INDIAN INSTITUTE OF MANAGEMENT, CALCUTTA

COMPANY ANALYSIS: TATA STEEL

REPORT
Submitted by

Aashish Jhunjhunwala 0077/55

Anjali Sam 0085/55
Keshav Keshan 0100/55
Tripathi Rohan Sandeep 0142/55
Yogesh Taneja 0149/55

Under the Guidance of

Prof. Sudhir S. Jaiswall
Finance & Control Group
Indian Institute of Management, Calcutta

in partial fulfillment for the course completion

of
Corporate Financial Reporting Analysis

2018-19

1
PART 1- Executive Summary:
Interpretation of each Standalone Financial Statement:
Analysis of Tata Steels's Cash Flow Statement
15000
Cash flow statement:
Despite increases in operating cash flows resulting
10000
from strong markets conditions, the company
5000 observed net cash outflow because of a 3x increase
0 in financing activities caused due to repayment of
short term borrowings. Also, despite decreased
-5000
outflows for purchase of current investments,
-10000 negligible cash inflows from sale of other non-
-15000 current investments has led the net cash flows from
Cash flow from operations Cash flow from investing investments decrease by INR 1,500 crores. Increase
Cash flow from financing in trade payables by INR 4,500 cr has led to
decreases in the net operating working capital
Balance Sheet: generating cash flows to the extent of INR 1,111 Cr.
There has been a substantial increase in the PPE
of Tata Steel in the FY 2016-17 to the extent of Analysis of PPE and Capital WIP
INR 22,000 Cr, majority of it being attributable
to Capital WIP which became ready to use this 80,000.00

year and hence has been classified as PPE. Also, 60,000.00

new additions to PPE is almost equivalent to the
40,000.00
amount of depreciation and hence the net
carrying value has remained the same. The 20,000.00
increases in inventory (~3000 cr) on hand reflect
0.00
the expectancy of an expansionary economy. 2016-2017 2015-2016
(a) Property, plant and equipment
Breakup of total Interest Payment (b) Capital work-in-progress
3500
3000
2500 Income Statement
2000 1848
1500 2689 The increase in revenues of INR 10,600 Cr is the
consequence of increase in domestic demand for
1000
steel coupled with increase in domestic and global
500 1070
steel prices. Also, the finance expenses for the current
0 221
year stands at INR 2,689 Cr. The interest expense
2017 2016
Interest capitalized Interest expensed
related to borrowings attributable to PPE has been
expensed in the current year as compared to its
Common Size Analysis: capitalization into Capital WIP in the previous years.
Income Statement: COGS as a proportion
of revenue has decreased showing signs of Income Statement
higher profitability with Gross Margins
going above 30%. However, at the same 2015-16
time, operating ratio has worsened from 9%
to 11% primarily because of a substantial 2016-17

rise in expenditure on rates and taxes (550 0% 20% 40% 60% 80% 100%
Cr). Depreciation per rupee of revenue has Cost of Goods Sold Operating Expenses
decreased, which is a sign of improvement in Depreciation and Amortization Non Operating Expenses
Asset turnover ratios, since the total assets 2
have largely remained the same.
 Trend Analysis: Trend Analysis of Ratios:
The debt equity ratio hasn’t changed
Income Statement: Revenue has increased by 24% while
much but the composition of debt has with
COGS has increased just by 15%. This has translated into more of long term borrowings in place of
an increase in Gross Profit margin by almost 50%. Despite
short term. Despite increases in Trade
an increase in Operating expenses from the previous year, payables, the current ratio has
EBITDA remains strong and has increased by 78.15%.
strengthened primarily because of huge
Balance Sheet: There was a 618% increase in the current increases in inventory (43%) and trade
borrowings from 2014-15 to 2015-16 due to issue of receivables (77%). This also implied
commercial papers and short-term loans taken from banks marginal improvements in the Quick ratio.
and financial institutions. 45% of these loans were paid off Overall, TATA displays a strong liquidity
in the year 2016-17. position and consolidated solvency
position.
Comparative Ratio Analysis:
4
2.99
3
2.41

2 1.6
1.15
0.87
1 0.59 0.68 0.55 0.43 0.33 0.48 0.39
0.21 0.27
0
0
Total Debt/Equity(x) Current Ratio(x) Quick Ratio(x) Interest Cover(x) Debt Ratio
TATA JSW SAIL

Liquidity and Solvency: TATA does fairly well as compared to its competitors in terms of both liquidity
and solvency. This is due to relatively lower debt reliance and higher income generation of TATA than both
its competitors. Negative EBIT meant an alarmingly low ICR of SAIL (=0) which is probably why they had
to resort to short-term borrowings. Interest coverage of JSW is lower than TATA; higher borrowings mean
higher financial charges for JSW and lower ICR. Current and Quick ratios of Sail are half as that of TATA;
this is because SAIL's short-term borrowings are close to 19% compared to 3% as that of TATA.

20.00
16.28
120 111.45
15.00
100
10.00 7.94 7.86 6.92 82.33
80
5.00 3.36 2.96 59.53
2.15 60 51.34
0.47 0.70 0.46
0.00 37.01
40 26.83
ROE Net Profit Financial Asset 20.7122.24
-5.00 Margin leverage Turnover(x) 20 10.76

-10.00 -6.47 0
-8.81 Receivable days Inventory Days Payable days
-15.00 TATA JSW TATA JSW SAIL

DuPont Analysis: Tata does marginally better than JSW Efficiency Ratios: The increase in
in terms of profitability. However, JSW has higher Receivables days could have been internally
leverage as well as improved efficiency with its stronger induced to create more sales but it is still
asset turnover ratio (0.7 against 0.47 of Tata). All this has healthy. However, improvements in inventory
led to JSW having a much higher Return on Equity of days and payables days has brought the
16.28% against Tata’s 7.94 cash cycle down to -12.4 days.
3
PART 2
TATA STEEL- Company background
Established in Jamshedpur in 1907, Tata Steel, a Company that took shape from the vision of Jamsetji N.
Tata, is today a global business enterprise having products and services in over 150 countries. Being the
world’s second-most geographically diversified steel producer, we operate in 26 countries, have commercial
presence in over 50 countries and have employees spread across five continents. The company has a wide
product portfolio, which includes flat and long steel, tubes, bearings, ferro-alloys, and minerals as well as
cargo handling services.
Nature of operations
Tata Steel has a presence in around 50 countries with
manufacturing operations in 26 countries employing more than
80,000 people. Tata Steel is among the top global steel
companies with an annual crude steel capacity of 27.5 MnTPA.
Tata Steel India has an end-to-end value chain that extends from
mining to finished steel goods, catering to an array of market
segments. The Jamshedpur facility has an annual crude steel
capacity of 10 MnTPA and the Kalinganagar plant has a
capacity of 3 MnTPA.
Lines of business
Tata Steel primarily serves customers in the automotive,
construction, consumer goods, engineering, packaging, lifting and excavating, energy and power,
aerospace, shipbuilding, rail, defence and security sectors. Developing new solutions in the emerging sectors
has provided a big fillip to Tata Steel to expand the scope of businesses. Branded products and retail
solutions segment is targeted to provide an end-to-end customer service and has expanded its base to
provide unique services to its existing & new customers.
Industry Outlook

India was the world’s third-largest steel producer in 2017. The growth in the Indian steel sector has been
driven by domestic availability of raw materials such as iron ore and cost-effective labour. Consequently,
the steel sector has been a major contributor to India’s manufacturing output. India’s finished steel
consumption grew at a CAGR of 5.69 per cent during FY08-FY18 to reach 90.68 MT. India’s crude steel
and finished steel production increased to 102.34 MT and 104.98 MT in 2017-18, respectively. In 2017-
18, the country’s finished steel exports increased 17 per cent year-on-year to 9.62 million tonnes (MT), as
compared to 8.24 MT in 2016-17.

4
Abridged Classified Balance Sheet, Multi-step Income Statement & Direct Method Cash
flows

Assumptions:
Depreciation and
amortization expenses
relating to tangible
assets have been
considered a part of
COGS and the same for
intangible assets a part
of operating expenses.
In cases where this
distribution was not
available, the breakup
has been assumed to be
80% COGS.
Salaries and Wages as
part of Employee benefit
expenses have been
included in the COGS
Other Expenses have
been taken as a part of
COGS. Exceptional items
have been included as
part of non-operating
expenses/incomes.

5
6
Financial Highlights

CASH • Despite increases in operating cash flows resulting from strong markets conditions, the
FLOW company observed net cash outflow because of a threefold increase in financing
STATEMENT activities (repayment of short term borrowings)
• The cash received from accounts receivables is less the actual sales for the period
showing that the increased sales have been induced by allowing for better credit terms.
• The company also had a negative cash inflow from investing activities to the tune of INR
3,172 Cr attributable to purchase of fixed assets. However, at the same time,
depreciation of a similar amount (INR 3,541 Cr) has kept the net value of PPE almost
the same.
• Repayment of borrowings combined with payment of interest and dividend has used up
majority of the positive cash flow from operations.
• The total tax payment is less than the tax expense because of deferment of tax to the
extent of INR 500 Cr.
• Despite decreased outflows for purchase of current investments, negligible cash inflows
from sale of other non-current investments has led the net cash flows from investments
decrease by INR 1,500 crores.
• There has been a decrease in the net operating working capital generating cash flows
to the extent of INR 1,111 Cr. This is primarily driven by an increase in financing by
current financial liabilities.

BALANCE • There has been a substantial increase in the PPE of Tata Steel in the FY 2016-17 to the
SHEET extent of INR 22,000 Cr; majority of it being attributable to Capital WIP which became
ready to use this year and hence has been classified as PPE.
• The increase in total assets is around INR 6,000 Cr; half of which has been financed
through current liabilities primarily trade payables. This further means that the company
is resorting to non-interest borrowings which reduces the financing expenses pressure on
the income statement and consequently improves its bottom line.
• There has been a substantial increase in carrying Inventory with the company reflecting
the expectancy of an expansionary economy. Also, the company has an inflated trade
receivable of INR 2,007 Cr which is in commensurate with the increase in sales.

INCOME • The increase in revenues of INR 10,600 Cr is the consequence of increase in domestic
STATEMENT demand for steel coupled with increase in domestic and global steel prices. The
company was able to meet this increase in demand due to creation of new production
facilities arising out of conversion of Capital WIP to PPE.
• The cost of goods sold stands at INR 38,733 Cr reflecting the increased use of inputs to
meet the increased domestic demand. The company also had a record operating
expense of INR 5,855 Cr majority of being attributable to freight and handling charges.
• Tata Steel is engaged in a capital-intensive industry and consequently has high financing
expenses. The finance expenses for the current year stands at INR 2,689 Cr. The interest
expense related to borrowings attributable to Capital WIP has been expensed in the
current year as compared to its capitalization into Capital WIP in the previous years.
• There has been a substantial increase (INR 4,000 crores) in the income recognized from
the changes in the fair value of investments.

7
Common Size and Horizontal analysis
Income Statement
Common size
• COGS as a proportion of revenue has decreased
showing signs of higher profitability with Gross
Margins going above 30% as compared to
previous year
• However, at the same time, operating ratio has
worsened from 9% to 11% primarily because of
a substantial rise in expenditure on rates and
taxes (Rs 550 cr).
• Depreciation per rupee of revenue has
decreased, which is a sign of improvement in Asset
turnover ratios, since the total assets have largely
remained the same.
• The recognition of capital WIP as PPE has led to
a lot of interest to be expensed which was earlier
capitalized
Horizontal
• Pre-tax Operating cash flows, in other words
EBITDA has increased at a substantial rate of
78.15% YOY signalling healthy growth in the
operations of TATA steel
• A 77% and 137% YOY increase in the operating
income and EBIT respectively of the firm bodes
well for the stakeholders and shareholders
especially
• Increase in the EBT (247%) and a greater increase
in the profit for the year (260%) YOY is an
evidence of strong growth. However, an analysis
of the cash flow statement would be required to
cement this statement.
• An increase in revenue from operations by just
24% but EBIT increase by 137% signals
operating leverage and efficiency and
effectiveness
• The EPS has quadrupled (318% increase)
justifying the above analysis. The firm has utilized
financial and operating leverage effectively.
Balance Sheet
• Despite an increase in non-current assets, their
relative share of total assets has gone down by 4
percentage points because of increase in absolute
value of current assets (primarily inventory and
trade receivables).
• The relative value of shareholder's funds has
remained largely the same. However, the retained
earnings have increased by approximately Rs
3,000 crore
• The total proportion of financial liabilities has
remained the same, but the company has changed
the composition of these liabilities from an almost
equal distribution in payables and borrowings to a
distribution skewed towards payables. This is a sign
of better negotiation abilities with trade payables.
• Total provisions (both current and non-current) have
increased from 2% to 2.4%.
• A detailed look into the other non-current financial
assets reveals advance for repurchase of equity
shares from TTSL from NTT Docomo worth Rs.144cr.
which substantiates the 115% increase in other
financial assets. Also, there has been a substantial
increase in the unsecured and doubtful financial
assets for which allowance has been made.
• There is an increase of 64% in the stock of raw
materials which includes 68.5% increase in raw
materials in transit. Finished & Semi-finished goods
stock has increased by 50% approximately
following the consecutive decrease in WIP
• There was a 618% increase in the current
borrowings from 2014-15 to 2015-16 due to issue
of commercial papers and short-term loans taken
from banks and financial institutions. 45% of these
loans were paid off in the year 2016-17.
8
 KEY ACCOUNTING POLICIES:
In accordance with the notification issued by the MCA, the Company has adopted Ind AS notified under the
Companies (Indian Accounting Standards) Rules, 2015 with effect from April 1, 2016. The financial
statements have been prepared under the historical cost convention with the exception of certain assets and
liabilities that are required to be carried at fair values by Ind AS.

BALANCE SHEET
Intangible Costs incurred on individual development projects are recognised as intangible assets until when the project is
assets complete and available for its intended use.
Debt Interest bearing bank loans, overdrafts and issued debt are initially measured at fair value and are subsequently
measured at amortised cost using the effective interest rate method. Any difference between the proceeds (net of
transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings in
the statement of profit and loss.

Finance As lessee: Finance leases are capitalised at the commencement of lease, at the lower of the fair value of the
Lease property or the present value of the minimum lease payments. The corresponding liability to the lessor is included
in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and
reduction of the lease obligation.

Financial Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual
Assets/ provisions of the instrument. Financial assets and liabilities are initially measured at fair value. Transaction costs that
Liabilities are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or
deducted from the fair value measured on initial recognition of financial asset or financial liability.

Inventory Inventories are stated at the lower of cost and net realisable value. Costs comprise direct materials and direct
labour costs and overheads incurred in bringing the inventories to their present location and condition. NRV is the
price at which the inventories can be realised in the normal course of business after allowing for the cost of conversion
to a finished condition and for the cost of selling.

Statement of Profit and Loss

Non-Operating Dividend is recorded when the right to receive payment is established. Interest income is recognised on time
Income proportion basis taking into account the amount outstanding and the rate applicable.

Depreciation Depreciation or amortisation is provided so as to write off, on a straight line basis, the cost of property, plant
and equipment and other intangible assets, including those held under finance leases to their residual value.
Assets value upto 25,000 are fully depreciated in the year of acquisition.

Govt. Grants Govt. grants related to expenditure on property, plant and equipment are credited to the statement of profit
and loss over the useful lives of qualifying assets.

Impairment At each balance sheet date, the Company reviews the carrying values of its property, plant and equipment
and intangible assets. An impairment loss is recognised in the Statement of Profit and Loss if the carrying
amount of a Fixed asset exceeds its recoverable amount. An impairment loss recognised on asset is reversed
when the conditions warranting impairment provision no longer exists

9
Ratio Analysis – TATA Steel
6
5.31 • The debt equity ratio hasn’t changed much
5 but the composition of debt has with more
of long term borrowings in place of short
4 term
2.99 • Despite increases in Trade payables, the
3 current ratio has strengthened primarily
1.84 because of huge increases in inventory
2
(43%) and trade receivables (77%). This
1 0.59 0.59
0.87 0.72 0.72 also implied marginal improvements in the
0.41 0.43 0.38
0.24 Quick ratio.
0 • Overall, TATA displays a strong liquidity
Total Debt/Equity(x) Current Ratio(x) Quick Ratio(x) Interest Cover(x)
position and consolidated solvency position.
Mar 2017 Mar 2016 Mar 2015

Fig 1: Financial Stability Ratios

100 The increase in Receivables

82.33 80.84
80 64.88
69.53 days could have been
59.53
60
55.05 internally induced to create
more sales but it is still healthy.
40
However, improvements in
20 10.76 6.94
4.95 inventory days and payables
2.29
0 days has brought the cash
Cash Cycle Receivable days Inventory Days Payable days
-20 -12.04
cycle down to -12.4 days. This
-20.84 suggests better management
-40
of operations in 2017.
Mar 2017 Mar 2016 Mar 2015

Fig 2: Efficiency Ratios

90 800
81.3 Even though the dividend
80 684.62
700 pay-out has reduced, the
70 66.3 absolute amount of
600
dividends paid has
510.44
60 472.65 increased (from ₹8 to ₹10).
500
50 Since a healthy portion of
400 earnings have been given
40 35.47
out as dividend in the last
300
30
28.2 two years, the Book
200 value/share has come
20 down. Better profitability
12.07
9.84
10 100 and increased revenue from
operations has increased
0 0 the Net income accruing to
Earnings Per Share (Rs) Dividend Pay Out Ratio(%) Book NAV/Share(Rs)
the equity shareholders
Mar 2017 Mar 2016 Mar 2015 Mar 2017 Mar 2016 Mar 2015

Fig 3: Operational & Financial Ratios

10
Comparative Analysis
3.5
2.99
3
2.41
2.5
2 1.6
1.5 1.15
0.87
1 0.59 0.68 0.55 0.43 0.48
0.33 0.27 0.39
0.5 0.21
0
0
Total Debt/Equity(x) Current Ratio(x) Quick Ratio(x) Interest Cover(x) Debt Ratio
TATA JSW SAIL

Fig 1: Financial Stability Ratios

• Debt/Equity of JSW is high which indicates presence of huge amounts of long term borrowings (35%) compared
to its peers (20%).
• Current and Quick ratios of Sail are half as that of TATA; this is because SAIL's short-term borrowings are close to
3% compared to 19% as that of TATA.
• Negative EBIT meant an alarmingly low ICR of SAIL (=0) which is probably why they had to take short-term
borrowings. Interest coverage of JSW is lower than TATA; higher borrowings mean higher financial charges for
JSW and lower ICR.
• Debt ratio of JSW is high; this means a lot of assets are financed through debt. This is due to higher degree of
financial leverage due to higher borrowings in case of JSW (35%).
• TATA does fairly well as compared to its competitors in terms of both liquidity and solvency. This is due to relatively
lower debt reliance and higher income generation of TATA than both its competitors.

120 111.45 150 133.69

100 96.68
82.33
100
80 70.29 72.05
59.53
60 51.34 45.22
37.01 50
40 26.83
20.71 22.24
20 10.76
0
0 Cash Cycle Operating Cycle
-12.04
Receivable days Inventory Days Payable days
-50
TATA JSW SAIL TATA JSW SAIL

Fig 2: Efficiency Ratios

• TATA takes half the time to convert its receivables into cash as compared to its peers. This highlights a stronger
bargaining power with its buyers
• SAIL has the lowest inventory turnover and takes almost double the time to convert its inventory to sales as compared
to its peers
• JSW has the lowest payable days which highlights weaker bargaining power with its suppliers compared to TATA
which does substantially better
• A negative cash conversion cycle for TATA highlights its superior market strength as compared to its competitors,
despite its comparable operating cycle with JSW

11
20.00 16.28
14.72 Higher degree of financial
15.00 leverage for JSW led its
10.11
10.00 7.94 comparable ROA to be
4.65
5.00 3.18 translated into a much
0.00 0.00 higher ROE than TATA.
0.00
Also, we observe better
-5.00 ROA (%) ROE (%) ROCE (%)
asset utilization by JSW
-10.00 which leads to higher ROA,
-8.81
-15.00 although profitability ratios
are similar
TATA JSW SAIL

Fig 3: Performance Ratios

Improved Gross margins 40.00 35.47

and lower financial charges 35.00
for TATA together meant 28.20
30.00
higher earnings than JSW, 25.00
whereas poor margins for 20.00
14.90 15.10
SAIL led to a negative EPS. 15.00
Higher dividend pay-out 10.00
ratio for TATA as compared 5.00
to JSW implies a lower re- 0.00
0.00
investment, that might be Earnings Per Share (Rs) Dividend Pay Out Ratio(%)
-5.00
induced by huge amounts of
accumulated profits in its -10.00 -6.86

balance sheet TATA JSW SAIL

Fig 4: Financial Ratios

20.00
16.28
15.00

10.00 7.94 7.86 6.92

5.00 3.36 2.96

2.15
0.47 0.70 0.46
0.00
ROE Net Profit Margin Financial leverage Asset Turnover(x)
-5.00

-10.00 -6.47
-8.81
-15.00
TATA JSW SAIL

Fig 5: DuPont analysis

Tata does marginally better than JSW in terms of profitability. However, JSW has higher
leverage as well as improved efficiency with its stronger asset turnover ratio (0.7 against
0.47 of Tata). All this has led to JSW having a much higher Return on Equity of 16.28%
against Tata’s 7.94

12
Financial Performance and Position
Tata Steel’s domestic operations sales volume registered healthy volume growth at 10.97 MT, up by 15% YoY. Tata
Steel’s domestic sales volume growth for FY17 at 15% is notably higher than domestic steel consumption growth of
3.0%, reflecting an increase in Tata Steel’s market share in the domestic market. The company has access to captive
raw materials at its Jamshedpur plant which enables it to realise superior EBITDA margins compared to its domestic
peers. Furthermore, the phased commissioning of facilities is ongoing at Kalinganagar (TSK). As per the management,
over the long-term horizon, plant’s productivity as well as profitability would be higher given the lower conversion cost
(compared to Jamshedpur) as well as a decline in start-up cost post production stability. The performance of ferro alloys
& minerals division registered sharp improvement on the back of improved market conditions. Significantly higher EBITDA
in the year was supported by higher sales realisations, improved deliveries, deferred income release on higher
exports and lower employee cost on changes in actuarial assumptions. This was partly offset by cost changes impacted
by higher coal prices. Operating cash flow before working capital changes more than doubled from FY16 to FY17. The
working capital increased on account of higher raw material prices and ramp up at TSK.

Source: Google

Also, the world remains bullish on India steel, as definitive anti-dumping duty for next 4 years will benefit large domestic
steel mills, providing floor price to domestic steel players. Further, capacity utilization of domestic steel industry is poised
to hit 90% in the next 3 years, as no new major capacity is coming up. Confluence of anti-dumping regime and supply
shortage will firm up steel pricing over the next 3 years. Double digit expected growth in sales coupled with increasing
output prices, stable input prices, growing plant capacity and capacity utilisation, steady cash flows, controlled expenses
(implementation of Zero Based Budgeting) and sustainable leverage ensures that Tata Steel is strongly placed in the
domestic steel market.

13