Domain Corporate Strategy

Name of the Case: Models of capital investment for Tata Steel

Sponsor:

Introduction

Itishree (Chief Corporate Strategy, Tata Steel) watched and listened as her team
discussed the organization’s long-term strategy. One of the top priorities for her
organization in the horizon was deleveraging - debt had to be reduced significantly in the
next few years.

Itishree reflected on how for a capex- heavy industry with a myriad of regulatory issues,
planting seeds for the future now was so important. Her 25 years’ experience in the steel
sector had taught her how not making the right moves early could have cascaded
implications greater than anticipated!

With the team busy brainstorming and deliberating at the oval table of their conference
room, Itishree suggested to her team of experts to look at different models of capital
investment for Tata Steel in case the Joint Venture turned to be successful. In a months’
time, they must present their outcome to Tata Steel’s leadership team during their annual
Strategy meet that is anchored by her department.

Background

Established in 1907, Tata Steel Group today is the one of the world’s most geographically
diversified steel producers and is recognized as the hallmark for corporate citizenship and
business ethics. Tata Steel operates with a completely integrated value chain that extends
from mining to finished steel 2products. With a relentless focus on innovation and cutting-
edge technologies, it is building a sustainable business enterprise.

Tata Steel’s aspiration is to become the “most respected and valuable steel company
globally” by 2030. In order to make the aspiration a reality, the organization has set out its
agenda of increasing steel-making capacity in India along with focus on strengthening its
cost leadership position, protecting revenues from steel cyclicality and ambition to lead in
safety, health, environment and social responsibility. This would be enabled by strong
people practices, leadership in technology, building digital capability and a future-ready
culture embodying agility & innovation. However, the Company has a large debt portfolio
and has been focused on deleveraging through internal cash generation and monetization
of non-core assets. It has consciously diversified its sources of capital to tap alternative
pools and exploit financing opportunities.

Problem Statement/Challenges Faced

Due to inherent challenges of the steel industry (long lead time of project execution,
regulatory issues etc), most steel companies need to make long-term investments early –
that which involves a large amount of capital invested in fixed assets such as infrastructure,
machinery, or equipment for steel-making.
Due to the significant amount of cash outflows required, it necessitates the business to
perform a capital investment analysis to evaluate the profitability of the investment and
determine whether it is worthy. This is especially important when the business is presented
with multiple potential opportunities and needs to make an investment decision.
There are multiple choices for deploying capital. Tata Steel could invest in growth by
increasing its steel-making capacity - this will help create and exploit growth opportunities
of the fast-growing Indian market and protect our market position. It could invest in
research and development which can lead to patents and new technologies that open up
future opportunities for differentiation or new business models. Further, it could invest in
specific low carbon technologies and business models that have potential. There is also
an opportunity to invest in new businesses in adjacencies.

Each of these investment options have fundamentally different risk and return profiles. In
some cases like investment in steel capacity, the business is known, returns are also
predictable and the capital outlay has predictability. Some like investments in technology
have higher risk, but also possibility of larger payoffs. Investments in other businesses has
uncertainties due to less familiarity with the space, but potentially providing derisking /
smoothening the revenue / margin curve from the cyclical nature of the steel industry.

Critical Case Questions

Our ask to you is to help Itishree’s team prepare the concept document to be presented in
their upcoming annual Strategy meet titled ‘Models of capital investment for Tata Steel’.
As guided by Itishree, the team could structure their thoughts along the below-mentioned
sample approaches.

a) How should TSL view its investment priorities?

b) What should be the capital allocation model (how to make the decision on choice
of investment avenue) based on the options and nature of investments described
above?
c) What would be the investment profile of TSL going forward? (refer to TSL
Integrated Reports for information on financials and business strategy).