Summer Project Report

On

FUNDAMENTAL ANALYSIS OF IRON AND STEEL

INDUSTRY AND TATA STEEL
At

Table of content
S.NO

Pg No.
DECLARATION
CERTIFICATE OF GUIDE
ACKNOWLEDGEMENT
EXECUTIVE SUMMARY
INTRODUCTION
REVIEW OF LITERATURE
RESEARCH METHODOLOGY
ANALYSIS OF RESULTS
PART #1: Economy Analysis
PART #2: Analysis of Iron and Steel industry
PART #3: ANALYSIS OF TATA STEEL
PART #4: DETAILED ANALYSIS OF
ANNUAL REPORT
FINDINGS AND RECOMMENDATIONS
CONCLUSION
REFERENCES

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THE 39
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ACKNOWLEDGEMENT

I am also utmost grateful to my Project Guide Mr. Tarun Pathak, Sales Manager,
Indiabulls and Mr. Rajiv Sabarwal , for their able guidance and encouragement, and
above all for assigning this project to me thereby allowing me to explore into the steel
industry in India.
My sincere thanks to all the employees of Indiabulls who have very kindly spared their
valuable time in attending to my queries with genuine interest and making me feel as a
part of their Indiabulls family. Their periodic inputs and informal discussions have
enabled me get a better perspective on my progress and methodology. I hope all that I
have learnt from my project will help me in my future growth as well.
I am highly obliged to all other persons in the organization, who have helped me to
complete my summer internship project successfully.

EXECUTIVE SUMMARY

Indiabulls serves the financial needs of more than 4, 50,000 customers with its wide
range of financial services and products which are the following: Stock Broking Services (Retail Investor Services, HNI Services & Institutional
Broking including securities, derivatives, commodities trading and depository
services)
Research & Advisory services (Equity Research, Portfolio Advisory, Wealth
Management)
Consumer Finance (consumer secured & unsecured credit)
Mortgages (loan against shares, mortgage & housing finance)
Real Estate Business (started in 2005)
Distribution Services (Distribution of Mutual Funds, IPO, Insurance and other
fixed income securities)
With around 4000 Relationship Managers, Indiabulls helps its clients to satisfy their
customized

financial

goals.

Some of the large shareholders of Indiabulls are the largest financial institutions of the
world such as Fidelity Funds, Goldman Sachs, Merrill Lynch, Morgan Stanley and
Farallon

Capital.

Indiabulls became the first company to bring FDI in Indian Real Estate through a JV
with Farallon Capital Management LLC, a respected US based investment firm.
Indiabulls has demonstrated deep understanding and commitment to Indian Real Estate
market by winning competitive bids for landmark properties in Mumbai and Delhi.
Indiabulls is a market leader in securities brokerage industry, with more than 31% share
in online trading. Indiabulls entered in a 50/50 joint venture with DLF, Kenneth Builders
& Developers (KBD). Indiabulls has received an in principle approval from
Government of India for development of multi product SEZ in the state of Maharashtra.

The existing players in the market are Motilal Oswal, Sharekhan, Religare, Reliance
Money, etc which offer almost similar services as Indiabulls but there is definitely some
product differentiation. With such a huge amount of competition it is very essential to
remain competitive by each and every way possible.
The project was undertaken at the Connaught Place, brokerage office.
The methodology adopted was:

Collecting data about various aspects of fundamental analysis, about the

economy, the industry and the company.

Understanding the various data collected and some aspects of stock market
and share price movements.
Analyzing the industry financials, the company annual report and financial
statements in order to draw conclusions and give recommendations regarding
the working of the company.
Identifying the key factors that should be kept in mind while analysis of all
the above mentioned things such as ratios, M& A, etc.
The company projections were carried out on the following basis:1. Recent company annual report Chairmans statement and MD & A
2. Understanding companies, product, services, business segments,
exports
3. Recent Quarterly growth rate
4. Analysis of growth rate of last 8 quarters
5. Press release and news items for capturing any stark deviation in
quarterly performance YoY or across industry value chain.

INTRODUCTION
Introduction about the company
Indiabulls has emerged as Indias leading Financial Services and Real Estate Company
having over 640 branches all over India, in less than two year, since its initial public
offering in September 2004. Indiabulls serves the financial needs of more than 4, 50,000
customers with its wide range of financial services and products which are the
following: Stock Broking Services (Retail Investor Services, HNI Services & Institutional
Broking including securities, derivatives, commodities trading and depository
services)
Research & Advisory services (Equity Research, Portfolio Advisory, Wealth
Management)
Consumer Finance (consumer secured & unsecured credit)
Mortgages (loan against shares, mortgage & housing finance)
Real Estate Business (started in 2005)
Distribution Services (Distribution of Mutual Funds, IPO, Insurance and other
fixed income securities)
With around 4000 Relationship Managers, Indiabulls helps its clients to satisfy their
customized

financial

goals.

Indiabulls Financial Services Ltd is listed on the National Stock Exchange, Bombay
Stock Exchange and Luxembourg Stock Exchange. The market capitalization of
Indiabulls is around USD 2,350 million (25th April 2007). Consolidated net worth of the
group is around USD 510 million (31st March 2007). Indiabulls and its group companies
have attracted USD 500 million of equity capital in Foreign Direct Investment (FDI)

since March 2000. Some of the large shareholders of Indiabulls are the largest financial
institutions of the world such as Fidelity Funds, Goldman Sachs, Merrill Lynch, Morgan
Stanley and Farallon Capital.
Business of the company has grown in leaps and bounds since its inception. Revenue of
the company grew at a CAGR of 159% from FY03 to FY07. During the same period,
profits of the company grew at a CAGR of 184%.
Indiabulls became the first company to bring FDI in Indian Real Estate through a JV
with Farallon Capital Management LLC, a respected US based investment firm.
Indiabulls has demonstrated deep understanding and commitment to Indian Real Estate
market by winning competitive bids for landmark properties in Mumbai and Delhi.
Indiabulls is a market leader in securities brokerage industry, with more than 31% share
in online trading. Indiabulls entered in a 50/50 joint venture with DLF, Kenneth Builders
& Developers (KBD). Indiabulls has received an in principle approval from
Government of India for development of multi product SEZ in the state of Maharashtra.
Introduction to the project
The project undertaken at Indiabulls is aimed at studying the investment opportunities
from the point of view of retail and small investors, financial institutions and private
equity firms. For this purpose a Fundamental Analysis of Iron and Steel Industry as well
Tata Steel is carried out.
This involves studying the data regarding the Economy, Industry and the Tata Steel. This
involves analyzing the Annual Report of the company, key ratios and financials of the
industry and news reports published in news papers.
The ultimate aim of the project is to emphasize the importance of Fundamental Analysis
before investing in a company for the long run. It highlights that it is very crucial and

beneficial for a long term investor to analyze the financial statements, the state of the
economy and industry before investing in a company.

Significance of Fundamental Analysis

Santayana once said, "Those who do not remember the past are condemned to return to
it." Benjamin Graham added to this by saying, "To invest intelligently in securities one
should be forearmed with an adequate knowledge of how the various types of stocks
have behaved under varying conditions - some of which one is likely to meet again in
one's experience." This report attempts to provide the above mentioned insights. The
required knowledge enabling an investor to invest in the stock market is provided by the
Fundamental Analysis.
It emphasizes the factors that one should look at before he/ she buys any shares or
invests in a company. The art of successful investment lies in the choice of those
industries that are most likely to grow in the future and then in identifying the most
promising companies in these industries.
It also stresses that people should be discouraged from acting on rumors or on tips and
encouraged to go by hard facts. Analysis and information give one the basis for a logical
decision.

Objectives
The main objectives of the report are:
To emphasize the importance of accessing the world of information and
analysis and to show how one can arrive at an Investment decision
To understand the economy and the iron and steel industry in which the
company operates and find out the factors against or conducive to company
growth and functioning.
To understand the financial statements of tata steel, the industry and the
various news pieces about the economy and the company.
Conducting a detailed analysis of the annual report, key ratios, draw
conclusions and tell the findings
Above all the report enables to understand the importance that Fundamental
analysis has for an investor.

REVIEW OF LITERATURE

Capital Market
The Indian capital market is vibrant and alive. Its growth in the last two decades has
been phenomenal. In 1983, the market capitalization of the shares quoted in the Bombay
Stock exchange amounted to a mere $7 billion. It grew to $65 billion in 1992, to $220
billion by April 2000 and it is, at the end of 2003, estimated at $432 billion. India ranks
7th in price index and 4th in total return index.
The ride has been tumultuous. The interest and growth of the market began with the
FERA dilution i.e. when foreign companies diluted their interest. The interest grew with
speculators and others entering the arena. The reforms following the liberalization and
the entering into this market of Foreign Institutional Investors and Mutual Funds coupled
with scams and downturns forced the individual investor out of the market. The bursting
of the dotcom bubble and the Ketan Parekh scam punctuated the average investors' fears
In terms of investors the largest investor segment is Financial Institutions and Mutual
Funds. Foreign Institutional Investors (FIIs) and Non Resident Indians have a significant
presence. They account today for a significant amount of the investments made in the
market. In the end of July 2005 foreign institution investors by investing a little over half
a billion dollars raised the stock index by nearly 300 points.
Fundamental Analysis

10

Fundamental analysis is not for speculators. It is for those who are prepared to study and
analyze a company; for those who arrive at a decision after careful thought and
deliberation. Fundamental analysis is for the rational man.
To select the most promising shares the investor faces obstacles. The first is in the
assessment- the Human fallibility factor. The second is from the nature of the
competition. The third is from sheer perversity - the failure of the market to be logical.
The investor may be wrong in his estimate of the future or even if he is right the current
price may already reflect what he is anticipating. The point I am trying to stress that in
the end, the manner the prices of shares moved depend on a host of factors. Yet the basic
issue remains. The share must have value. Its fundamentals must be good. Its
management must be competent.
Fundamental analysis has three components:
The Economy
The Industry
The Company

Economy
A wise man once said, "No man is an island". No person can work and live in isolation.
External forces are constantly influencing an individual's actions and affecting him.
Similarly, no industry or company can exist in isolation. It may have splendid managers
and a tremendous product. However, its sales and its costs are affected by factors, some
of which are beyond its control - the world economy, price inflation, taxes and a host of
others. It is important, therefore, to have an appreciation of the politico economic factors
that affect an industry and a company. It can be analyzed under following heads:
The Political Equation
Restrictive Practices
Foreign Debt and Balance of Trade
Inflation
Interest Rates

11

 Government Policy
Infrastructure
Industry Analysis
The importance of industry analysis is now dawning on the Indian investor as never
before. Previously, investors purchased shares of companies without concerning
themselves about the industry it operated in. And they could get away with it three
decades ago. This was because India was a sellers' market at that time and products
produced were certain to be sold, often at a premium. Those happy days are over. Now,
there is intense competition. Consumers have now become quality, cost and fashion
conscious. Foreign goods are easily available and Indian goods have to compete with
these. There are great technological advances and "state of the art" equipment becomes
obsolete in a few years, if not months.
Industry Analysis comprises of analyzing the financial statements of various companies
in the industry, the trends of share price movements, comparison of each company with
the industry figures.
Steel industry
India has a long heritage of iron and steel making. The journey started in ancient times
and through the ages this evolved and matured into a vibrant and modern industry at par
with the best in the world. The commissioning of Tata Iron & Steel Company's
production unit at Jamshedpur, Bihar in 1911-12 heralded the beginning of modern steel
industry in India. At the time of independence in 1947 India's steel production was only
1.25 MT.
The steel sector has been one of the primary vehicles of economic development in
independent India. India is endowed with essential raw materials such as iron ore and
coal. The industry has widespread forward and backward linkages with the rest of the
economy. The founding fathers of Indias five-year plans treated this as a priority sector
and the industry rose to commanding heights of economy through large-scale capacity
12

creation in public sector. Since then it has passed through various phases of changing
domestic and external policy environment. The industry as a whole has responded to the
emerging compulsions of the changing times. The change came in the last decade of
20th century with liberalization of India iron and steel industry. Indian steel sector saw
the largest additions to capacity during this time.

The company- TATA STEEL

The Annual Report
The primary and most important source of information about a company is its Annual
Report. By law, this is prepared every year and distributed to the shareholders. Annual
Reports are usually very well presented. A tremendous amount of data is given about the
performance of a company over a period of time. The average shareholder looks no
further. If an Annual Report is impressive, if the company has made a profit and if a
reasonable dividend has been paid, he is typically content in the belief that the company
is in good hands. This must not be the criterion by which to judge a company. The
intelligent investor must read the annual report in depth; he must read between and
beyond the lines; he must peep behind the figures and find the truth and only then should
he decide whether the company is doing well or not. The Annual Report is broken down
into the following specific parts:
A. The Director's Report,
B. The Auditor's Report,
C. The Financial Statements, and
D. The Schedules and Notes to the Accounts.

13

RESEARCH METHODOLOGY
Methodology Adopted
The entire project had been divided into a period of eight weeks in which the following
activities had been planned:
Collecting data about various aspects of fundamental analysis, about the
economy, the industry and the company from Indiabulls database, Tata Steel
website, books, capitaline, internet, newspapers and stock market.
Understanding the various data collected and some aspects of stock market
and share price movements with the help of the sales managers, relationship
managers and technical staff at indiabulls.
Analyzing the industry financials, the company annual report and financial
statements in order to draw conclusions and give recommendations regarding
the working of the company.
The company projections were carried out on the following basis:1. Recent company annual report Chairmans statement and MD & A
2. Understanding companies, product, services, business segments,
exports
3. Recent Quarterly growth rate
4. Analysis of growth rate of last 8 quarters
5. Press release and news items for capturing any stark deviation in
quarterly performance YoY or across industry value chain
6. Understanding Industry and economic trends
14

a. Demand
b. Supply prices
c. Technology
d. Regulation
e. M&A
7. Recent strategies and initiatives in terms of:
a. Product launches
b. Capacity addition
8. Making revenue projection for quarters for segments
9. Validating with aggregate figures of industry and other companies in
the same sector for comparison
Identifying the key factors that should be kept in mind while analysis of all
the above mentioned things such as ratios, M& A, etc.

15

ANALYSIS OF RESULTS
The project has been divided into 4 parts:
Economy Analysis
Industry Analysis
Company Analysis
Annual Report Analysis

16

PART #1: ECONOMY ANALYSIS

The Economy can be analyzed under the following headings:
The political equation
A stable political environment is necessary for steady, balanced growth. If a country is
ruled by a stable government which takes decisions for the long-term development of the
country, industry and companies will prosper. On the other hand, instability causes
insecurity, especially if there is the possibility of a government being ousted and
replaced by another that holds diametrically different political and economic beliefs.
India has gone through a fairly difficult period. There had been terrible political
instability after the ouster of Mr. Narasimha Rao from the Prime Minister ship. There
has also been much grand standing such as the Mandal recommendations in order to
capture votes. These led to riots. There were other religious and ethnic issues that also
led to violence such as the Babri Masjid/Ram Janmabhoomi issue. All these shook the
confidence of the developed world in the security and stability of India. Tourism fell.
Foreign Direct Investment fell. Investments were held back. These had an adverse
impact on the development of the economy. In recent times this scenario has changed.
The Government, even though a coalition has been stable. Its policies have been positive

17

and the economy has been doing well. There are predictions that by 2050, India would
be one of the three most powerful nations in the world. This has led to renewed interest
in India and investors are back.
The other gnawing political issue that has been a thorn in India's back is the Pakistan
issue. The deterioration in our relationship culminated in 1999 in the war in Kargil.
Earlier we have fought several wars on Kashmir and other issues. In 2005 there has been
an improvement in the relationship. Wars push up inflation and demand declines. It is
estimated that the Gulf War cost India $1.5 billion on account of higher prices of
petroleum products, opportunity costs and fall in exports. The defence budget is
enormous. This money could have been spent elsewhere for the development of the
country. Other examples include Sri Lanka, East Europe and other troubled countries.
These countries were once thriving. No longer are they the same.
In conclusion, the political stability of a country is of paramount importance. No
industry or company can grow and prosper in the midst of political turmoil.
Restrictive Practices
Restrictive practices or cartels imposed by countries can affect companies and industries.
India has a number of restrictions on what may be imported and at what rate of duty. To
an extent this determines the prices at which goods can be sold. If the domestic industry
is to be supported, the duties levied may be increased resulting in imports becoming
unattractive. During the last two years Indian customs duties have been reduced
drastically. Imports are consequently much cheaper and this has affected several
industries.
On May 03 2007 Finance Minister P Chidambaram announced reduction in the export
duty on iron ore fines with less than 62 per cent Fe (iron) content to Rs 50 per tonne
from Rs 300. However, export duty on iron ore fines with Fe content of more than 62 per
cent and lumps would remain unchanged at Rs 300 per tonne. The steel industry was
unhappy with this decision and said the partial roll back of export duty on iron ore fines

18

would hit domestic steel utilities and could affect expansion plans. They had been
demanding that export duty be doubled to discourage export of iron ore, which is needed
to fructify the massive capacity expansions announced by the major steel utilities.
According to latest estimates we have about six billion tonnes of mineable iron ore
reserve in the country and if the present level of exports continued unabated then we
would be exhausting our ores by 2030 and forced to import.
When viewing a company, it is important to see how sensitive it is to governmental
policies and restrictive practices.

Foreign Debt and the Balance of Trade

Foreign debt, especially if it is very large, can be a tremendous burden on an economy.
India pays around $ 5 billion a year in principal repayments and interest payments. This
is no small sum. This has been the price the country has had to pay due to our imports
being far in excess of exports and an adverse balance of payments. At the time the
country did borrow, it had no alternative. In 1991, at the time of devaluation, India had
only enough foreign exchange to finance the imports of few weeks. It is to reverse this
that the government did borrow from the World Bank and devalue the currency.
Exports
Cumulative exports during April-January 2007, recorded a growth of 20.2 per cent
compared to 27.9 per cent a year ago. However, on a monthly basis, exports showed a
slow down in December 2006 and January 2007 (Chart 1).

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Imports
The cumulative imports during April-January 2007 posted a growth of 27.3 per cent
(34.8 per cent a year ago)

.
Trade Deficit
The trade deficit which remained in tandem with the levels of last year, widened from
September 2006. In January 2007, it widened to US $ 5.8 billion due to the slackening in
exports. During April-January 2006-07 trade deficits touched a record US $ 50.5 billion,
an increase of US $ 15.4 billion over the previous year. The trade deficit on the oil
account increased by US $ 6.0 billion during April-November 2006, while the non-oil
trade deficit increased by US $ 3.0 billion.
A permanent solution will result only when the inflow of foreign currency exceeds the
outflow and it is on account of this that tourism, exports and exchange earning/saving
industries are encouraged.
Inflation
Inflation has an enormous effect in the economy. Within the country it erodes
purchasing power. As a consequence, demand falls. If the rate of inflation in the country
from which a company imports is high then the cost of production in that country will
automatically go up. This might reduce the cost competitiveness of the product finally
manufactured. Conversely, if the rate of inflation in the country to which one exports is
high, the products become more attractive resulting in increased sales.

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A significant feature of recent domestic developments is the firming up of inflation

through the year. Currently hovering above 6 per cent, inflation, in terms of the
wholesale price index, is ruling above indicative projections and represents a key
concern in the evolving macroeconomic outlook. In terms of consumer prices, inflation
is even higher in the range of 7-8 per cent. Primary articles, unlike in recent years, have
contributed significantly to WPI during 2005-06. Accounting for a third of headline
inflation, they can be interpreted to originate from supply side pressures. At the same
time, prices of manufactured products account for over half of current headline inflation.
Domestic prices are firming up in sympathy with international prices. Metal prices have
risen by 53.6 per cent in 2006. Low stock levels and continuing demand has kept most
metal prices high and elevated levels are likely to persist in the near term. In conjunction
with emerging strains on capacity, elevated asset prices and the surging demand for bank
credit, the rising prices of manufactures constitute the demand pressures on inflation.
The silver lining to the cloud is the improvement in public finances and the decline in
international crude prices, and consequently in domestic prices of petroleum products.
Excluding the beneficial effect of this softening of fuel prices, it results in inflation
exceeding the headline in terms of wholesale prices.
Indias interface with the global economy has been another distinguishing feature of
macroeconomic developments. The strength and resilience reflected in Indias balance of
payments has to be assessed in the context of global economic and financial
developments. Global real GDP growth on a purchasing power parity basis is expected
to have accelerated to above 5 per cent in 2006 but with a shift away from the US and
towards Europe, Japan and the emerging world, all of which have distinctive features.
Global financial markets have been reasonably stable while re-pricing risks. Short-term
interest rates have firmed up since October, but long-term bond yields have fallen,
translating into a steeper inversion of the yield curve. Foreign exchange markets have
been recording lower levels of volatility in recent weeks than before. Global equity
markets have posted steady gains.

21

Low inflation within a country indicates stability and domestic companies and industries
prosper at such times. Thus, it is very essential to keep inflation under control.
Interest Rates
A low interest rate stimulates investment and industry. Conversely, high interest rates
result in higher cost of production and lower consumption. When the cost of money is
high, a company's competitiveness decreases. In India, the government, through the
Reserve Bank, has been successful in lowering interest rates. Increasing competition
among banks has also helped. Yield on the 10-year gilt expected to end the fiscal 200607 is in the band of 7.8-8 per cent.
As the markets had already factored in a rate hike by the Central bank, a relief rally
followed after the announcement of reverse-repo rate being left unchanged. The yield on
the benchmark 8.07 per cent government security fell from 7.9 per cent, a level it had
acquired in anticipation of the policy, to its short-term equilibrium of 7.3 per cent. The
hike in the repo rate - the benchmark lending rate in the economy, signals an upward
bias towards other lending rates. Monetary tightening, together with increased
provisioning requirement, would keep the liquidity situation tight. Going forward, we
see yield on the 10-year G-sec to lie in the range of 7.8-8.0 per cent by the end of the
fiscal year. Reverse repo rate kept unchanged at 6 per cent. Bank rate kept unchanged at
6 per cent, cash reserve ratio kept unchanged at 5.5 per cent
Government Policy
Government policy has a direct impact on the economy. A government that is perceived
to be pro-industry will attract investment. The liberalization policies of the Narsimha
Rao government excited the developed world and foreign companies grew keen to invest
in India and increase their existing stakes in their Indian ventures. The initiative of the
former BJP government in improving the infrastructure grabbed the attention of foreign

22

investors. The present government continues to focus on infrastructure as it is realized

progress at a decent rate would not be possible without infrastructure.
The Infrastructure
The development of an economy is dependent on its infrastructure. Industry needs
electricity to manufacture and roads to transport goods. Bad infrastructure leads to
inefficiencies, poor productivity, wastage and delays. This is possibly the reason why the
1993 budget laid so much emphasis, and offered so many benefits, to infrastructural
industries, such as power and transportation. In recent years there has been greater
emphasis. Flyovers have been built, national highways are being widened and made
better and the improvements made in communications are awesome.
To encourage foreign funds flow into the infrastructure sector, the Financing Ministry
has allowed Foreign Institutional Investors (FIIs) also to invest in unlisted companies. In
a bid to make the core sector attractive for FDI, the Cabinet Committee on Foreign
Investment (CCFI) has modified the 49 percent cap on foreign equity in the
infrastructure sector to render fund mobilization easier. This major policy decision
which will indirectly raise the foreign equity investment in infrastructure sector to well
over 51 per cent it a domestic partner fails to meet his commitment from internal
sources, including borrowing, should help the large industrial houses. The importance of
infrastructure sector also follows from the fact that foreign investors are now looking at
infrastructural development as a yardstick for directing their investments. In fact
infrastructural development had taken precedence over wage levels in assessing the
investment potential in developing countries. In India infrastructure sector itself is
becoming an attractive investment area for FDIs.

23

PART #2: ANALYSIS OF IRON AND STEEL INDUSTRY

Steel Industry
The steel sector has been one of the primary vehicles of economic development in
independent India. India is endowed with essential raw materials such as iron ore and
coal. The industry has widespread forward and backward linkages with the rest of the
economy.
The performance of the Indian steel industry during the last decade, though spectacular,
has not been altogether smooth. The euphoric developments in the few deregulation
years were cut short. The external global environment worsened progressively under
pressure from a series of financial meltdowns in various parts of the world while our
domestic economy also stagnated. Prices started falling continuously as world steel
industry strained under conditions of extreme over supply and cut throat competition.
The domestic market also dwindled on back of slow growth in construction and other
forms capital formation.

24

Government Policy
Stable currency
Easing of regulations
Strong Banking & judicial system
Encouraging trade relations with ASEAN and other countries
Infrastructure building
Exploring new Energy resources
National Steel Policy, 2005
November 2005 saw the release of National Steel Policy the first Vision document for
the Indian Iron and Steel Industry. The policy aims at making the domestic steel industry
globally competitive in terms of cost, quality and product mix and also aims at hiking
steel production to 78 MT by 2011-12 and 110 MT by 2019-20. The policy suggests
adoption of a multi-pronged strategy to move towards the long-term goal. On the
demand side, the strategy would be to create an incremental demand through
promotional efforts, creation of awareness and strengthening the delivery chain,
particularly in the rural areas. Simultaneously, on the supply side, the strategy would be
to facilitate creation of additional capacity, remove procedural and policy bottlenecks in
the availability of inputs such as iron ore and coal, make higher investments in research
and development and human resource development and encourage the creation of
infrastructure such as roads, railways and ports, the policy paper states. The long-term
goal is that India should become self-reliant and globally competitive in the steel sector
in terms of cost, quality and product mix
Current Scenario
8th largest steel producer in the world
Production of Finished steel in 2005-06, 42.7 million tones (mT), a growth of
11%.

25

 Apparent Consumption of Finished Steel in 2005-06 - 38.1mT, growth of 10.8%.

Apparent consumption of Longs -16.2 mT, Flats - 21.8 mT.
Largest producer of Sponge Iron - 12.8 mT in 2005-06 (a growth of 25%).
Indias exports of Finished Steel in 2005-06, 4.4 mT, Imports 3.7 mT
Huge Iron Ore reserves 23 bn. tonnes
Private Steel Producers are opting for Forward as well as Backward Integration
Indian Steel Producers are increasingly looking for overseas acquisitions in steel
as well as raw materials

Industry Structure
The Indian steel industry can be divided into two distinct producer groups
1. Major producers: Also known as Integrated Steel Producers (ISPs), this group
includes large steel producers with high levels of backward integration and capacities of
over 1 MT.
The following companies form this group:
Steel Authority of India Limited (SAIL).
Tata Steel (TISCO).
Rashtriya Ispat Nigam Limited (RINL).
Jindal Vijayanagar Steel Limited (JVSL).
Essar Steel.
Ispat Industries.
SAIL, TISCO and RINL produce steel using the blast furnace/basic oxygen furnace
(BF/BOF) route that uses iron ore, coal/coke as the basic input mix for producing
finished steel. Other major producers such as Essar Steel, Ispat Industries and JVSL use
routes other than BF/BOF for producing steel. While Essar Steel and Ispat Industries
employ Electric Arc Furnace (EAF) route that uses sponge iron, melting scrap or a mix

26

of both as input, JVSL uses COREX, a revolutionary technology for making steel using
basically iron-ore and coal. The Major producers are vital to the industry as they account
for most of the mild steel production in the country. The group produces most of the flat
steel products in the country including Hot Rolled, Cold Rolled and Galvanized steel.
The majors also produce a small proportion of Long products and other special steel
being produced in the country.
2. Other producers: This group consists of smaller stand-alone steel plants that include
producers and processors of steel
Processors/Rerollers: Units producing small quantities of steel (flat/long
products) from materials procured from the market or through their own
backward integration system.
Stand alone units making pig iron and sponge iron.
Small producers using scrap-sponge iron-pig iron combination produce steel
ingots (for long products) using Electric Arc Furnace (EAF) or Induction Arc
Furnace (IAF) route.
Other producers account for a majority of long products being produced in the country
and some of the value added flat steel products like cold rolled steel and galvanized
steel.
Indian Steel Industry- Major Players

SAIL
22%
Others
40%

Essar
8%

RINL
7%
Tata Steel
JSWL 9%
Ispat
6%

27

8%

Company

05-06

SAIL

(MT)
9.15

Tata Steel

3.8

RINL

3.0

ESSAR

3.3

ISPAT

2.6

JSWL

3.5

OTHERS

17.2

Total

42.7

Steel Prices
Following de-regulation of prices for integrated steel plants in 1991-92, the domestic
prices of steel have become market-determined. Steel prices are highly volatile and
move in tandem with global prices. While rationalization of the customs and excise duty
structure is aimed primarily at reducing fiscal and revenue deficits, it has an indirect
influence on consumer prices. At present, there are around three thousand units

28

manufacturing steel and steel products, which are marketed by over 100,000 traders for
ultimate consumers. This dispersal of the distribution chain has been the principal reason
why no price regulation of the steel trade has ever been in force.
During FY2006, the prices took a downturn. Due to a slowdown in the global demand
driven by slower Chinese demand resulted in a decline in prices by over 30% during July
September 2005 as compared to the beginning of the year. Domestic prices fell 33%
when considered since April 2005. The beginning of year 2006 again witnessed a surge
in prices backed by increase in demand from China, which indicated that the country
would consume 350 MT of production, thus reducing the level of overcapacity. Prices in
China hovered around USD 500 per tonne owing to rise in freight costs and growth in
demand from automobile and construction sectors. To curb Chinese steel exports, which
grew 22% in H1 CY06, the Chinese government has recently cut the export rebate from
11 to 9%. During the beginning of September 2006 the domestic steel firms have
reduced the prices of HR coils. The prices of the metal were slashed by around Rs.7501,500 per tonne to around Rs.26, 000 for hot rolled coil (HRC). The factors contributing
to this correction are:
Increase in Chinese exports due to significant capacity build-up in the last two
years.
A move to pre-empt cheaper imports of steel, especially from rival China.
Slowdown in infrastructure activities due to monsoons.
We do not expect steel prices to go up to the levels of around USD 700/ton as seen a
year back but to stabilize in the range of USD 450-500/ton in the medium term.
Presently, the prices are hovering in the range of USD 450-470/ton.
Cyclical Nature
The cyclical nature of the steel industry deters fresh investments due to risks of
recession. The mismatch between demand and supply also leads to price volatility
witnessed during recent times. Stagnation in steel prices for long periods followed by
29

sudden spurt also affects the consumers and the infrastructure industry. Therefore, the
efforts of various stakeholders to develop risk-hedging instruments like futures and
derivatives would be supported.
Investment Promotions and Policy Implementation
The very nature of steel production, especially through the integrated route, requires a
number of clearances of the central and state governments for investment in the steel
sector. Delays at various levels not only add to project costs but also discourage fresh
investments.
Recent Changes In The Steel industry

Industry Profitability
The profitability of the industry is analyzed by taking the top players of the industry,
which jointly represents 70% of the cumulative sales of all the companies in the
industry. The figures given below are the aggregates of financials of following players:
Steel Authority of India Limited
Tata Iron and Steel Limited
Essar Steel Limited
Ispat Industries Limited
30

Industry Financials
Rs. Crore
FY2002
Net Revenue 25,872
Other Rec 788

FY2003
30,904
354

FY2004
40,121
379

FY2005
55,808
475

FY2006
55,048
1043

Income
Total
income
Operating

26660
24183

31258
25915

40500
30722

56283
35222

56091
40612

Cost
Operating

1689

4989

9399

20586

14436

Profit
Depreciation 2518
Financial
3243

2108
2270

2371
1754

2576
1877

2956
1931

Expense
Net Profit
OPM (%)
NPM (%)

718
16.14
2.30

4581
23.43
11.31

11278
37.89
20.04

7239
26.22
12.91

-2612
6.53
-9.8

The above table shows that over the past four years, the net revenue of the industry has
been on an increasing trend and went up by a CAGR of 20.78%. In the corresponding
period, the operating profit of the industry went up by a CAGR of 70.98%. It is because
of the decline in the proportion of operating cost to net revenue from 93% in FY2002 to
74% in FY2006. The profits of the industry peaked in FY2005 when prices of the metal
were at all time high. The prices however bottomed towards the end of CY2005
diminishing the profits of the industry in FY2006.
Industry Aggregate: Operational Performance

31

Industry Aggregate: Financial Performance

The Regulatory Interface

Our study revealed that interestingly enough the Indian government appears distinctly
less proactive than their counterparts worldwide. Consequently the Indian steel Industry
is amongst the least protected in the world. While developed countries have put
numerous tariff and non-tariff barriers on steel exports from the country, the domestic
industry is exposed to cheaper imports from competing nations. The government has
now formulated a new policy that targets an increase in production (to 110million tonnes

32

by the year 2020) to meet the expected expansion in domestic and international demand
in the coming years.
The Indian Steel industry- SWOT Analysis
STRENGTHS

WEAKNESSES

1.Iron ore reserves of 23 billion tones

1. High cost of energy

2.Low cost and efficient labor force

2. Higher duties and taxes

3. Strong managerial capability

3. Infrastructure

4. Huge potential for demand

4. Quality of coking coal

5.Strongly

globalized

industry

emerging global competitiveness

and 5. Labor laws

6.Dependence

on

imports

for

steel

6. Modern new plants and modernized old manufacturing equipments and technology
plants

7.Slow

statutory

clearances

for

7. Regionally dispersed merchant rolling development of mines

mills
OPPORTUNITIES

THREATS

1. Huge infrastructure demand

1.Slow

2. Rapid urbanization

development

growth

in

infrastructure

3.Increasing demand for consumer durables 2. Global economic slowdown

4. Untapped rural demand

3. Market fluctuations and Chinas export

5. Increasing interest of foreign steel possibilities

producers in India

33

PART #3: ANALYSIS OF TATA STEEL

Background
Established in 1907, Tata Steel is Asias first and Indias largest integrated private sector
steel company. With its captive iron ore and coal mines and one of the worlds 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. The company intends to raise its capacity to 15
million tonnes per annum by 2010 through organic growth and acquisitions. Tata Steel
has invested in NatSteel, Singapore, which will give it a manufacturing footprint in six
countries in the Asia Pacific region and China. The Company has plans to establish the
steel manufacturing units in Iran and Bangladesh. In India, Tata Steel has also signed
Memorandum of Understandings with the Government of Orissa and Chattisgarh for
putting up a steel plant in each state. These Greenfield projects and other strategic
acquisition opportunities could see Tata Steel making a total estimated investment of Rs.

34

70,000 crores in the next decade, constituting the largest investment within the Tata
Group.
Tata Steels relentless quest for excellence through initiatives like ASPIRE, which
combines TPM, Six Sigma, Total Operational Performance, Suggestion Management
and Quality Circles, has reaped rich benefits. The company has been conferred the prime
Ministers 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.
The Company has been ranked first (for the second time) among World Class Steel
Companies by World Steel Dynamics based on its annual listing in June 2005.

Vision 2007
To seize the opportunities of tomorrow and create a future that will make us an EVA
positive company. To continue to improve the quality of life of our employees and the
communities we serve.
Mission 2007
Consistent with the vision and values of the founder Jamsetji Tata, Tata Steel strives to
strengthen India's industrial base through the effective utilization of staff and materials.
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 the essential ingredients of a
strong and stable enterprise, profitability provides the main spark for economic activity.
Overall, the Company seeks to scale the heights of excellence in all that it does in an
atmosphere free from fear, and thereby reaffirms its faith in democratic values.

35

A Sustainable Competitive Advantage- Access to Raw Material:

We believe that access to raw material is a critical factor in determining a steel

producers long-term profitability. Tiscos high degree of integration gives it a
sustainable competitive advantage over its peers and will boost its bottom line.
We believe that Tisco is best placed in the industry with captive iron ore, which meets its
entire requirement. Over 60% of its coking coal requirement is also met by captive
sources. The company will experience a cost-push because of an increase in imported
coking coal cost (40% of its total coking coal requirement is met through import of
coking coal), but savings in other cost heads will offset this.
Impressive growth in profitability: We believe that firm steel prices, high-volume
growth and least exposure to cost-push among peers, will result in impressive growth in
its profitability. We expect Tiscos operating profit to increase by 80% in FY05 and 17%
in FY06.
Reaching global heights: Tiscos focus on value-added products, long-term
relationships with customers and continuous technology up gradation has made it a
world-class steel producer. With the acquisition of Nat Steel, the company has
transformed itself from a single-location producer to a multi-location producer. Tata
Steel has signed agreements to buy a 5% interest in the Carborough Downs Coal
Project, Australia - an underground coking coal project. Tata Steel has entered into a
Joint Venture with BlueScope for setting up a metallic coating and painting unit. The
company will build a new business across India and South Asia.
Once this growth plan is implemented, Tisco would join the league of the likes of Posco
(but would enjoy a better competitive positioning due to its captive raw material sources)
and this will result in a re-rating of the stock. It has made significant investments to
enrich its product mix and build its brand over the years, which helps it to minimize the

36

impact of volatile steel prices. Shift in contract mix, in favor of long-term contracts, also
ensures that its current profitability levels are sustainable.
Areas Of Business
Apart from the main steel division, Tata Steel's operations are grouped under strategic
profit centre like tubes, growth shop (for its steel plant and material handling
equipment), bearings, Ferro alloys and minerals, rings, agrico and wires.
Tata Steel's products include hot and cold rolled coils and sheets, tubes, wire rods,
construction bars, structural, forging quality steel, rings and bearings. In an attempt to
'decommoditise' steel, the company has recently introduced brands like Tata Steelium
(India's first branded cold rolled steel), Tata Shaktee (galvanized corrugated sheets), Tata
Tiscon (re-rolled bars), Tata pipes, Tata bearings, Tata Wiron (galvanized wire products)
and Tata Agrico (hand tools and implements).
Tata Steel is also exploring opportunities in the Ferro-chrome and titanium businesses.

Joint

Ventures

and

Associates

Tata Steel has numerous joint ventures and subsidiaries. Among them are:
Tinplate Company of India
Tayo Rolls
Tata Ryerson
Tata Refactories
Tata Sponge Iron
Tata Metaliks
Tata Pigments
Jamshedpur Injection Powder (Jamipol)
TM International Logistics

37

 mjunction services
TRF
Jamshedpur Utility and Service Company (JUSCO)
The Indian Steel and Wire Products(ISWP)
Lanka Special Steel
Sila Eastern Company
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 most of its
works,
Corporate

plants,

mines
social

and

collieries.
responsibility

Tata Steel is one of the few Indian companies to be invited to join the UN-sponsored
Global Compact. It has also been conferred the prestigious Global Business Coalition
Award (GBC) for Business Excellence in the Community in view of its outstanding
work in the field of HIV / AIDS awareness.

Management
The Company has a Non-Executive Chairman and the number of Independent Directors
is more than one-third of the total number of Directors. The number of Non-Executive
Directors (NEDs) is more than 50% of the total number of Directors. None of the
Directors on the Board is a Member on more than 10 Committees and Chairman of more
than 5 Committees (as specified in Clause 49), across all the companies in which he is a
Director. The necessary disclosures regarding Committee positions have been made by
the Directors.

38

Seven Board Meetings were held during the year 2005-06 and the gap between two
meetings did not exceed four months. Out of the 13 Directors, 5 attended all the
meetings and 5 others attended more than 5 meetings. This shows that directors attend
the meetings and are involved in the important affairs of the company.
Share holding pattern
(as on 31-Dec-2006)

Shares

(%)
1051590

Foreign

99

18.12
1243379

Institutions

18

21.42
1217

Govt Holding
Non Promoter Corp. Hold.
Promoters
Public & Others
Totals

67
26190519
175652216
149011337
580472856

0.02
4.51
30.26
25.68
100

SHARE HOLDING PATTERN

foreign
institutions
govt holding
non promoter group
promoters
public and other

This shows that the major share holding of the company is with the promoter group and
the public.

39

PART #4: DETAILED ANALYSIS OF THE ANNUAL REPORT

The Annual Report is broken down into the following specific parts:
A. The Director's Report,
B. The Auditor's Report,
C. The Financial Statements, and
D. The Schedules and Notes to the Accounts.
The Directors Report
The Directors Report is a report submitted by the directors of a company to its
shareholders, advising them of the performance of the company under their stewardship.
The Directors Report provides an investor valuable information. It states the following
important facts:-

40

 The company changed its name from TISCO to TATA STEEL LTD. w.e.f.
12 th august 2005
Economic conditions around the world have been encouraging. The US saw
sustained GDP growth of over 2% throughout the year while Japan moved
out of deflationary conditions and even Europe has showed signs of industrial
growth and consumption by the end of the last financial year.
China along with other developing economies like India are likely to continue
to drive demand growth in steel, while Europe and US demand is also likely
to remain robust.
The outlook for the industry remains positive though rising costs on account
of raw materials, freight and energy will keep the margins under pressure.
The Indian economy grew at an estimated 8.1% in FY '06. This includes a
strong performance in steel consuming sectors like automobiles, engineering,
constructions and white goods.
The Government has substantially increased the allocation for various
infrastructure projects under the Bharat Nirman program which is expected to
be implemented over the next couple of years.
Exports crossed US$100bn. mark in 2005-06. Fourth consecutive year of
more than 20% exports growth
Moderate inflation rate - within 4-5%
Stable Rupee against US dollar
Growing Forex reserves - US$ 160 bn.
Business Confidence at all time high
These factors indicate that India is at the inflexion point of development which bode
well for the domestic steel industry in the future. The pace of Indias development would
depend on the execution of the various infrastructure projects announced by the
Government during the year. TATA STEEL too has developed a long term strategy of
developing a strong base in India, pursuing the de-integrated production capability of
making intermediate steel in low cost geographies and finishing in growing and

41

developed markets. In pursuing this strategy the company is planning to build Greenfield
Projects in Orissa, Chhattisgarh and Jharkhand in the next decade. It is also working
towards ownership and development of additional raw material sources in India and
overseas for its enhanced operations. As part of the de-integrated strategy, it has signed
the definitive arrangements with various companies abroad. Thus in these terms the
company has succeeded in fulfilling its objectives.
The Net Profit after taxes at Rs 3,506.38 crores was marginally higher in
comparison to previous year. Operating profit was marginally lower at Rs.
5,931.51 crores as against Rs.6, 045.36 crores in the previous year.
Your Company has forayed into organized steel retailing by opening steel
junction at Kolkata, a one-stop shop for steel products like pipe, tube, wire,
sheet, builders hardware, architectural items, lifestyle products, kitchen
products, etc. This will enable architects, interior decorators and builders in
and around Kolkata to easily access steel products for their use.
The Board, for the year ended 31st March, 2006 has recommended a
dividend @ 130% (Rs. 13/- per share) subject to the approval of the
shareholders at the Annual General Meeting.
International Credit rating Agency Standard & Poors (S & P) upgraded
foreign currency rating of the Company to BBB with stable outlook, which
is two notches above Indias sovereign rating. With this rating, TATA
STEEL is in the investment grade for any foreign currency debt issuance.
According to S & P, the Company is considered well insulated from direct
and indirect sovereign risks since it demonstrates moderate leverage, strong
free cash flow generation and a competitive business profile.
In the recent past, the Company has been strengthening its balance sheet by
increasing cash flows, reducing interest cost and improving working capital
management. With this effort, the Company is in a position to take advantage
of growth opportunities in the global steel market. The surplus fund of the
Company not required immediately has been temporarily invested in money
market mutual funds taking into account risk adjusted return. The total
investment in mutual fund as on 31st March, 2006 stood at Rs. 2,026.63
42

crores. Such an investment is wise and prudent on the part of the company in
order to reap additional benefits.
All the above points make the expansion programme undertaken by the company very
lucrative for it in the long run. It has the captive resources at its disposal like nobody else
in the industry. The indications are all positive for the industry and the company making
the above mentioned projects undertaken by the company beneficial to be pursued in the
long run.
The Auditors Report
The auditor represents the shareholders and it is his duty to report to the shareholders
and the general public on the stewardship of the company by its directors. Auditors are
required to report whether the financial statements presented do, in fact, present a true
and fair view of the state of the company. They are also required to report any change,
such as a change in accounting principles or the non provision of charges that result in
an increase or decrease in profits. It is really the only impartial report that a shareholder
or investor receives and this alone should spur one to scrutinize the auditor's report
minutely.
The Auditors report of Tata Steel is not qualified at all and is a clean report. Almost
everything in the report proves that proper accounts have been maintained and they
represent a true and fair view of the working of the company. Have a look at various
aspects highlighted in the report:
Fixed asset
1. The Company has maintained proper records showing full particulars including
quantitative details and situation of fixed assets.
2. Some of the fixed assets have been physically verified by the Management in
accordance with a programme of verification which provides for physical verification of
all the fixed assets at reasonable intervals having regard to the size of the Company and

43

the nature of its assets. According to the information and explanations given no material
discrepancies were noticed on such verification.
InventoriesAccording to the information and explanations given, the procedures of physical
verification of inventories followed by the management are reasonable and adequate in
relation to the size of the Company and the nature of its business.

Loans1. The Company has granted inter-corporate loan to three parties. At year end
outstanding balance of such loans granted was Rs.283.52 crores and the maximum
amount involved during the year was Rs.720.47 crores.
2. The rate of interest and other terms and conditions are prima facie not prejudicial to
the interest of the Company.
3. The receipt and payment of principal amounts and interest have been regular during
the year.
4. There is no overdue amount in respect of above intercorporate loans.
5. The Company has not taken any loan from any party covered in the register
maintained under Section 301 of the Companies Act, 1956.
Internal control systemThere is adequate internal control system commensurate with the size of the Company
and the nature of its business for the purchase of inventory and fixed assets and for the
sale of goods and services and there is no continuing failure to correct major weaknesses
in such internal control system.
Statutory Dues-

44

1. The Company has been generally regular in depositing undisputed statutory dues
including provident fund, investor education and protection fund, income tax, sales tax,
wealth tax, service tax, customs duty, excise duty, cess and other material statutory dues
applicable to it with the appropriate authorities during the year.
2. No undisputed amounts payable in respect of income tax, wealth tax, sales tax,
customs duty, excise duty, cess and other material statutory dues applicable to it, were in
arrears, as at 31st March, 2006 for a period of more than six months from the date they
became payable, except for sales tax collection which are refundable to customers
because they have been collected in excess or which have been collected pending receipt
of the relevant certificates from the customers.
Other Items1. The Company does not have any accumulated losses and has not incurred cash losses
during the financial year and the immediately preceding financial year.
2. The Company has not defaulted in repayment of dues to financial institutions, banks
or debenture holders.
3. During the period covered by the audit report, the Company has not raised any money
by public issues.
4. No fraud on or by the Company was noticed or reported during the year.

45

THE FINANCIAL STATEMENTS

Profit and Loss Analysis

Income
1) Net income from operations increased by 4% upto Rs. 15139.39 cr an absolute
change of Rs. 640.44 cr while sales of core products (excluding sale of power
and water) rose by 8% from Rs. 15250.69 cr to Rs. 16521.44 cr reasons being:
Steel division- domestic sales increased by 17% upto Rs. 9958.34 cr.
Tubes division-sales increased by 15% upto Rs. 1006 .19 cr
Ferro alloys division and bearings division-sales reduced and increased by
1% and 9% respectively.
This show that overall there is an increase in the operating efficiency and
capability of the company.
2) Other income has increased from Rs. 148. 03 cr to Rs. 254.76 cr. It comprises
mainly of Income from investments (increase of 50%) and profit on sale of
capital assets. But other income forms an insignificant portion of the total net
income (almost 1.7%). This signifies that the company is deriving its income
mainly from core, recurring and productive operating activities.

46

Expenditure
1) Total expenditure has risen by 9% absolute change being 842.25 cr mainly due to
increase in manufacturing and other expenses by 7.6%. This indicates that the
company is spending more on its core activity and emphasizes on expanding its
business through its core working only. Now the reasons for these are as follows:
It comprises of Purchase of finished and semi- finished steel, Raw material
consumed payments to employees, operational and other expenses, freight
and handling charges and provision for doubtful debts.
Raw materials consumed have increased by 38% due to increase in cost of
imported coal, ferro alloys and zinc. Raw material purchased from outside is
much more than raw material produced within the company. Raw material
expenses form a significant portion of total expenses.
Purchase of semi- finished, finished steel and other products has decreased by
50%.
Operational expenses have increased by 10% which form almost 43% of the
total expenditure. This is mainly due to increase in stores consumed (19%),
conversion charges (2%) and other expenses (11%).
Payments to and provision for employees and Freight and handling charges
increased by 5% and 7% (increase in volume of sales) respectively.
2) Depreciation has increased by 26% mainly due to increase in gross block and this
is 6% of net sales.
3) Interest has decreased by 37% due to decrease in borrowings of overall loans by
8% (secured loans decrease by 11%).
EMPLOYEE SEPERATION COMPENATION
It has decreased by 56% due to revision in AS-15 and separation of 1141 employees
during the year.
PBT

47

It has decreased by 1% mainly due to increase in manufacturing expenses absolute

amount being Rs. 5239.96 cr (35% of net sales).
PAT
It has increased by 1% absolute change being 32.22 cr mainly due to reduction in tax
liability by 5%(current tax reduced by 14%).
It is 24% of net sales.
PROFIT FOR APPROPRIATION
It has increased by 29% and is at Rs 5296.59 cr mainly due to balance b/f from last year
i.e. 1790.21 cr. It has been divided as follows: Proposed Dividend- Rs. 719.51 cr, Tax on
Dividend- Rs. 100.92 cr and General reserve- Rs.1500 cr. Amount transferred to general
reserve is 9.9% of net sales.
Balance Sheet Analysis

Funds EmployedSources of Funds

1) SHARE CAPITAL

Tata Steel has just two classes of shares. Its authorized share capital is
divided into 60 crore ordinary shares of Rs. 10 each and 2.5 crore cumulative
redeemable preference shares of Rs. 100 each. Out of this 554,074,932
Ordinary Shares have been issued and 553,472,856 Ordinary Shares have
been fully subscribed and paid for. The capital, either authorized or paid up
has not changed over the previous year.
Further details provided disclose that the above capital consists of a
whooping 257, 930, 992 shares issued as bonus shares. These shares have
been issued by utilizing funds either from the Securities Premium account or
the General Reserve.
48

 721, 530 shares have been issued as fully paid up to the Shareholders of the
erstwhile Indian Tube Company Limited on its amalgamation with the
Company, for consideration other than cash.
1,210,003 shares of the face value of Rs. 10 per share were issued as fully
paid up to the shareholders of the erstwhile Tata SSL Ltd. on its
amalgamation with the Company, for consideration other than cash.
Adding all the shares issued as bonus shares and those issued to share holders
under schemes of amalgamation, we find out that out of the total subscribed
capital, 259, 862, 525 shares have been issued for consideration other than
cash. Thus the equity holders have just paid for 46.95% of the equity and rest
they have got through capitalization of general reserve or securities premium
account.
2) RESERVES AND SURPLUS
Tata Steel has 9 Reserves and the surplus forming a part of its Reserves and
Surplus account. The major portion of reserves and surplus is made up of
general reserve; balance c/f from p/l account, securities premium account,
debenture redemption reserve, contingency reserve.
Securities Premium account, Amalgamation Reserve, Debenture Redemption
Reserve, Capital redemption Reserve, Capital Reserve, Exports Profit
Reserve, Contingency Reserve do not show any changes as compared to the
previous year.
The General Reserve has increased from Rs. 3091.46 crores to Rs. 4591.46
crores due to the addition of the yearly transfer from the p/l account to the
reserve of Rs. 1500 crores.
There has been a change in Export Promotion Reserve from Rs. 1.53 crores
in the previous year to Rs. 10.96 crores in 2005-06 due to Exchange
Fluctuation on long term loans in relation to non-integral foreign operation.
The surplus transferred from the p/l account to the reserve has increased from
Rs. 1790.21 crores to Rs. 2976.16 crores. This indicates to the fact that the
company has retained more earnings as compared to previous year. This tells
that company does not have a lot of good investment opportunities and,
49

hence, prefers retaining profits. This will lead to less distribution of profit to
the shareholders but will increase future earnings of the company.
Thus, the increase of approximately 42% is mainly due to increase in general
reserve (49%) and increase in balance c/f from profit and loss a/c (66%).
3) TOTAL SHAREHOLDERS FUND
It has increased by Rs. 2695.38 crores mainly due to substantial increase in
Reserves and Surplus.
4) LOANS
SECURED LOANS\
Tata Steel has seven different classes of Non Convertible
Debentures privately placed with many different banks and parties.
These include Debentures carrying interest rates of 14%, 14.25%,
10.50%, 12.60%, 9.90%, 9.50% and 9.45%. These are secured by
mortgages on all present and future fixed assets, excluding land and
buildings mortgaged in favor of Government of India, land and
buildings, plant and machinery and movables of the Tubes Division
and the Bearings Division mortgaged in favor of the financial
institutions and banks, assets of the Ferro Alloys Plant at Bamnipal
mortgaged in favor of State Bank of India and assets of Cold Rolling
Complex (West) at Tarapur and a floating charge on other properties
and assets (excluding investments) of the Company.
The company has Syndicated loans from various banks like ANZ
investment bank, SBI, Bank of America which have been secured by
assets as mentioned in the above point for each bank.
The company has also taken loans from IDBI and Joint Plant
Committee-Steel Development Fund.
The syndicated loans have been repaid by Tata Steel as well as the
14% non convertible debentures.

50

 12.60% non convertible debentures have been redeemed of the value

of Rs. 37.5 crores and also a part of the loan from IDBI has been paid
back.
Secured loans consists of syndicated loans from various banks, non
convertible debenture privately placed, cash credits from banks and
loans from JPC-SDF.
Current level of secured loans stand at Rs. 2191.74 crores out of
which Rs. 462.5 crores are in form of non convertible debentures, Rs.
1609.25 crores of loan from Joint Plant Committee Steel
Development Fund, Rs. 63.47 crores from IDBI and Rs. 56.49 crores
as cash credit from various banks.
Secured Loans have decreased by 276.44 crores mainly due to
decrease in syndicated loans from various banks.

UNSECURED LOANS
This includes fixed Deposit, Loan from HDFC, Loans from Financial
Institutions like Japan Bank for international cooperation and other
institutions, Buyers credit repayable under foreign currency and
Interest Free loans Sales tax Deferral Scheme.
There has been a decrease in every other loan except increase in
Buyers credit repayable under foreign currency
There has been an overall increase in Unsecured Loans by Rs. 53
crores, an increase of 19% due to substantial increase in buyers credit
in foreign currency by 220%.
Total Loans have decreased by Rs. 223 crores, a decrease of 8%.
5) DEFFERED TAX LIABILITY (NET)

51

It has increased by Rs.127.58 crores due to increase in difference between book and
tax depreciation and a small decrease in employee separation scheme.
Total Funds Employed
Due to all the above stated changes Total Funds Employed has increased by Rs. 2473.85
cores, an increase of 20%. The application of these funds has been explained below.
Application of Funds
1) FIXED ASSETS
GROSS BLOCK
Tata Steel owns Land & buildings, railway sidings, leaseholds, plant &
machinery, furniture & fixtures, livestock & vehicles and intangibles, totaling
Rs. 9865.05 crores at depreciated value. Buildings include factory buildings,
godowns, administrative buildings and residential buildings. Railway sidings
help in transporting finished products and raw materials to and from the
nearest railway station. Intangibles represent computer software, regrouped
from Plant & Machinery and Furnitures, Fixtures. It is amortised at the rate of
16.21% per annum.
Within the fixed assets, plant and machinery, that is, the assets directly
needed for production are at Rs. 13, 531.96 crores or 82% of fixed assets.
Next is the amount invested in buildings, that is, Rs. 2007.24 crores.
The schedule (given in annexure) provides detail information about Gross
block and depreciation for various fixed assets along with movements about
additions and deletions, impairment and Net block. Total gross block of
Fixed assets is Rs. 16564.90 crores whereas the Net Block amounts to
Rs.9865.05 crores.
There has been an increase in all the fixed assets of the company.
Increased by Rs. 1509.65 crores i.e. over 10% due to huge increase in plant
and machinery (increased by over 1800 crores).
Impairment during the current period is nil.
52

 Depreciation of the current period is Rs. 775.10 crores

Total depreciation has increased by Rs. 760 crores and it stands at Rs. 6605
crores.
NET BLOCK - increased by Rs. 753 crores or 8.2%.

2) INVESTMENTS
Investments are divided into Long Term and Current. Long Term
Investments are divided into Trade Investments and investment in
Subsidiaries. Long term investments are carried at cost less provision for
dimunition in value
Trade investments are divided into investments in Shares and Debentures of
various companies (quoted) and Shares and debentures (unquoted).
Investment in subsidiary companies is in the form of shares (unquoted).
Current Investments are carried at lower of cost and fair value
The investments stand at Rs. 4069. 96 crores out of which long term and
current investments are almost equal.
52% of long term is trade investments while other 48% are in subsidiaries.
Almost all the current investments are in mutual funds. Investment in mutual
funds has increased by Rs. 552.68 crores or 38%.
Long term investments have increased by Rs. 1084.63 crores, that is, 114%
approximately.
3) CURRENT ASSESTS
Has increased by Rs. 301crores mainly due to an increase in stores and
spares, stock in trade and cash and bank balances. Sundry debtors have
decreased.
An increase in stock- in- trade and stores and spare parts indicate that there is
not efficient movement in these components as compared to last year. They
are not being rotated properly.

53

 Stock in trade has increased by Rs. 113.40 crores mainly due to an increase in
finished, semi finished and raw materials purchase. Work-in- progress has
decreased indicating efficiency in operation.
Sundry debtors have decreased by Rs. 42 crores but debtors over six months
have increased by Rs. 8 crores. Decrease in sundry debtors indicates faster
recovery of dues and better turnover. This indicates improved efficiency of
operations and better management of debtors.
Cash and bank balances include cash, current accounts with various banks
and deposit accounts with scheduled banks. It has increased by Rs. 42 crores
due to an increase in current accounts with scheduled banks. An increase
indicates better liquidity with the company.
4) LOANS AND ADVANCES
This includes advances with public bodies, advances and loans to subsidiary
companies, advance payment against taxes and other advances.
Advances with public bodies include balances with Customs, Port Trust, etc.
Other advances include: Loan due by an Officer of the Company,
Intercorporate deposits, and Application monies on investments. Advances
and Loans to subsidiary companies include Loans and Advances in the nature
of Loans given to Subsidiaries
It has decreased by 150 crores due to substantial reduction in loans and
advances to subsidiary companies.
Loans include unsecured, good loans and considered doubtful loans.
GROSS CURRENT ASSETS- Increased by approx Rs. 154 crores indicating better
liquidity for the company.
5) CURRENT LIABILITIES AND PROVISION
Current Liabilities of Tata Steel include Sundry Creditors, Interest accrued,
Advances received from customers and Liability towards Investor education
and protection fund.

54

 Sundry Creditors have increased by Rs. 214 crores and is Rs 2534.03 crores.
This will have an adverse impact on the liquidity and the working capital
position of the company. But Sundry debtors are much less (Rs. 539.40
crores) than the sundry creditors (Rs 2534.03 crores) indicating that the
company enjoys far higher credit period than it allows to its customers. Also
Creditors form almost 89% of the total current liabilities.
There have not been any abnormal changes in other current liabilities except
Interest accrued but not due which decreased by Rs. 60.86 crores.
Current Liabilities increased Rs. 146 crores mainly due to increase in sundry
creditors as they have increased by more than 200 crores. Increase in current
liabilities is not favorable for day to day working of the company.
6) PROVISIONS
The provisions include Provisions for Retiring gratuities, Provision for tax,
Provision for FBT and Proposed dividend. The provision for retiring
gratuities has decreased but fully covers the liability for the same.
Decreased insignificantly by Rs. 37 crores or 3.7%. Major chunk of
provisions are formed by proposed dividend and provision for taxes.
The total of current liabilities and provisions is Rs 3808.72 crores which is
slightly less than the total of current assets and loans and advances which is
Rs. 4237.60 crores.
Hence, the Net Current Assets are positive and stand at Rs. 428.88 crores. This means
there are not sufficient funds with the company to finance the daily business or the
current assets. This indicates that the company should improve its working capital
management and credit policy in order to improve its financing position.

55

Cash Flow Statement

There is a net cash inflow of Rs. 41.67 crores this year resulting in the cash balance at
the end of the year to be Rs. 288.39 crores. Net cash inflow has increased tremendously
indicating improvement in the liquidity of the company and its management of short
term funds. It can meet its cash commitments in a better way now as compared to last
year. This shows company has a good ability to generate cash in future.
Operating activities
Cash that is flowing into the business is coming mainly from operating
activities indicating towards the robust operations of the company. This is a
key indicator of the ability of Tata Steel to maintain its operating capabilities,
pay dividends, repay loans make new investments through internal cash
generation.
The cash from operating activities has reduced but its not significant. It has
decreased by Rs. 183 crores or 4.8%. This decrease is mainly due to decrease

56

in Employee Separation Compensation and increase in Operating profit

before working capital changes.
There is a net cash inflow of Rs. 3639 cr indicating efficient working capital
management.
Rs. 1747 cr has been spend on account of direct tax.
Cash flow from operating activities has decreased in comparison to last year.
But still is quite a big amount.
The decrease has been due to changes in the working capital.
Investing activities
There is a net cash outflow of Rs 2464.59 cr. It indicates a favorable cash
position.
Major activities have been in investments. There has been a net purchase of
Rs.1225.21 cr in investments. This shows that there has been a major cash
outflow.
Tata Steel had a total net cash outflow for fixed assets which indicates that
business is expanding. High investment in fixed assets will lead to higher
income from operating activities in future.
There is a heavy sale of investment.
Financing activities
Net cash outflow from financing activities is Rs.1125.13 cr.
There is a high outflow on account of dividend and dividend tax paid.
It seems that short term borrowings from banks have been used for dividend
payment.
There has been no capital contribution.
It has raised loans even though it has lot of surplus cash.

57

Ratio Analysis

Key Ratios
RATIOS

RONW (%)
EPS(Rs.)

COMPANY

CALCULATED

41.7

36.91

67.62

61.51
171.69

NAV
0.31

0.34

Debt-Equity Ratio

58

Interest Cover Ratio

32.11
0.71

29.29
0.92

Current Ratio
Collection Period allowed

13

to customers
1.2
Fixed

Assets

Ratio
Net Worth

1.53

Turnover
Turnover 1.23

1.59

Ratio
Debtors Turnover Ratio
Price Earning (P/E)

30.58
8.43

28.06
8.72

Analysis of the Ratios

The difference in most of the ratios is due to difference in PAT due to
miscellaneous expenditure not written off which the company should have
written off earlier.
In current ratio the company has not taken into consideration current investments
but in the schedule of investment liquid funds are shown which we have taken
into account as short term investments.
The company has a very rigid credit policy allowing only 13 days to consumers
because they have a separate Stringent Credit Management Cell.

DU Pont Analysis
Formula

Net

profit *

Net Worth Turnover

59

RONW

margin
2004-05
2005-06

23.13
29.5

*
*

2.05
1.23

=
=

47.5
36.34

The companys RONW has reduced due to reduction in net profit margin as well as net
worth turnover which depicts relatively poor asset utilization and relatively lower profit
margin.
Analysis of the Market Ratios
P/E Ratio
The most commonly used valuation metric by investors is the price to earnings ratio or
commonly referred to as the P/E ratio.
P/E Ratio= Market Price per share/ Earnings per share
It is a measure of the price paid for a share relative to the income or profit earned by the
firm per share. A higher P/E ratio means that investors are paying more for each unit of
income.
It's difficult to determine whether a particular P/E is high or low without taking into
account two main factors:
1. Company growth rates - How fast has the company been growing in the past, and are
these rates expected to increase, or at least continue, in the future? Something isn't right
if a company has only grown at 5% in the past and still has a stratospheric P/E. If
projected growth rates don't justify the P/E, then a stock might be overpriced. In this
situation, all you have to do is calculate the P/E using projected EPS.
2. Industry - It is only useful to compare companies if they are in the same industry. For
example, utilities typically have low multiples because they are low growth, stable
industries. In contrast, the technology industry is characterized by phenomenal growth
rates and constant change. Comparing a tech company to a utility is useless. You should
only compare high-growth companies to others in the same industry, or to the industry
average.

60

The P/E Ratio for Tata Steel for 2005-06 was 8.72 as compared to 6.58 in the previous
year. The EPS was 61.51 and the market price around 536.37 in 2005-06. This increase
in P/E shows that the market expects the earnings to rise. In 2005-06 growth rate
according to net worth was 38.18% as compared to 56.34% in 2004-05. Even when the
growth rate has come down the P/E Ratio has gone up indicating that market has faith in
the growth potential of the company. This P/E Ratio is not sufficiently high indicating
that market does not expect the earnings of the company to rise phenomenally. A big
reason behind this might be that the growth rate of the company has been stabilizing in
the last two years. The companies that have been around for a while and dont have
much room for exponential growth like Tata Steel will be sure to distribute their
earnings to investors. They do not have the same need for reinvesting as younger
companies. And because of this, their P/E Ratios may tend to be lower.
The P/E Ratio for SAIL was 13.79 in the year 2005-06. In the previous years the ratio
was around 8 and the company expects its ratio to stabilize somewhere around 8 only in
years to come. This indicates that the industry majors have almost similar kind of P/E
indicating that the industry is on the stabilizing mode i.e. reaching the maturity stage.
Dividend Payout
The Dividend Payout percentage for 2005-06 was 21.13. In 2004-05 the same was 21.34
and in 2003-04 it was 21.72. For the last three years the Payout has been almost
consistent showing the strong fundamentals of the company. Thus, the company is good
for investment.
Earnings Per Share
Earnings per Share are calculated by dividing a company's net revenues by the
outstanding shares. This gives you a number you can use to compare the earnings of
companies since it is unlikely any two companies will have the same number of shares
outstanding.

61

The EPS for Tata Steel was Rs. 61.51 for 2005-06 as compared to Rs. 60.91 for the
previous year. This increase is due to the slight increase in the Net Profit of the company
as the number of outstanding shares has been the same for the two years.
The EPS for SAIL was 9.72 for 2005-06 and 16.50 for 2004-05. The net earnings of the
company had come down in 2005-06 as compared to previous year from Rs. 6817 crores
to Rs. 4013 crores. Although the profit of the company is more than that of TATA but
their EPS is much below that of TATA. The reason is that the value of outstanding
shares of TATA is only Rs.553crores whereas for SAIL it is Rs. 4130 crores. This
explains

the

huge

difference

in

the

EPS

of

the

two

companies.

Book Value
So why use BVPS as an analytical tool if it doesn't fully measure the potential of the
stock? There are a few good reasons:
BVPS is a good baseline value for a stock. While it's not technically the same
thing as the liquidation value of the shares, it is a proxy for it. In many cases,
stocks can and do trade at or below book value. If the company's balance
sheet is not upside-down and its business is not broken, a low price/BVPS
ratio can be a good indicator of undervaluation.
BVPS is quick and easy to calculate. It can and should be used as a
supplement to other valuation approaches such as the P/E approach.
If the company is going through a period of cyclical losses, it may not have
positive trailing earnings or operating cash flows. Therefore, an alternative to
the P/E approach may be used to assess the current value of the stock. This is
especially applicable when the analyst has low visibility of the company's
future earnings prospects.
The market price of the companys share should be at least 3 times the book value of the
share. The market price is more than 3 times the book value of Rs. 176.19. Thus the
company is safe for investment purposes.
62

PBIDT
For a company to be sound its earnings before interest, tax and depreciation should not
be less than 15% of sales. For TATA this percentage is 36.06. Their PBIDT was Rs.
6183.5 crores and Net Sales were Rs. 17144.22 crores. On this aspect as well the
company is good for investment purposes.
RONW
The ratio measures the net profit earned on the equity share holders funds. It is a
measure of the overall profitability of the company. It is
(PAT- Preference dividend)*100/Equity Share holders funds
This ratio was 36.91% for 2005-06 and was 50.75% for 2004-05. There has been an
increase in net profit but due to a huge increase in the reserves as compared to the
previous year the ratio has come down. This indicates that the company has retained a
major portion of its earnings which is beneficial for the company as well as stakeholders
in the long run.
ROCE
The return on capital employed for TATA has decreased from 63.79% to 50.07%
although there has been an increase in Net Profit (Rs.3474crores to Rs. 3506crores) as
well as the Capital Employed (Rs. 9799crores to 12271crores). This might have been
because of the reason that the capital was invested in assets or projects which have along
gestation period and can only yield returns after many years of being started. Thus, the
results will become evident only after few years.
Debt- Equity Ratio
It is 0.34 for this year. This has been consistently falling for the past few years indicating
that the debt component in financing the company has been continuously decreasing but

63

it has gone quite down from the accepted norms indicating that the company is relying
more on equity which is expensive and does not allow passing the cost differential of
debt.
SWOT Analysis of Tata Steel
STRENGTHS
Largest player in the Indian Steel industry
Strong backward integration in key raw material like iron ore and power
One of the biggest turnaround in Indias incorporation
A well developed Product Mix
Very aggressive expansion plans
All its plants are a profit centers.
TATA STEEL is a virtually Debt-Free Company.
Lowest cost producer of steel
Its investment in Nat steel will give it manufacturing footprint in six
countries.
Its mergers with various other companies abroad are set to increase its
business in a huge manner.
Tiscos captive iron ore and coalmines will also reduce its cost of expansion.
Its strong balance sheet and management expertise gives it an edge over its
peers in terms of execution of growth plans.
WEAKNESS
Heavily dependent on import of raw materials (coking coal)
Cyclical nature of the steel industry.
OPPORTUNITIES
Strong Economy growth (second fastest growing Economy after China)
Booming infrastructure sector (Roads, Ports, Airports, SEZs, Power)
Strong demand in automobile sector, consumer durables sector and
engineering goods sector.
64

 Robust demand in construction and retail industry

Low per capita steel consumption offers a higher growth
Rich Geological Resource base
Large consumer base
Low labor cost and high productivity
Growing Skilled and Technical Human Capital
THREATS
Steel prices may remain stumpy on account of oversupply from China
Bureaucratic nature of Government - Socio- Political interventions (in leasing
mines)
Rising interest rates could affect expansion programmes (High cost of
Finance)
High cost of Energy
Big ticket investment by POSCO and Mittal could swallow the market
(specifically export)
Deficit infrastructure.
Comparison of Company and Industry Financials

Key Financials
Comparatives
for:Tata

Steel

Ltd.
Units :Crores
Total

Depreci-

Company name
Steel
Essar Steel Ltd.
JSW Steel Ltd
MSP Steel &

Year

Equity

Reserves

Income

Fin Exp

ation

Tax

N.P.

0603-12
0603-12

581.17
218.03

1,246.18
3,859.16

6,291.86
6,526.02

440.01
365.01

482.1
405.82

165.94
437.6

530.18
864.29

Power Ltd.
Rashtriya
Ispat

0603-12

58.1

4.92

85.41

3.47

4.34

1.5

1.1

Nigam Ltd.
Shri
Ramrupai

0603-12
0603-12

7,827.32
66

346.38
57.71

7,761.59
475

31.06
11.03

415.57
5.85

637.14
9.52

1,252.37
18.09

65

Balaji Steels Ltd.

Steel Authority of
India (SAIL) Ltd.
Tata Steel Ltd.
Visa Steel Ltd.

0603-12
0603-12
0603-12

4,130.40
553.67
110

8,471.01
9,201.63
186.1

29,209.5
15,432.1
386.33

467.76
168.44
14.83

1,207.3
775.1
4.96

1,694.3
1,734.3
7.53

4,012.97
3,506.38
12.48

Total :

-n/a-

14,367.98

22,858.6

67,911.7

1,518.94

3,333.2

4,694.3

10,239.9

Analysis
Tata steel is amongst the top most profit earners of the Iron and Steel Industry.
It forms almost 34% of the total industry net profit.
Only one company, that is SAIL, is above Tata Steel in terms of Net Profit.
Industry Ratios

Ratios
Comparitives

for:Tata

Steel

Ltd.
Rep.

Current

Rep. EPS

BVPS

OPM

NPM

RONW

Ratio

Company name
Steel
Essar Steel Ltd.
JSW Steel Ltd
MSP Steel & Power Ltd.
Rashtriya Ispat Nigam Ltd.
Shri Ramrupai Balaji Steels

Year

(Rs,)

(Rs,)

(%)

(%)

(%)

(Times)

603
603
603
603

9.13
53.28
0.19
0

31.48
240.36
10.68
0

24.23
27.79
11.24
25.89

8.54
14.14
1.29
16.13

29.01
22.16
1.77
15.36

1.97
0.89
3.37
4.33

Ltd.
Steel Authority of India (SAIL)

603

2.74

18.39

8.48

3.84

14.9

4.3

Ltd.
Tata Steel Ltd.
Visa Steel Ltd.

603
603
603

9.72
63.35
1.13

29.99
171.68
25.86

23.24
38.88
9.8

13.79
22.78
3.22

32.4
36.9
4.38

1.23
0.72
1.98

Analysis
The EPS for Tata Steel is the highest in the industry indicating that it is given the
highest earnings to its shareholders on one share. Thus, it is beneficial to invest
in the company and its policies are sound from shareholder point of view.

66

 Its current ratio is less than optimal, that is less than 1:1, which indicates less
liquidity in the company as compared to its counter parts.
Its RONW is also highest in the industry indicating that it is utilizing the funds at
its disposal in a manner that is better than all other players in the industry.
Almost all the figures given above indicate that the company is a leader in the
Iron and Steel sector and has proved its metal.
This shows that the company is best in the segment from the point of view
investment. The shareholders can get a good return on their investments.
Tata- Corus Deal
Recommended acquisition of Corus via Scheme of Arrangement
Initiation of a global partnership through a friendly transaction
Acquisition price 4.55 / USD 8.69 per Corus share in cash
Equity value of Corus of USD 8.23 bn(1)
Clear and compelling industrial logic for the combination
Global # 5 rank with potential to consolidate further
World Class Operating platform
Lowest cost position in two continents Western Europe and Asia
Market presence in automotive, construction and packaging
Technology and innovation
Continuous improvement culture
The TATA- CORUS deal will provide TATA a Multi- location, Strong Regional
Presence, Strong Brand Name, Greater than 50mtpa capacity, de-integrated production
by 2015. It will enable TATA STEEL to undertake Overseas Acquisitions in growing
and mature markets, to own strategic raw materials, to have enhanced customer reach
and access to new global markets.
Future Prospects

67

 The Company has initiated a program for expansion of crude steel making
capacity at Jamshedpur by 1.8 mtpa. The expansion project is expected to be
completed by 2008.
The increased requirement of coke would be sourced from Hooghly Met Coke &
Power Company Limited, a subsidiary of the Company. The coke making
capacity to be set up at Haldia is also being augmented from 0.8 mtpa to 1.2 mtpa
along with power generating capacity from 60 MW to 90 MW.
The project in Orissa envisages setting up an integrated steel plant of 6 mtpa
capacity in two phases of 3 mtpa each at Kalinganagar.
The Company has signed MoU with the Government of Chhattisgarh to set up a
5 mtpa capacity steel plant in 2 phases.
The Company has also signed an MoU with Government of Jharkhand to set up a
12 mtpa steel plant in Jharkhand in 2 phases of 6 mtpa each.
The Company has envisaged setting up a 2.4 mtpa steel plant in Bangladesh. The
discussions are continuing with the Government of Bangladesh on various issues
including supply of gas, lease of coal blocks and fiscal incentives.
The Company is setting up a Ferro Chrome Project at Richards Bay, South
Africa to produce 1.20 lakhs tpa of high carbon ferro chrome.
The company is undergoing a major restructuring of supply chain and the
replenishment process under the Theory of Constraints initiative. Pilot
projects have been rolled out under this initiative and they have started giving
remarkable results in reducing stock outs and enhancing the sales.
Long Term Strategic Plan
Strong Base in India
De- integrated Manufacturing
Primary Steel making in countries rich in iron ore and coal
Ownership/ Tie up of strategic raw materials

68

 Finishing and value addition in developed and growing markets such as India,
China, Europe, US and SE Asia.
Control over logistics cost and efficiency

FINDINGS AND RECOMMENDATIONS

Economy
The Government scenario is becoming stable and positive for development of
the country.
India has a number of restrictions on what may be imported and at what rate
of duty. During the last two years Indian customs duties have been reduced
drastically. Imports are consequently much cheaper and this has affected
several industries. These aspects should be kept in mind and the duties levied
may be increased resulting in imports becoming unattractive.
Trade Deficit has widened due to a reduction in exports. The permanent
solution to this is that inflow of foreign currency should be increased by
increasing exports, tourism, etc.
Inflation is around 6% according to WPI whereas it is around 7% - 8%
according to CPI. Inflation is required to be kept under strict vigilance in
order to enable the industries thrive.
Industry

69

 The Government Policy has been positive towards the Iron and Steel
industry. It has tried to ease the regulations governing the industry, helped in
infrastructure building.
Currently India is the 8th largest producer of steel in the world and has huge
iron ore reserves. Indian companies are taking over a lot of companies
abroad. This shows that the future for the industry is quite bright.
Major players in the industry are SAIL, TATA STEEL, ESSAR and JINDAL
STEEL.
There have been recent changes in the industry like the market is getting
consolidated, there is global growth, and there has been shortage of crucial
raw materials and tight shipment. These are not all positive changes. Few of
them are naturally governed and cannot be dealt with easily. So, whatever
can be controlled by us should be controlled.
There are certain threats to the industry but at the same time there are many
opportunities as well waiting to be explored. The threats have to be dealt with
very cautiously and opportunities need to be taken advantage of.
Tata Steel
The sustainable competitive advantage for the company is its huge captive
iron ore reserves which meet its entire requirements. It has high degree of
integration as well.
Tiscos focus on value-added products, long-term relationships with
customers and continuous technology up gradation has made it a world-class
steel producer. It has acquired various companies abroad and is continuing its
strategy for the same.
It should continue with this as this will put the company in the league of
POSCO.
Almost all the meetings that took place in the year were attended by the
directors. This shows discipline and interest on the part of the management.

70

 The major share holding of the company is with the promoter group and the
public.
Annual Report
Directors Report
It tells that the economy has been growing continuously, outlook for the industry
remains positive though rising costs on account of raw materials, freight and energy will
keep the margins under pressure, exports are growing rapidly, inflation has been brought
under control, Forex reserves have grown and business confidence is positive.
These factors indicate that India is at the inflexion point of development which bode
well for the domestic steel industry in the future. The pace of Indias development would
depend on the execution of the various infrastructure projects announced by the
Government during the year. In terms of the above aspects the company has performed
very well in the past year.
Auditors Report
The Auditors report of Tata Steel is not qualified at all and is a clean report. Almost
everything in the report proves that proper accounts have been maintained and they
represent a true and fair view of the working of the company.
Profit and Loss Account
Net income from operations has increased with particularly an increase in sale of core
products of the company. This shows that the company is improving its operations and
gaining efficiency in its core business.
Total expenditure has risen by 9% absolute change being 842.25 cr mainly due to
increase in manufacturing and other expenses by 7.6%. This indicates that the company

71

is spending more on its core activity and emphasizes on expanding its business through
its core working only.
It has increased by 29% and is at Rs 5296.59 cr mainly due to balance b/f from last year
i.e. 1790.21 cr. It has been divided as follows: Proposed Dividend- Rs. 719.51 cr, Tax on
Dividend- Rs. 100.92 cr and General reserve- Rs.1500 cr. Amount transferred to general
reserve is 9.9% of net sales.
Balance Sheet Analysis
Sources of funds
Adding all the shares issued as bonus shares and those issued to share holders
under schemes of amalgamation, we find out that out of the total subscribed
capital, 259, 862, 525 shares have been issued for consideration other than
cash. Thus the equity holders have just paid for 46.95% of the equity and rest
they have got through capitalization of general reserve or securities premium
account.
The surplus transferred from the p/l account to the reserve has increased from
Rs. 1790.21 crores to Rs. 2976.16 crores. This indicates to the fact that the
company has retained more earnings as compared to previous year. This tells
that company does not have a lot of good investment opportunities and,
hence, prefers retaining profits. This will lead to less distribution of profit to
the shareholders but will increase future earnings of the company. The
increase in reserves and surplus of approximately 42% is mainly due to
increase in general reserve (49%) and increase in balance c/f from profit and
loss a/c (66%).
Secured Loans have decreased by 276.44 crores mainly due to decrease in
syndicated loans from various banks.

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 There has been an overall increase in Unsecured Loans by Rs. 53 crores, an

increase of 19% due to substantial increase in buyers credit in foreign
currency by 220%.
Application of Funds
There has been an increase in all the fixed assets of the company. Increased
by Rs. 1509.65 crores i.e. over 10% due to a huge increase in plant and
machinery (increased by over 1800 crores).
The investments stand at Rs. 4069. 96 crores out of which long term and
current investments are almost equal.
Has increased by Rs. 301crores mainly due to an increase in stores and
spares, stock in trade and cash and bank balances. Sundry debtors have
decreased.
There have not been any abnormal changes in other current liabilities except
Interest accrued but not due which decreased by Rs. 60.86 crores.

Cash Flow Statement

There is a net cash inflow of Rs. 41.67 crores this year resulting in the cash balance at
the end of the year to be Rs. 288.39 crores. Net cash inflow has increased tremendously
indicating improvement in the liquidity of the company and its management of short
term funds. It can meet its cash commitments in a better way now as compared to last
year. This shows company has a good ability to generate cash in future.
Ratio Analysis
The P/E Ratio for Tata Steel for 2005-06 was 8.72 as compared to 6.58 in the
previous year. The EPS was 61.51 and the market price around 536.37 in
2005-06. This increase in P/E shows that the market expects the earnings to
rise.
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 The EPS for Tata Steel was Rs. 61.51 for 2005-06 as compared to Rs. 60.91
for the previous year. This increase is due to the slight increase in the Net
Profit of the company as the number of outstanding shares has been the same
for the two years.
PBIDT for TATA is 36.06%. Their PBIDT was Rs. 6183.5 crores and Net
Sales were Rs. 17144.22 crores. On this aspect as well the company is good
for investment purposes.
RONW was 36.91% for 2005-06 and was 50.75% for 2004-05. There has
been an increase in net profit but due to a huge increase in the reserves as
compared to the previous year the ratio has come down. This indicates that
the company has retained a major portion of its earnings which is beneficial
for the company as well as stakeholders in the long run.
Tata steel is amongst the top most profit earners of the Iron and Steel Industry. It forms
almost 34% of the total industry net profit. Only one company, that is SAIL, is above
Tata Steel in terms of Net Profit. The EPS for Tata Steel is the highest in the industry
indicating that it is given the highest earnings to its shareholders on one share. Thus, it is
beneficial to invest in the company and its policies are sound from shareholder point of
view. Its RONW is also highest in the industry indicating that it is utilizing the funds at
its disposal in a manner that is better than all other players in the industry. This shows
that the company is best in the segment from the point of view investment. The
shareholders can get a good return on their investments.
Recommendations
Develop raw material resources to ensure adequate supply of good quality
raw materials.
Ensure optimal exploitation of iron ore mines.
Improve infrastructure support to the industry.
Make available cheaper capital to fund capacity additions..

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 Maintain current excise duty on steel to make it affordable to end users.

Discourage the imports of defectives, which are affecting the quality of the
domestic steel industry.
Backward integration is the key to leadership
With steel prices set to decline and raw material prices still marching towards their peak,
gaining control over raw material sources is the key to profits for any steel manufacturer.
The players competitive positions will be decided by how much they can maximize
their realizations using value addition, and minimize their costs using backward
integration. Players are focusing on obtaining backward linkages, so as to eliminate the
risk of non-availability of inputs, and minimize the impact of an increase in their prices.
Most of the players are eyeing strategic stakes in coalmines abroad or in Indian iron ore
mines.
Thus, the key success factors for any steel company would be:
Proximity and access to raw materials.
Value addition and product range.
Proximity to markets.

Conclusion
Fundamental analysis holds that no investment decision should be made without
processing and analyzing all relevant information. Its strength lies in the fact that the
information analyzed is real as opposed to hunches or assumptions.
On the other hand, while fundamental analysis deals with tangible facts, it does tend to
ignore the fact that human beings do not always act rationally. Market prices do
sometimes deviate from fundamentals.

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This is true to an extent but the strength of fundamental analysis is that an investment
decision is arrived at after analyzing information and making logical assumptions and
deductions. Furthermore, fundamental analysis ensures that one does not recklessly buy
or sell shares especially buy. Hence fundamental analysis supports and encourages safe
investing.
No system is fool proof. No system has consistently outperformed the market. There is
no system that does not call for human judgment and input. All systems require thought
and some assumptions.
However, out of many systems that we might have experimented with and tried,
fundamental analysis is the most logical and the most meaningful.

BIBLOGRAPHY
http://www.google.com(for reference)
http://www.investopedia.com/university/
http://www.moneycontrol.com(various subsites)
http://www.steel.nic.in/over.htm
http://www.tatasteel.com/investorrelations/annual_
report-05-06/index.html
Capital line Database

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 Indiabulls intranet
KPMG intranet
Economic times
Hindu Business Line
Which company? ( an article on how to use fundamental analysis to identify a
winning stock)

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