BUSINESS VALUATION
MBA442F
A report submitted in partial fulfillment of the requirements for the degree of Master of Business
Administration
Submitted By:
Gowtham Kumar R Jadhav - 2027523
M Rohit - 2027532
Medha Singh - 2027640
UNDER THE GUIDANCE OF
PROF. RAJANI RAMDAS
MBA PROGRAMME
SCHOOL OF BUSINESS AND MANAGEMENT
CHRIST DEEMED TO BE UNIVERSITY, BANGALORE
DECLARATION
On behalf Gowtham Kumar R Jadhav, M Rohit, and Medha Singh, hereby we declare that the CIA
entitled “Equity valuation Report of a Tata Steel” has been undertaken by our group for the award
of Master of Business Administration. We have completed this study under the guidance of Prof.
Rajani Ramdas, Associate Professor, Department of Finance, Institute of management Christ
(Deemed to be University) Bangalore.
We also declare that this Equity valuation Report has been submitted for the award of any Degree,
Diploma, Associate ship, Fellowship or any other title, in CHRIST (Deemed to be University) or in
any other university.
PLACE-BENGALURU
DATE: 01/10/2021
Gowtham Kumar R Jadhav -
2027523
M Rohit -
2027532
Medha Singh –
2027640
TATA STEEL
Company Profile:
Tata Steel was established in India as Asia's first integrated private steel company in 1907. They
also developed India's first industrial city at Jamshedpur. Tata Steels is one of the leading global
steel companies. From Indian operations, the annual crude steel capacity is nearly 20 Million
Tonnes per annum, and they register a turnover of INR 91,037 crore in FY2021. In 2016 they
also set up a second Greenfield steel plant of 3 million tonnes per annum in the eastern state of
Odisha. Recently they are in the plan of expanding it to 8 million tonnes per annum which is
underway.
They possess and operate captive mines that help us to maintain cost – competitiveness and
production efficiencies through an uninterrupted supply of raw material. The Indian product
portfolio is divided into four segments – Automotive and Special Products; Industrial Products,
Projects, and Exports; Branded Products and Retail; and Services and Solutions. The Company
supplies hot-rolled, cold-rolled, galvanized, branded solution offerings, and more.
Industry Profile:
In 2019, India was the world's second-largest steel manufacturer, with 111.2 million tonnes (MT)
produced. The rise of India's steel industry has been spurred by the domestic availability of raw
materials such as iron ore and low-cost labor. As a result, the steel sector in India has contributed
significantly to the country's manufacturing output.
With cutting-edge steel mills, India's steel sector is advanced. It's always been the goal to
maintain older facilities up to date and improve them to be more energy-efficient. Steel
producers in India are divided into three categories: major producers, primary producers, and
secondary producers.
Market Size:
In FY21, crude steel and finished steel output were 102.49 MT and 94.66 MT, respectively.
Crude steel output is predicted to reach 112-114 MT (million tons) in FY22, up 8-9 percent YoY,
according to CARE Ratings. In FY21, finished steel consumption totaled 93.43 MT.
In FY21, finished steel exports and imports were 10.79 MT and 4.75 MT, respectively. India's
exports increased by 121.6 percent YoY in April 2021 compared to April 2020. India exported
8.24 MT of finished steel in FY20.
Investments:
In recent years, the steel industry and its allied mining and metallurgical industries have seen
significant investments and innovations. According to data given by the Department for
Promotion of Industry and Internal Trade (DPIIT), Indian metallurgical industries attracted US$
14.74 billion in FDI between April 2000 and March 2021. Some of the significant investments in
the Indian steel industry are as follows:
1. In June 2021, Mr. T.V. Narendran, the newly elected CII president and MD of Tata Steel, in
an interview with The Telegraph, stated that steel companies had firmed their plans to invest
~Rs. 60,000 crore (US$ 8.09 billion) over the next three years—this is was the most
significant private sector investment plan announced in recent times.
2. In June 2021, Shyam Metalics and Energy Ltd. (SMEL) announced that the company plans
to double its production capacity at an estimated investment of ~Rs. 2,894 crore (US$
389.72 million) through brownfield expansion at two of its units in the next 3-4 years.
3. In April 2021, in a virtual roundtable conference organized by the Indian Chamber of
Commerce, Mr. Shin Bongkil, the South Korean Ambassador to India, announced that
POSCO, the South Korean steel giant, is planning to set up an integrated steel plant in
Odisha at an investment of US$ 12 billion, which would make it the country's biggest
FDI project.
4. In May 2021, JSW Steel signed a Memorandum of Understanding (MOU) to conduct a
feasibility study with its strategic alliance partner JFE Steel Corporation to establish a
Grain-oriented Electrical Steel Sheet Manufacturing and Sales JV Company in India.
5. In May 2021, JSW Steel announced the steel-making expansion at its Vijayanagar plant
from 5 MT to 17 MT every year by the financial year ending March 2024.
6. In March 2021, JSW Steel completed its takeover of debt-ridden Bhushan Power and Steel
Ltd., boosting the former's overall output to 21.5 mtpa. JSW Steel's has 18 mtpa of capacity,
which will hit more than 26 mtpa with the addition of BPSL and a doubling of capacity at
JSW Steel's Dolvi steel mill to 10 mtpa.
7. In March 2021, Arcelor Mittal Steel signed a Rs 50,000 crore deal with the Odisha
government to set up a steel plant in the state.
8. In February 2021, Tata Steel BSL collaborated with FarEye, a software logistics firm, to
improve its digital transformation process.
Source: [Link]
GROWTH STAGE
The steel business is one of India's center ventures, adding to somewhat multiple percent of GDP.
Before February, the company wanted to accomplish a total limit of 300 MTPA by 2031 and
become independent in assembling a few particular grades. The arranged limit extension and
request development are relied upon to require Rs 10 lakh crore ongoing capital speculation and
27 GW power supply to the steel business by 2030–2031. India's steel industry utilizes more than
25 lakh individuals through immediate and backhanded positions and is relied upon to develop to
create 36 lakh occupations by 2031—unmistakably adding to the country's monetary success
straightforwardly (worth financial option) and by implication (assisting with building buying
influence through business generation). Operating against the setting of India's promising story of
economic development, India's steel industry has an abundance of space to develop. At 71 kg for
each capita in 2019, utilization is a lot below the worldwide normal of 225 kg. In any case, a few
advancements are required to spur a surge of interest, remembering sped up spending for
foundation, an extension of the rail line organization, improvement of the homegrown
shipbuilding industry, the opening-up of the safeguarded area for private investment, expected
development in the car and capital products industry, and growth in metropolitan and provincial
regions. The nation should extend its steel creation with requests expected to ascend from 110
million tons in 2020 to around 230 million tons by 2030–2031. India had focused on a limit of
180 million to 190 million tons each year (MTPA) by 2024–2025 and 300 [Link] 2030. Be
that as it may, the COVID-19 lockdown carried monetary exercises to a sudden stop and eased
back the steel business with debilitated interest. Organizations are currently exploring
tempestuous occasions, and the company's expected development is in danger.
PRODUCTION
The Indian steel industry has seen better production (crude steel) until FY20, and it is supposed to
continue this growth rate. Still, due to the rapid increase in the covid situation and amidst the
lockdown in the country, there is a slight drop in production (crude steel) by 2.18%, and further, the
production (crude steel) dropped in FY21 by 14.48%.Similarly, production in finished steel fell by
0.25% and 15.27% in FY20 and FY21, respectively. From April 2020 to February 2021, the
production of crude steel stood at 92.78 MT, and hence to reduce the burden of the steel industry
and support MSMEs, the government has reduced the customs duty on stainless steel to
7.5%.Overall, the manufacturing output of steel in India is expected to increase to 128.6 MT by
FY21, which will help to increase the country’s share of global steel production from 5.9% in FY18
to 7.7% by FY21.
(Source: [Link])
CONSUMPTION
As per the graph below, the consumption of finished steel grew at a CAGR of 5.2% between
FY16 ~ FY20, and it reaches the mark of 100 MT, where the consumption of finished steel in
absolute increases from 8.55 MT in FY20 to 9.13 MT FY21.
In FY21, India’s consumption of finished steel is 6.78 MT, and being a developing nation, India
aims to improve per capita steel consumption to 160 kgs by FY2030 ~ 31; this could happen by
rapid growth in the industrial sector and rise in infra expenditure projects in roads, highways, and
railways, etc.
India’s rural consumption of steel stood at 19.6kg/per capita in FY21, targeting to increase to
38kg/per capita by FY2030 ~ 31.
(Source: [Link])
IMPORT & EXPORT
India's export and import of finished steel stood at 9.49 MT and 4.25 MT respectively in FY 20
and FY 21; India's export increased by 196% compared to FY20 and 17 % compared to FY19
due to sudden demand in EU nations. In FY20, India exported 8.24 MT of finished steel.
Finished steel from India is exported to many markets such as Italy, Belgium, UAE, Nepal,
Vietnam, etc. At the same time, India's biggest importers of finished steel are South Korea, China,
and Japan.
(Source: WORLD BANK)
STEEL GROWTH DRIVERS
The appliance and consumer electronic (ACE) sector between FY2018 ~ 25F are expected to be
at the CAGR of 9.91%, contributing to the steel industry's growth. Growth in automobile
production which is currently at 26.35 million in FY21, is expected to increase. The gross value
added (GVA) of the construction industry grew 4.4% in FY20 and is expected to post rapid
growth in coming years, backed by higher expenditure from the government of India. Also, the
construction industry is one of the major consumers of steel, expansion across the construction
industry will convert into growth of the steel sector.
(So
urce: WORLD BANK)
COVID IMPACT AND ITS RESPONSE
The pandemic has dissolved interest because of diminished utilization in end-client
businesses. Steel requests dropped 54% Yoy in May, and limit use in rough steel creation
dropped to 26.5 percent in April. The pandemic is also blocking and intends to add limits
because of the crunched liquidity of Indian maker’s pre-COVID, which deteriorated during
falling interest. Also, the high obligation is required to prompt higher interest costs and work
deficiencies forestalling practical creation.
Indian steel players will probably concede the limit expansion plans of right around 10 MT by
no less than one to two years. In early FY21, Indian steel players saw uses diminished by 15
to 20 percent compared to earlier years; a few players likewise had higher reliance on trades.
In recent years, the steel business has filled in close connection with in g going ahead, India's
GDP development is relied upon to stay quiet. Hence, the steel business's development will
probably remain quieted—wrecking the previously mentioned development plans. Therefore,
the nation will require a recovery intended to alleviate the effect of the pandemic-actuated log
jam.
GROSS DOMESTIC PRODUCT (GDP)
The vital job of steel in India's development and its future has been caught in a report ready
by the National Council of Applied Economic Research (NCAER). Its discoveries propose
that the steel area in India has an extremely high capability of contributing to India's general
turn of events. For sure, it is the one product that has diverse applications crossing different
areas of financial movement. It is utilized in building houses, fabricating vehicles, and
everyday utensils just as in for bundling. Exceptional preparations are progressively being
used in bundling, manufacturing, and designing ventures, for example, power age,
petrochemicals, and manures.
That steel plants present tremendous work openings, particularly in Tier III urban
communities, is another reality that can't be overlooked. Steel has a business multiplier
impact of 6.8x while it has a yield multiplier impact of 1.4x. Further, India has now
overwhelmed Japan to turn into the world's second-biggest maker of crude steel, creating
more than 100 MT of it every year. Steel currently contributes about 2% to India's GDP and
utilizes approximately 6 lakh individuals straightforwardly and 20 lakh individuals in a
roundabout way.
Also, India's essential area set apart by a long coastline to empower fares and imports makes
it a central member in the worldwide steel market. These details alone indicate the
significance of steel driving the country's development past 7% Y-o-Y.
Source: RBI
GDP & STEEL PRODUCTION GROWTH COMPARISON
15
10
0
8 1 4 7 0 3 6 9 2 5 8 1 4 7 0 3 6 9
96 197 197 197 198 198 198 198 199 199 199 200 200 200 201 201 201 201
1-5
/ / / / / / / / / / / /
2 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12/ / / / / /
/1 / / / / / / / / / / / / / / / / /
31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31
-10
GDP Growth (%) Steel production growth(%)
Source: RBI
GOVERNMENT REGULATIONS ON STEEL INDUSTRY
There are four major legislation covering Occupational Health and Safety at Workspace. They
are:
The Factories Act, 1948- covers factories where the Chief Inspector of Factories of the
respective states enforce safety at the work-place.
The Mines Act, 1952 and Mines Rules, 1955- is basically for mining industry Directorate
General of Mines Safety (DGMS) under Ministry of Labour & Employment, Government
of India is the ruling body enforcing law.
The Dock Workers (Safety, Health and Welfare) Act, 1986.
The Building & Other Construction Workers Act, 1996- it covers for constructions
workers at the site of construction where Directorate General Labour Welfare is the
central head and Labour Commissioners/Factory Inspectorates manages the state level
enforcements.
The major hazards that can occur at a steel plant are:
Type of Hazard/Risk Major areas where Hazard is faced
Toxic gases (rich in Carbon monoxide) All over the plant
Explosive Gases (Rich in Hydrogen and All over the plant
Methane)
Harmful Chemicals Coal Chemicals plant, CRM
Liquid metal/ slag (burn, explosions) Blast Furnace, SMS, Continuous casting,
Foundries
Extreme Temperature (-180 OC to 1700 Coke Ovens, Blast Furnace, SMS,
OC) Continuous casting, Foundries, Rolling
Mills and Cryogenic Oxygen Plant
Fire All over the plant
Electric Shock, Electrocution, Flash over All over the plant
Rail/ Road Traffic Movement All over the plant
Moving/ Rotating machines (Hit, Caught, All over the plant
pressed etc.)
Working at Height All over the plant
Dust, noise, heat and Vibration All over the plant
Material Handling All over the plant
Confined Space (suffocation/ gas Oil cellar, Conveyor/ cable galleries, Silos,
poisoning) etc.
High pressure Steam, Water & industrial All over the plant
gases
MAJOR PLAYERS
JSW Steel
JSW Steel is a significant subsidiary of the JSW Group. The company is a major incorporated
steel producer. It is currently one of India's fastest-growing enterprises, with a presence in
over 100 countries. JSW is also the first company to produce high-strength, advanced top-of-
the line steel products for its vehicle sections.
With the most significant item portfolio in steel, the organization is likewise India's biggest
steel exporter, transporting to more than 100 nations across five landmasses. With plants in
Karnataka, Tamil Nadu, and Maharashtra, it can create 18 MTPA. As the organization
inclines up creation plans, it is on target to hit the 40 MTPA mark within ten years.
JSW Steel plans to expand its ability to deliver around 27 million tons (MT) of crude steel by 2022
from approximately 18 MT in the financial year 2020.
Steel Authority of India Limited (SAIL)
SAIL is India's most prominent steel-production organization and one of the seven
Maharatnas of the country's Central Public Sector Enterprises.
The organization produces iron and steel at five coordinated and unusual steel plants, found
mainly in India's eastern and focal districts and arranged near homegrown wellsprings of
crude materials. SAIL fabricates and sells a broad scope of steel items. SAIL mined an
aggregate of 32.40 million tons of iron mineral, motions, and coal in FY20.
RATIO ANALYSIS
PER-SHARE RATIO
Basic EPS
Earnings per Share (EPS) is the industry benchmark by which investors judge a company's
performance. The dilutive impact of convertible instruments is not taken into account in basic
earnings per share. Basic EPS = (Net income - preferred dividends) ÷ weighted average of
common shares outstanding during the period.
Diluted EPS
When all convertible securities are exercised, diluted EPS is used to assess the quality of a
company's earnings per share (EPS). All outstanding convertible preferred shares, convertible
debentures, stock options, and warrants are considered convertible instruments.
Cash EPS
Cash earnings per share (cash EPS), often known as operating cash flow, is a financial
performance metric that compares cash flow to outstanding claims. The higher a company's
cash earnings per share (EPS) is, the better it has fared over time.
Revenue from operations/share
The amount of revenue generated by a company's primary business is referred to as revenue
from operations. Revenue from operations excludes income from non-operating activities
such as asset sales, subsidiary sales, investment income, and so on. On a per-share basis,
Revenue from operations/share reflects how much revenue a firm generates from its primary
business. Net Profit Margin:
The key measure for comparing the profitability of two or more companies in the same
industry is the net profit margin. After all, expenses are paid, the net profit margin is the
percentage of total sales that stays with the company as profit.
Source: Annual Report
When Comparing the EPS, the company had performed well in 2018 and drastically fell
from there. Due to the new entrants and Less demand for the products in the market, the
Cash EPS of the Company is always high, which shows the operational solid Cash flows.
The revenue from operation and also the net profit per share is also comparatively high
in Tata Steels as the company can sustain and make the same sale in the markets
Profitability Ratio
Return on Equity / Net Worth
The return on Equity (ROE) is a financial performance indicator computed by dividing
net income by shareholders' Equity. Because shareholders' Equity equals a company's
assets less its debt, the return on net assets is ROE.
ROCE
Return on Capital Employed or ROCE, measures how well a company's Capital is utilized
to generate profit. ROCE is calculated as a percentage. A 20 percent ROCE means that
for every 100 rupees invested in Capital, the company can earn a 20-rupee return.
Return ON Assets
The return on assets ratio, also known as the return on total assets, is a profitability ratio that
compares net income to average total assets to determine the net income generated by tangible
assets during a given period. This ratio, in a nutshell, determines how profitable a company's
assets are.
Debt/Equity:
The debt-to-equity ratio indicates how much of the company's overall funding originates from
creditors (those who lend money at a profit) and investors (those who invest in the shares of a
company). Higher debt-to-equity ratios indicate that the bulk of a company's funding comes from
loans and other forms of debt (such as debentures and bonds).
Asset Turnover Ratio (%)
The debt-to-equity ratio is a financial indicator that displays how much debt and Equity are used
to fund a company's assets. Risk, gearing, or leverage are all terms for the same ratio, strongly
related to leverage.
Profitability Ratio 2021 2020 2019 2018 2017
Net Profit Margin (%) 5.03 0.66 5.62 13.3 -3.71
Return on Net worth/Equity (%) 10.19 2.18 15.33 22.92 -11.93
Return on Capital Employed (%) 12.69 5.79 13.59 10.92 9.64
Return on Assets (%) 3.05 0.62 4.37 6.4 -2.44
Total Debt/Equity (X) 1.11 1.59 1.37 1.51 2.32
Asset Turnover Ratio (%) 63.66 59.48 67.5 63 64.78
Source: Annual Report
Return on Equity was low in 2017, and then the company managed to make it high. It had
an ROE of 10.19 in 2021; the ROCE is also high, which shows the company is effectively
using its Capital in the business.
Return on Assets is fluctuating a lot because of the nature of the company. The main
Assets include machinery, which will be having depreciation and many functional
problems, which makes this ratio more fluctuating.
The Total Debt to Equity was always below three, which shows the company does not
have a high amount of debt, and it managed to run with very low debts. The asset
Turnover ratio also indicates the company is effectively using its resources for the
business.
Liquidity Ratio
Current Ratio
The current ratio is a liquidity ratio that evaluates a company's capacity to pay short-term or one
year obligations. It explains to investors and analysts how a firm might make the most of its
existing assets on its balance sheet to pay down current debt and other obligations.
Quick Ratio
The quick ratio, also known as the acid-test ratio, is a sort of liquidity ratio in finance that gauges
a company's capacity to extinguish or reduce current liabilities instantly using its immediate cash
or quick assets.
Inventory Ratio
Inventory turnover measures how many times inventory is sold or used in a certain
period, such as a year. It's used to determine if a company has too much stock concerning
its sales.
Dividend Payout Ratio
The dividend payout ratio is the percentage of net income that a company pays out in
dividends to its stockholders. The portion of earnings that are not paid to investors is
invested to ensure future earnings growth.
Earnings Retention Ratio
The retention ratio is the percentage of a company's earnings credited to retained earnings
rather than paid out as dividends. It is also known as the retention rate because it is the
inverse of the dividend payout ratio.
Cash Earnings Retention Ratio (%)
The retention ratio is the percentage of profits that are kept in the company as retained
earnings. The retention ratio is the percentage of net income held in the company instead of
being distributed as dividends.
Source: Annual report
The current and quick ratio of the company shows the company has the capability of paying off
the short-term obligations fast and does not have many burdens as liabilities; the inventory Ratio
is also moderate. Hence, the company is managing the sales and stock in hand very effectively.
The dividend payout ratio is also good, and the company is paying a good amount as dividend,
and the company is also investing the money for the overall growth. The company is also holding
a certain amount as Retained earnings which can be seen in the graph.
Interest Coverage Ratio
The interest coverage ratio is a debt-to-profitability ratio that determines how readily a
corporation can pay interest on its debt. Divide a company's earnings before interest and taxes
(EBIT) by interest expense for a particular period to get the interest coverage ratio.
Source: Annual Report
Valuation Ratios
When compared to a specified measure, such as profits or enterprise value, a valuation ratio is one
of the various formulas determining whether a security is cheap or costly.
Retention Ratio
The retention ratio is the percentage of a company's earnings credited to retained earnings rather
than paid out as dividends. It is also known as the retention rate because it is the inverse of the
dividend payout ratio.
Earnings Yield Ratio
The earnings yield is calculated by dividing the most recent 12-month earnings per share by the
current market price. The earnings yield (the inverse of the P/E ratio) reflects how much of a
company's earnings per share is paid out in dividends.
Source: Annual Report
The valuation Ratio also shows the company is performing well, and the Earnings yield ratio is also
good; hence, it shows the company is one of the best to invest.
COMPETITIVE ANALYSIS OF TATA STEEL
SWOT ANALYSIS
PESTEL ANALYSIS OF STEEL INDUSTRY
India's steel industry has been thriving for many years. The steel industry accounts for around 1.2
percent of total GDP. The tremendous rise in steel demand is witnessed in this sector due to
industrial growth and other significant advancements occurring all over the world.
Political analysis
The aspects that can influence the business are included in the political analysis. It consists of the
political element, which consists of the government's policy toward a given industry. The
government introduces the National Steel Policy in this industry. The primary goal of implementing
this policy is to close the gap between steel demand and supply.
Special incentives are created for the steel industry under this strategy. Incentives for the steel
sector include tariff reductions, zero duty on imports, and the allocation of land and other
infrastructural facilities. With the expanding industry, the government increased the sales tax
from 15% to 20% while allowing 75 percent FDI (foreign direct investment). This program also
provides additional customs duty reductions.
Economic analysis
From previous decades, the steel business has been considered to be a tremendously growing
industry. Opening up to diverse economies has resulted in foreign direct investment. Various
foreign actors are interested in investing in the country. Permission in advance licensing is one of
the several economic programs that allows duty-free importation of raw materials for export.
However, despite the industry's expansion, GDP is growing at a snail's pace. The steel industry is
also dealing with the aftermath of the subprime mortgage crisis in the United States, which
occurred in 15 months. The subprime mortgage crisis has had negative consequences for
automobiles, infrastructure, and other steel-related businesses. In today's world, there is a
tremendous disparity between demand and supply for steel.
Sociocultural analysis
One of the essential aspects of industry study is sociocultural, which describes the impact of a
given industry on society. Similarly, the steel industry encourages people to work permanently.
Still, it separates the area between rural and urban sectors because the industry is only in one
area, which leads to specific growth in that area and not the overall growth people who work in
the steel industry have various health problems that are incurable in nature as a result of the
working circumstances. Many industries do not pay attention to the health of their personnel.
Technical analysis
Traditional technology has been used in the sector for many years. The application of the
technology in the manufacturing process is not novel. Tata Steel is developing the same strategy
that is used to boost steel trading. Steel trade is now available online, thanks to tata and sail.
Only the electric furnace is employed in the manufacturing process these days; however, there is
waste in the raw materials due to energy fluctuations.
Primary arc, induction furnace, and electric furnace are the essential technologies employed in
the manufacturing process, all of which are old-fashioned. Sail, one of India's biggest steel
producers, is working with PASCO to implement a plan to use the latest technology known as
FINEX.
Environmental analysis
Even though the steel industry supports numerous industries and promotes development, it
creates an adverse environment. All significant industries adhere to government-mandated
environmental regulations, despite harming the environment. Many industries use pollution
control and energy conservation devices; however, this is insufficient. The ecological aspect is
given the least weight.
However, Tata Steel is promoting an environmentally friendly technique to reduce CO2
emissions during the manufacturing process. Tata is working on developing Ultra-Low Carbon
steel, which will reduce environmental damage.
Legal analysis
The government is enacting numerous laws and regulations for this industry. The government is
set to emphasize the health rules affecting employees in the steel industry. In the steel sector,
special health incentives and standards are implemented.
Porter's Five Forces of the Steel Industry
S. Name of force Constituents
No.
1 Threats of new
entrants Economies of scale
Product Differentiation
Capital Requirements
Switching Costs
Access to distribution channels
Government Policy
2 Bargaining
power of competition in supplier industry
Suppliers substitutes of suppliers' products
Importance of buyer to the supplier
Switching costs for suppliers' products
Threat of forward integration by suppliers
3 Bargaining
power of Switching Costs
buyers Scales of buyer purchases
differentiated products
Competition between buyers
availability of information
threat of backward integration
concentration of buyer power
4 Threat of
substitute Buyers propensity to substitutes
products Relative price and performance of substitutes
Cost of switching to substitutes
5 Rivalry among
competing Diversity of competition
firms Excess capacity & exit barrier
Intensity of rivals
Barriers to entry: It's reasonable to assume that the entry barriers are moderate. The following are
the factors that support our point of view.
Capital Requirement: The steel industry is a high-capital-intensive sector. Depending on
the location of the plant and the technology employed, it is predicted that a 1 mtpa
integrated steel production will cost between Rs. 25 billion and Rs. 30 billion to build.
Economies of scale: When it comes to sector forces, the size of the operation matters.
Fewer costs, lower R&D expenses, and superior bargaining power when obtaining raw
materials are all benefits of economies of scale. It should be emphasised that integrated
steel corporations have their own mines for essential raw resources such as iron ore and
coal, which shields them to a large extent from new entrants.
Government Policy: The government has a policy that benefits steel producers. There are,
however, some inconsistencies in the allotment of iron ore mining and land acquisitions.
Furthermore, regulatory clearances and other challenges are some of the most significant
obstacles for newcomers.
Product differentiation: Steel has low product differentiation barriers because it does not
fall into the luxury or specialised products categories, and hence does not have a significant
price difference. Certain firms, such as Tata Steel, however, continue to command a
premium for their products due to their high quality and long-established brand value.
Buyer bargaining power: Buyers have less bargaining power than in the FMCG or retail
industries. The government, on the other hand, has the authority to limit or cap prices if it
deems it necessary. Steel firms offer their products either directly to end users or through
their own distribution networks. Exports are also done by some businesses.
Bargaining power of suppliers: Supplier negotiating leverage is limited for fully integrated steel
plants because they own major raw material mines such as iron ore coal. Those who are non-
integrated or semi-integrated, on the other hand, must rely on suppliers. SAIL, which imports
coking coal, is an example.
Bargaining Power of Buyers: Buyers have limited bargaining power because the items are used
in a wide range of industries and the number of providers is relatively low. Because the products
are more or less standardised, the costs are competitive as well; yet, only a few companies can
claim premium status, such as TATA Steel, due to its long-standing brand image.
Rivalry: The domestic steel sector is in a medium state, as demand continues to outstrip supply.
Steel is a net importer in India. However, there is a risk of cheaper products being dumped.
Threat of substitutes: It's at the middle of the scale. Despite the fact that aluminium use in the
vehicle and consumer durables industries has been steadily increasing, it still does not pose a
substantial threat to steel, which cannot be totally replaced and has a large cost differential.
After considering all of the factors mentioned as well as the current global situation, we believe the
local steel sector will be able to continue its pace in the long run. However, in the short term,
growth may be hampered. Investors should concentrate their efforts on businesses that are
integrated, have economies of scale, and provide high-quality goods.
Capital Expenditure Driver
DEPRECIATION-The Company audits the property's valuable existence, plant and hardware,
and immaterial resources toward the finish of each detailing period. This reassessment may bring
about a change in depreciation and amortization cost in future periods. Depreciation or
amortization is given to discount, on a straight-line premise, the expense/considered expense of
property, plant and hardware, and immaterial resources, including those held under finance
leases to their remaining worth. These charges are started from the dates the resources are
accessible for their expected use and are spread over their assessed helpful monetary lives or, if
more limited on account of rented resources, over the rent time frame. The assessed helpful
existences of resources, remaining qualities, and deterioration techniques are surveyed routinely
and, when essential, changed.
Source: Annual Report
Revenue Drivers
Tata Steel's revenue model deals with iron making, steel-making, and rolling products (crude steel
production, hot metal production, Iron ore, value-added products, etc.). When control of the
product is transferred, that is, when the products are delivered to the client, revenue is realized.
The company's revenue increased from FY 2017 mainly due to the commencement of operations
in Tata Steel Kalinganagar ('TSK') in May 2016, higher realizations, increased volumes,
improved demand in international markets, etc. Though there was a decline in revenue due to the
decrease in demand and international market during Covid-19 lockdowns, in FY 2021 their
revenue has increased (change 7%) due to the increase in realization of both domestic demand
and exports markets for their products. The company's revenue is expected to increase in the
future as well.
The production details are below:
Source: Annual Report
Cost Driver
From Tata steel, we can analyze the various cost drivers occurring, such as the cost of
materials consumed, purchases of stock in trade, employee benefit expenses, depreciation and
amortization expense, finance costs, and other expenses, including fuel consumed and rent
and royalty, etc.
1. Purchase of stock in trade: Looking at The FY 2020-21, at Tata Steel, the expense
was lower due to lower purchases of imported rebars, wire rods, and billets, and structural
steel owing to lower requirement, partly offset by increases at other sustainable businesses.
2. Cost of materials consumed: During the year under review, the cost of materials
finished decreased primarily due to lower prices of imported coal, along with lower
consumption of coal and purchased pellet, ferroalloys, and other raw materials due to lower
production owing to lockdown during Q1FY2021.
3. Employee benefits expense: During the fiscal year under review, employee benefits
expenses increased due to the previous year's wage agreement finalization and the resulting
impact on retirement provisions.
4. Depreciation and amortization expense: The depreciation charge for the year is
marginally more significant than the previous year, owing to a higher amortization charge on
capitalization of stamp duty on the expired section of the lease as well as fresh capitalization,
which is offset by assets being completely depreciated throughout the year.
5. Other expenses: Other expenses were lower than the previous year due to a lower
level of activity due to the COVID-19 lockdown, primarily due to lower conversion charges,
primarily at FAMD, lower consumption of stores and spares, lower power cost, lower freight
and handling charges due to lower domestic shipments, lower repairs to machinery as
compared to the previous year, and lower IT transformation initiatives.
6. Finance costs and net finance costs: Finance costs increased during the fiscal year
under review, owing primarily to higher interest on new issues of Non-Convertible
Debentures, as well as higher interest on short-term borrowings, unsecured foreign loans,
higher interest under provisions of the Income Tax Act of 1961, and interest on export
advance, which were partially offset by the lower charge on Commercial Papers and higher
capitalization of interest. Domestic term loan interest rates were about equal, as a drop due to
repayments at the end of the fiscal year was countered by a higher charge on new loans at the
start of the fiscal year. Net finance charges were marginally more increased due to more
significant finance costs, offset by higher interest income on inter-corporate deposits, interest
on income tax refunds received in previous years, and higher gain on sale of mutual funds.
Debt Driver
The debt structure of the company includes loans from Joint Plant Committee Steel
Development Fund, Loans from banks/financial institutions, commercial papers, bonds, and
debentures. The total outstanding borrowings were secured by property, plant and
equipment, right-of-use assets, inventories, and receivables. Loans from Joint Plant
Committee Steel Development Funds are repayable in 16 equal semi-annual payments after
four years from the tranche; a term loan is payable in 18 semi-annual installments
commencing from March 2022. Commercial papers are short-term, and maturity range
between one to three months. The Company's Gross debt for FY 2020-21 reduced mainly
because of repayment / prepayment of the borrowings, including lease liabilities.
Source: Annual report
Working Capital Driver
Tata Steel's completed and semi-finished inventories were mainly due to increased sales
volumes compared to the previous year. The lockout impacted Q4FY2020, resulting in
increased inventory buildup. Raw material stocks have reduced from a year earlier, mainly
owing to a decrease in inventory at FAMD for the 2020-21 fiscal year. The following are
some observations made when reviewing a five-year annual report:
The firm gives customers who purchased products on credit a fair 0 – 90 days (Trade
receivables period). Trade receivables grew considerably over the previous year, owing
mainly to an increase in group company receivables for the sale of iron ore and coal and the
cessation of discounting of group business receivables.
The creditors have given the company 90 days to repay its amount to them. The creditors
include MSE (3% of total payables) and other suppliers. The company's inventory cost
comprises raw materials, stores, and spares, Work – In – Progress. It has a -31% change in
inventory value as production was low this year. Stores and spares inventory decreased
mainly on account of planned reduction.
REFERENCES
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