etintelligence. Tatas have decreasing trend till 2006 and it has gone up in the year 2007 shows it has borrowed some money for investments. http://www. the ATO has been taken to be steady throughout at an average value of 2.93 in 2. ISI Emerging Markets 4.sharetradingtips. the Steel Makers are in a position of heavy debt. http://www. Generally very high debt is not preferred by the investors because it signifies the risk and high form of equity has threat of hostile bid and acquisition.Debt/Equity Ratio: As per Appendix 7 attached. A firm has two options when going for expansion one is raising debt and other going for public issue. www.p df 3.


APPENDIX 2 – PROFIT & Loss Statement 13 .






19 .

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