Eic Analysis of Tata Steel Essay Example

follows the policy of entering into long term supply contracts with raw materials vendors. Thus there can be a huge time gap between variation in prices under purchase contracts and the time when Corus can make a corresponding price change under its sales contacts with its consumers.

Moreover, Corus may not be able to pass on the increased raw materials costs to its customers. Such developments would lead to a downside in our rating. Steel production processes are energy dependent and price movements in the energy market would accordingly affect Tata Steel’s bottom line.

Tata Steel became 6th biggest Steel Producer in the World after acquiring Corus, but the cost of the integration goes much more beyond the financial aspect. There are other factors which will add to overall integration costs such as

Cross Cultural Integration Employer-Employee Relationship

Industry analysis:

1. Government Policy on Steel Industry

New Industrial Policy, July 1991 - Iron and Steel industry, removed from the public sector and exempted from the provisions of compulsory licensing.

From 24. 5. 92, Iron and Steel industry has been included in the list of `high priority'industries for automatic approval for foreign equity investment upto 51%. This limit has been recently increased to 74%.

2. International conditions

The steel industry is subject to cyclical swings arising from factors such as excess capacity, regional demand ; supply imbalances and volatile swings in market demand and prices, more recently exacerbated by quarterly pricing for iron ore and metallurgical coal. Global demand surpassed the pre-crisis peak in the financial year 2010-11, driven by strong demand in the developing economies, notably China. Prices for iron ore and metallurgical coal spiked, exacerbated by supply disruptions due to flooding in Queensland,

Australia.

The Indian operations benefitted from strong domestic demand and achieved record output at 6. 855 million tonnes. The South East Asian plants also benefitted from good demand and operated close to full capacity. Steel demand has not recovered to pre-crisis levels in the developed countries. Tata Steel Europe continued to calibrate its production at levels consistent with market demand in the UK and Europe.

3. Labour conditions

Tata Steel India reached the milestone of 82 years of industrial harmony and peace. During the financial year 2010-11 industrial relations remained normal at all locations.

Market based new wage series (lower than the existing wage series but higher than the market median) was introduced after arriving at a settlement with the Union during FY2010-11. All the new recruitment for the expansion units have been done in the new series of wages.

4. Industry life cycle

According to the National Steel Policy announced in November 2005, overall steel production is expected to rise from the current level of 44. 54 million tonnes to 110 million tonnes by fiscal 2020. Domestic steel demand is expected to grow by over 7 per cent on a compounded annual basis over the next 15 years.

Liquidity Strategy: During the financial crisis, the Company had focused on raising additional debt in order to maintain a liquidity buffer given the uncertain nature of the steel markets. However, given the lower level of earnings and increased debt, the leverage position of the Company had become sub-optimal. Therefore in FY 11, the Company continued on its journey of deleveraging. It repaid Rs. 4,258 crores of borrowings during the year. For the global financial crisis, the company responded very quickly on many fronts

and financing was certainly one of them.

Recognising the uncertain financing environment and the fragile state of the global banking industry, company has focussed on both internal and external levers. Primary importance is placed on conserving liquidity through reduced spend management and sharp reduction in working capital levels. Also focus is given on improvement in the productivity levels and reduction in overheads. On capital expenditure, company has re-prioritised on the most value creating and critical projects and reworked the capital planning strategy. On the external front, long term capital are raised which acts as a liquidity buffer in the current circumstance.

The above actions ensured that the Tata Steel Group had adequate liquidity and also financial flexibility for growth and exigencies. 2. Non financial factors:

1. Management

The operations and successes of the Tata Steel Group are taken care of by its capable management and Board of Directors. It is under the leadership of Mr. Ratan Tata that the company has scaled new heights and established a presence as one of the leading steel conglomerates in the world.

2. Future prospects

Tata Steel is expected to complete its 2. 9mn tonne steel capacity expansion of its Jamshedpur plant by end of FY12E.

The expansion will take Tata Steel's domestic steel capacity to 9.7mnt pa. Tata Steel's India operations enjoy the highest operating margins on account of high raw material integration (100% in iron ore and ~50% of coking coal).

The refinancing of the long term loan of $5. 4bn for Corus' acquisition has also eased investor concerns on Tata Steel's leveraged balance sheet. The FPO proceeds will further de-leverage Tata Steel's balance sheet and help it to smoothly fund its high return expansion

projects.

3. Policies

Quality Policy Tata Steel is committed to creating value for all our stakeholders by continually improving our systems and processes through innovation, involving all our employees. This policy shall form the basis of establishing and reviewing the Quality Objectives and shall be communicated across the organization. The policy will be reviewed to align with business direction and to comply with all the requirements of the Quality Management Standard.

Corporate Social Responsibility Policy

Tata Steel believes that the primary purpose of a business is to improve the quality of life of people.

So it is committed to improve the quality of the life of the people in the areas where it operates.

Environmental, Occupational Health & Safety Policy Tata Steel reaffirms its commitment to provide safe working place and clean environment to its employees and other stakeholders as an integral part of its business philosophy and values under which it will continually enhance its Environmental, Occupational Health & Safety (EHS) performance in its activities,products and services through a structured EHS management framework.

Research Policy

Tata Steel nurtures and encourages innovative research in a creative ambience to ensure that the competitive advantage in its overall business is retained and surpassed. Towards this goal, the Company commits itself to providing all necessary resources and facilities for use by motivated researchers of the highest caliber.

Strategies and technical competence

With regard to Value Creation, the Tata Steel Group set itself a target of increasing the return on invested capital of its existing assets to 30% by 2012-13 and to generate selective growth.

In order to meet this target, the Group has developed a two-fold strategy:
In order to increase the quality of earnings of its existing assets, the

Group will pursue the optimisation of its European assets, restructure low profitability assets and continue to derive benefits through continuous improvement and synergies across the Group.
In order to generate selective growth, the Group will pursue capacity expansions and securing access to raw materials.

The Group is increasing its capacity in India, through expansion of its current operations in Jamshedpur and through the construction of a greenfield site in Orissa, and assessment of raw material investment opportunities as and when they arise.

Inputs used and its availability

One of the major problems faced in the steel sector is the availability of raw material. Tata Steel in India is an integrated player, for the majority of its raw material requirements.

However, raw material self-sufficiency for the consolidated entity is at 25% post the Corus acquisition. It has been the stated objective of the company to increase self-sufficiency of raw materials to 50% in the medium to long term. Therefore company is acquiring new virgin sites with significant resource potential & stocks or in terms of smaller existing ventures which can be quickly aligned to the requirements in Europe.