Tata Steel - Financial Analysis

Working Capital Management
PROJECT REPORT
April 2007 - June 2007
Submitted in partial fulfillment of the requirements for the award of
two year full time, Masters in Business Administration
By
Sony Mathew
(Amrita School of Business)
Under the guidance of
Ms. Sunanda Muralidharan Mr. Pradeep Kumar Bal

Associate Professor (Finance) Senior Manager, Business Analysis
Amrita School of Business Flat Products, Tata Steel
Ettimadai. Jamshedpur.
Amrita School of Business

Amrita Vishwa Vidyapeetham
Ettimadai, Coimbatore - 641 105
Summer Project-2007 Working Capital Management
Declaration
I hereby declare that the project entitled “Working Capital Management” is submitted in partial
fulfillment of my MBA Degree “2006-2008” was carried out with sincere intention of benefiting the
organization. The project duration was from 23rd April 2007 to 23rd June 2007.
To the best of my knowledge it is an original piece of work done by me and it has neither
been submitted to any other organization nor published at anywhere before.
Name: Sony Mathew
Date: 23 rd June 2007 Signature
Place: TATA STEEL (Jamshedpur)
Amrita School of Business

Acknowledgement
Whatever we do and whatever we achieve during the course of our limited life is just
not done only by our own efforts, but by efforts contributed by other people associated with us
indirectly or directly. I thank all those people who contributed to this from the very beginning
till its successful end.
I sincerely thank Mr. Pradeep Kumar Bal (Senior Manager, Business Analysis, FP),
person of amiable personality, for assigning such a challenging project work which has
enriched my work experience and getting me acclimatized in a fit and final working ambience
in the premises of Flat Product Business Centre (TATA STEEL).
I acknowledge my gratitude to Ms. Sunanda Muralidharan (Associate Professor,

Amrita School of Business), for her extended guidance, encouragement, support and reviews
without whom this project would not have been a success.
Last but not the least I would like to extend my thanks to all the employees at Flat
Product department and my friends for their cooperation, valuable information and feedback
during my project.
Amrita School of Business ii

Executive Summary
The project on Working Capital Management has been a very good experience. Every
manufacturing company faces the problem of Working Capital Management in their day to day
processes. An organization’s cost can be reduced and the profit can be increased only if it is
able to manage its Working Capital efficiently. At the same time the company can provide
customer satisfaction and hence can improve their overall productivity and profitability.
This project is a sincere effort to study and analyze the Working Capital Management
of TATA Steel and also emphasis to Flat Product Profit Centre of TATA Steel. The project
work was divided into two phases. The first phase was focused on making a financial overview
of the company by conducting a Time series analysis of TATA Steel for the years 2002 to 2006
and a Comparative analysis of TATA Steel with its domestic competitors – SAIL, Jindal, Essar
& Ispat for the year 2006 in a cma(cash monitoring arrangement) format emphasizing on
Working Capital. The second phase was aimed at making a revised Working Capital projection
for the Flat Products Profit Centre (FPPC) for the year 2007-08 preceded by conducting an
operational overview, study of the valuation and controlling techniques and study of the credit
sales policy of Flat Products Profit Centre of TATA Steel.
The internship is a bridge between the institute and the organization. This made me to
be involved in a project that helped me to employ my theoretical knowledge about the myriad
and fascinating facets of finance. And in the process I could contribute substantially to the
organization’s growth.
The experience that I gathered over the past two months has certainly provided the
orientation, which I believe will help me in shouldering any responsibility in future.
Amrita School of Business iii

Table of Contents
1. ABOUT THE COMPANY 3
1.1. Company Profile 3
1.2. Flat Products 4
2. WORKING CAPITAL MANAGEMENT 5
2.1. Introduction 5
2.2. Working Capital Analysis 6
2.3. Nature and Importance of Working Capital 6
2.4. The Importance of Good Working Capital Management 7
2.5. Working Capital Cycle 8
3. TIME SERIES ANALYSIS OF TATA STEEL FOR 2002-06 10
3.2. Holding Norms 12
3.3. Contribution to Current Assets 13
3.4. Schedule of Changes in Working Capital 14
3.5. Assessment of Working Capital Requirements 16
3.6. Funds Flow Analysis 16
3.7. Percentage Analysis of Different Cost Components Vis-À-Vis Net Sales 18
3.8. Profitability Analysis (As % of net sales) 18
3.9. Tax and Dividend Analysis (%) 19
3.10. Liquidity Ratios 20
4. COMPARATIVE ANALYSIS OF TATA STEEL WITH SAIL, JSW, ESSAR & ISPAT 21
Amrita School of Business 1

4.2. Holding Norms 23
4.3. Contribution to Current Assets 24
4.4. Assessment of Working Capital Requirements 25
4.5. Percentage Analysis of Different Cost Components vis-à-vis Net Sales 26
4.6. Profitability Analysis (As % of net sales) 26
4.7. Tax and Dividend Analysis (%) 27
4.8. Liquidity Ratios 28
5. FLAT PRODUCT PROFIT CENTRE (FPPC)… 29
5.1. Operational Overview of FPPC 29
5.2. Valuation and Controlling techniques 30
5.3. Credit Sales Policy for Flat Products 30
5.4. Gross Working Capital Projection for FPPC 32
6. RECOMMENDATIONS 33
7. ANNEXURE 35
8. REFERENCES 36

1. ABOUT THE COMPANY

1.1 Company Profile
Established in 1907, Tata Steel is Asia's first and India's largest private sector steel company.
Tata Steel is among the lowest cost producers of steel in the world and one of the few select steel
companies in the world that is EVA+ (Economic Value Added).
Its captive raw material resources and the state-of-the-art 4.9 mtpa (million tonne per annum)
plant at Jamshedpur, in Jharkhand State, India gives it a competitive edge. With the acquisition of
Corus, Tata steel has become the fifth largest steel maker in the world. Soon the Jamshedpur plant
will expand its capacity from 4.9 mtpa to 7 mtpa by 2008. The Company plans to further enhance its
capacity, manifold through organic growth and investments. Its associated / subsidiaries constitutes
about 24 mtpa making it’s total capacity about 29mtpa which is the fifth largest in the world. Out of
this the steel business comprising of Flat Products, Long Products, RM Division, CSI Division,
Shared Services constitutes 85% of its business. The rest comprising of Tubes, Bearings, Agrico
Products constitutes the rest 15% business.
Company in Observation: TATA STEEL
The products of TATA STEEL can be broadly categorized into the following categories:
• Flat Products.
• Long Products.

1.2 Flat Products
In keeping with the company’s commitment to redefine the future of Indian Steel, the Flat
products business group at Tata Steel, today, is the country's largest manufacturer of world class
steel products. With a stretched capacity of 2.5 million metric tonne of Hot Rolled, Cold rolled &
Coated Products, Flat Products business group produces approx. 65% of total saleable steel.
Tata Steel's products include hot and cold rolled coils and sheets, galvanised sheets, tubes,
wire rods, construction rebars, rings and bearings. In an attempt to 'decommoditise' steel, the
company has introduced brands like Tata Steelium (the world's first branded Cold Rolled Steel),
Tata Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico
(hand tools and implements), Tata Wiron (galvanised wire products), Tata Pipes (pipes for
construction) and Tata Structura (contemporary construction material). The company has launched
the Customer Value Management initiative with the objective of creating complete understanding of
customer problems and finding solutions jointly. The company's Retail Value Management
addresses the needs of distributors, retailers and end consumers. The company has also launched
India's first steel retail store – steel junction - for making steel shopping a happy and memorable
experience.

2. WORKING CAPITAL MANAGEMENT
2.1 Introduction
A managerial accounting strategy focusing on maintaining efficient levels of both
components of working capital, current assets and current liabilities, in respect to each other is
referred to as working capital management. Working capital management ensures a company has
sufficient cash flow in order to meet its short-term debt obligations and operating expenses.
Implementing an effective working capital management system is an excellent way for many
companies to improve their earnings. The two main aspects of working capital management are ratio
analysis and management of individual components of working capital. Ratio analysis will lead
management to identify areas of focus such as inventory management, cash management, accounts
receivable and payable management.
The study objectives in working capital management particular to this study are:
Ø To examine the impact of accounts receivables days, inventories days, accounts payable
days and cash conversion cycle on return on total assets
Ø To analyze the trend in working capital needs of firms and to examine the causes for any
significant differences between the industries
Working Capital Components

The term working capital refers to the amount of capital which is readily available to an
organization. It is a measure of both a company's efficiency and its short-term financial health. That
is, working capital is the difference between resources in cash or readily convertible into cash
(Current Assets) and organizational commitments for which cash will soon be required (Current
Liabilities). Current Assets are resources which are in cash or will soon be converted into cash in
“the ordinary course of business”‘. Current Liabilities are commitments which will soon require cash
settlement in “the ordinary course of business”.
The working capital is calculated as:
WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES

Positive working capital means that the company is able to pay off its short-term liabilities.
Negative working capital means that a company currently is unable to meet its short-term liabilities
with its current assets (cash, accounts receivable, inventory). If a company's current assets do not
exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The
worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could
also be a red flag that warrants further analysis. Working capital also gives investors an idea of the
company's underlying operational efficiency. Money that is tied up in inventory or money that
customers still owe to the company cannot be used to pay off any of the company's obligations. So,
even if a company is not operating in the most efficient manner (slow collection), it will show up as
an increase in the working capital. This can be seen by comparing the working capital from one
period to another; slow collection may signal an underlying problem in the company's operations.
2.2 Working Capital Analysis

The major components of gross working capital include stocks (raw materials, work-in-progress and
finished goods), debtors, cash and bank balances. The composition of working capital depends on a
multiple of factors, such as operating level, level of operational efficiency, inventory policies, book
debt policies, technology used and nature of the industry. While inter- industry variation is expected
to be high, the degree of variation is expected to be low for firms within the industry.
2.3 Nature and Importance of Working Capital

The working capital meets the short-term financial requirements of a business enterprise. It is
a trading capital, not retained in the business in a particular form for longer than a year. The money

invested in it changes form and substance during the normal course of business operations. If it
becomes weak, the business can hardly prosper and survive. The success of a firm depends
ultimately, on its ability to generate cash receipts in excess of disbursements. On the one hand,
working capital is always significant. This is especially true from the lender's or creditor's
perspective, where the main concern is defensiveness: can the company meet its short-term
obligations, such as paying vendor bills?
But from the perspective of equity valuation and the company's growth prospects, working capital is
more critical to some businesses than to others. At the risk of oversimplifying, we could say that the
models of these businesses are asset or capital intensive rather than service or people intensive.
2.4 The Importance of Good Working Capital Management

Working capital constitutes part of the Crown’s investment in a department. Associated with
this is an opportunity cost to the Crown. (Money invested in one area may “cost” opportunities for
investment in other areas.) If a department is operating with more working capital than is necessary,
this over-investment represents an unnecessary cost to the Crown.
From a department’s point of view, excess working capital means operating inefficiencies. In
addition, unnecessary working capital increases the amount of the capital charges.
The Management of Working Capital

The amounts invested in working capital are often high in proportion to the total assets
employed and so it is vital that these amounts are used in an efficient and effective way. A firm can
be very profitable, but if this is not translated into cash from operations within the same operating
cycle, the firm would need to borrow to support its continued working capital needs. Thus, the twin
objectives of profitability and liquidity must be synchronized and one should not impinge on the
other for long. Investments in current assets are inevitable to ensure delivery of goods or services to
the ultimate customers and a proper management of same should give the desired impact on either
profitability or liquidity. If resources are blocked at different stages of the supply chain, this will
prolong the cash operating cycle. Although this might increase profitability (due to increase sales), it
may also adversely affect the profitability if the costs tied up in working capital exceed the benefits
of holding more inventory and/or granting more trade credit to customers. Another component of
working capital is accounts payable, but it is different in the sense that it does not consume

resources; instead it is often used as a short term source of finance. Thus it helps firms to reduce its
cash operating cycle, but it has an implicit cost where discount is offered for early settlement of
invoices.
Approaches to Working Capital Management

The objective of working capital management is to maintain the optimum balance of each of
the working capital components. This includes making sure that funds are held as cash in bank
deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned.
However, such cash may more appropriately be “invested” in other assets or in reducing other
liabilities.
Working capital management takes place on two levels:
§ Ratio analysis can be used to monitor overall trends in working capital and to identify areas
requiring closer management.
§ The individual components of working capital can be effectively managed by using various
techniques and strategies.
When considering these techniques and strategies, departments need to recognize that each
department has a unique mix of working capital components. The emphasis that needs to be placed
on each component varies according to department. For example, some departments have significant
inventory levels; others have little if any inventory.
Furthermore, working capital management is not an end in itself. It is an integral part of the
department’s overall management. The needs of efficient working capital management must be
considered in relation to other aspects of the department’s financial and non-financial performance.
2.5 Working Capital Cycle

Working capital cycle, also known as the asset conversion cycle, operating cycle, cash
conversion cycle or just cash cycle, is used in the financial analysis of a business. The higher the
number, the longer a firm's money is tied up in business operations and unavailable for other
activities such as investing. The cash conversion cycle is the number of days between paying for raw
materials and receiving cash from selling goods made from that raw material.

Cash Conversion Cycle = Average Stockholding Period (in days) + Average Receivables
Processing Period (in days) - Average Payables Processing Period (in days) with:
§ Average Stockholding Period (in days) = Closing Stock / Average Daily Purchases
§ Average Receivables Processing Period (in days) = Accounts Receivable / Average
Daily Credit Sales
§ Average Payable Processing Period (in days) = Accounts Payable / Average Daily
Credit Purchases
A short cash conversion cycle indicates good working capital management. Conversely, a
long cash conversion cycle suggests that capital is tied up while the business waits for customers to
pay. The longer the production process, the more cash the firm must keep tied up in inventories.
Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable.
On the other hand, if a firm can delay paying for its own materials, it may reduce the amount of cash
it needs. In other words, accounts payable reduce net working capital.

3. TIME SERIES ANALYSIS
Profit & Loss A/C

*Rs in Crores
2001-02 2002-03 2003-04 2004-05 2005-06
Net Sales 6697.49 8721.32 10702.39 14493.16 15135.41
Cost of Production 5028.23 5877.12 6726.15 7746.20 8193.60
Cost of Goods Sold 5046.55 5749.53 6662.12 7479.79 8080.20
Operating Profit before
Interest 833.24 1999.50 2984.80 5709.32 5701.50
Operating Profit after
Interest 430.09 1657.09 2757.68 5480.52 5533.06
Profit/ (Loss) before Tax 206.95 1292.67 2492.47 5092.46 5127.34
Profit/ (Loss) after Tax 191.45 1030.79 1572.47 3258.80 3521.34
Dividend Payout / Drawing 147.11 295.19 368.98 719.51 719.51
Retained Profit 44.34 735.60 1203.49 2539.29 2801.83
Balance Sheet
*Rs in Crores
2001-02 2002-03 2003-04 2004-05 2005-06
Total Current Liabilities 2999.03 4134.60 4278.43 5214.25 5197.43
Total Term Liabilities 4705.48 4225.61 3382.21 2739.70 2516.15
Total Net Worth 3445.96 3186.02 4515.86 7059.92 9755.30
Total Liabilities 12540.82 12386.45 13016.46 15843.29 18425.88
Total Current Assets 3095.39 3648.10 2808.52 4083.58 4237.60
Total Non-Current Assets 1242.89 1395.63 2957.76 4305.31 5227.69
Total Intangible Assets 988.99 0.00 155.97 214.82 253.27
Net Block 7213.55 7342.72 7094.21 7239.58 8707.32
Total Assets 12540.82 12386.45 13016.46 15843.29 18425.88


GWC CYCLE = (Inventory Period + Receivables Period)
NWC CYCLE = (Inventory Period + Receivables Period - Payables Period)
2001-02 2002-03 2003-04 2004-05 2005-06

A Inventory Period
A1. Raw Material Conversion Period
a) Raw Material consumption 1,400.61 1,749.97 2,245.42 3,020.42 3,024.38
b) Raw Material cons. per day 3.84 4.79 6.15 8.28 8.29
c) Raw Material inventory 212.15 262.30 292.82 603.70 707.54
d) Raw Material inv. holding days 55.29 54.71 47.60 72.95 85.39
A2. Work In Process Conversion Period

a) Cost of production 5,028.23 5,877.12 6,726.15 7,746.20 8,193.60
b) Cost of production per day 13.78 16.10 18.43 21.22 22.45
c) Work In process inventory 36.25 14.65 9.28 32.42 23.93
d) Work In process holding days 2.63 0.91 0.50 1.53 1.07
A3. Finished Goods Conversion Period

a) Cost of goods sold 5,046.55 5,749.53 6,662.12 7,479.79 8,080.20
b) Cost of goods sold per day 13.83 15.75 18.25 20.49 22.14
c) Finished goods inventory 429.19 556.78 620.81 887.22 1,000.62
d) Finished goods inv. holding days 31.04 35.35 34.01 43.29 45.20
Total inventory holding days

(A1+A2+A3) 88.96 90.97 82.11 117.78 131.66
B Receivables Period
a) Credit Sales 6,697.49 8,721.32 10,702.39 14,493.16 15,135.41
b) Sales per day 18.35 23.89 29.32 39.71 41.47
c) Debtors 1,073.66 958.47 651.30 581.82 539.40
d) Debtors outstanding days 58.51 40.11 22.21 14.65 13.01
C Payables Period

a) Credit purchases 5,046.55 5,749.53 6,662.12 7,479.79 8,080.20

b) Purchase per day 13.83 15.75 18.25 20.49 22.14
c) Creditors 1,497.89 1,731.17 1,983.60 2,319.96 2,534.03
d) Creditors outstanding days 108.34 109.90 108.68 113.21 114.47
GROSS WC CYCLE
(A+B) 147.47 131.08 104.33 132.43 144.66
NET WC CYCLE
(A+B-C) 39.13 21.18 -4.35 19.22 30.20
3.2 Holding Norms

2001-02 2002-03 2003-04 2004-05 2005-06
Raw Material-Days 55.29 54.71 47.60 72.95 85.39
Stores & Spares-Days 316.50 227.96 248.92 205.06 219.01
Stocks in Process-Days 2.63 0.91 0.50 1.53 1.07
Finished Goods-Days 31.04 35.35 34.01 43.29 45.20
Receivables-Days 58.51 40.11 22.21 14.65 13.01
Payables-Days 108.34 109.90 108.68 113.21 114.47
Holding Norms
700.00
600.00 39
500.00 21 30
-4 19
400.00
300.00
200.00
100.00
0.00
2002 2003 2004 2005 2006
Raw Material Stores and Spares Stocks In Process

Finished Goods Receivables Payables-Days

Ø Raw material holding period has increased by 55% while there has been an efficient
Management in the stocks in process and stores & spares holding period this is depicted by a
decrease of 60% and 30% in the holding days respectively
Ø The credit receivables period has also been brought down considerably by about 77% which
shows the efficiency of the debtors’ management.
Ø The payables period has also been stretched alongside.
3.3 Contribution To Current Assets
2001-02 2002-03 2003-04 2004-05 2005-06

Raw Material to Current Assets 0.07 0.07 0.10 0.15 0.17
Stores and Spares to Current Assets 0.11 0.09 0.12 0.09 0.10
Work In Process to Current Assets 0.01 0.00 0.00 0.01 0.01
Finished Goods Inventory to Current Assets 0.14 0.15 0.22 0.22 0.24
Total Inventory to Current Assets 0.33 0.32 0.44 0.46 0.51
Debtors to Current Assets 0.35 0.26 0.23 0.14 0.13
Contribution to Current Assets
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2002 2003 2004 2005 2006
Raw Material Stores & Spares Work In Process Finished Goods Debtors
Ø Considerable increase in finished goods inventory over the years

Ø Debtors have been highly reduced over the years

3.4 Schedule of Changes in Working Capital
Working Capital for 2002-2006

Current Assets
Short term inv. in Govt./Trust Sec. 169.47 164.54 187.42 299.71 337.83
Fixed Deposit with Banks 11.00 152.10 0.20 0.04 0.04
Receivables 1073.66 958.47 651.30 581.82 539.40
Raw Materials 212.15 262.30 292.82 603.70 707.54
Cons. Stores & Spares 344.00 319.22 326.17 349.06 442.66
Stocks in Process 36.25 14.65 9.28 32.42 23.93
Finished Goods 429.19 556.78 620.81 887.22 1000.62
Advances to Suppliers 0.00 0.00 0.00 0.00 0.00
Advance Payment of Tax 187.67 425.66 39.83 44.02 75.02
Other Current Assets (incld. cash) 632.00 794.38 680.69 1285.59 1110.56
Current Liabilities
Trade Creditors 1497.89 1731.17 1983.60 2319.96 2534.03
Advance Payments Received 83.01 95.74 133.59 199.51 185.07
Prov. for Tax 174.84 476.16 131.38 283.88 252.41
Dividend Payable 147.11 295.19 368.98 719.51 719.51
Other Statutory Liabilities 0.00 0.00 0.00 0.00 0.00
T.L./Deb. instalments due
within a year 0.00 0.00 0.00 0.00 0.00
Other C.L & Provisions 1096.18 1536.34 1660.88 1691.39 1506.41
Net Working Capital 96.36 (486.50) (1469.91) (1130.67) (959.83)

Percentage Change in Current Assets & Liabilities for 2002-06
Current Assets
Short term Inv. in Govt. /Trust Sec. (4.09) (2.91) 13.91 59.91 12.72
Fixed Deposit with Banks 418.87 1282.73 (99.87) (80.00) 0.00
Receivables (16.08) (10.73) (32.05) (10.67) (7.29)
Raw Materials 18.35 23.64 11.64 106.17 17.20
Cons. Stores & Spares 43.64 (7.20) 2.18 7.02 26.81
Stocks in Process 23.68 (59.59) (36.66) 249.35 (26.19)
Finished Goods (4.09) 29.73 11.50 42.91 12.78
Advances to Suppliers 0.00 0.00 0.00 0.00 0.00
Advance Payment of Tax 28.66 126.81 (90.64) 10.52 70.42
Other Current Assets (incld. cash) (12.95) 25.69 (14.31) 88.87 (13.61)
Total Current Assets (4.04) 17.86 (23.01) 45.40 3.77
Current Liabilities
Trade Creditors (3.80) 15.57 14.58 16.96 9.23
Advance Payments Received (0.47) 15.34 39.53 49.35 (7.24)
Prov. for Tax (2.97) 172.34 (72.41) 116.08 (11.09)
Dividend Payable (20.00) 100.66 25.00 95.00 0.00
Other Statutory Liabilities 0.00 0.00 0.00 0.00 0.00
T.L./Deb. Instalments
due within a year 0.00 0.00 0.00 0.00 0.00
Other Curr.Lia.& Provisions 13.52 40.15 8.11 1.84 (10.94)
Total Current Liabilities 0.97 37.86 3.48 21.87 (0.32)

3.5 Assessment of Working Capital Requirements

(Maximum Permissible Bank Finance)
2001-02 2002-03 2003-04 2004-05 2005-06

1. Total Current Assets 3095.39 3648.10 2808.52 4083.58 4237.60
2. Current Liabilities 2582.04 3726.08 4034.34 5023.86 5053.81
(other than Bank borrowings)
3. Working Capital Gap (1-2) 513.35 (77.98) (1225.82) (940.28) (816.21)
4. Min. stipulated Net Working
Capital (25 % of Total C.A) 773.85 912.03 702.13 1020.90 1059.40
5. Actual / Projected Net W.C 96.36 (486.50) (1469.91) (1130.67) (959.83)
6. Item 3 minus Item 4 (260.50) (990.01) (1927.95) (1961.18) (1875.61)
7. Item 3 minus Item 5 416.99 408.52 244.09 190.39 143.62
8. Max. Permissible Bank Finance (260.50) (990.01) (1927.95) (1961.18) (1875.61)
(Item 6 or 7, whichever is lower)
9. Excess Borrowing, if any
representing shortfall in NWC 677.49 1398.53 2172.04 2151.57 2019.23
3.6 Funds Flow Analysis
2002 2003 2004 2005 2006

1. SOURCES (LONG TERM)
a. Net Profit after Tax 191.45 1030.79 1572.47 3258.80 3521.34
b. Depreciation 524.75 555.48 625.11 618.78 775.10
c. Increase in Capital 1.21 0.00 184.49 0.00
d. Increase in Term Liabilities 33.26
(including Public Deposits)
e. Decrease in
i. Fixed Assets
ii.Other Non Current Assets 99.73
f. Others incld. Inc. in quasi equity 0.00 0.00 0.00 0.00 0.00

TOTAL LONG TERM

SOURCES 849.19 1587.48 2197.58 4062.07 4296.44
2. USES (LONG TERM)

a. Net Loss
b. Decrease in Term Liabilities 479.87 843.40 642.51 223.55
including Public Deposits)
c. Increase in
i. Fixed Assets 649.82 780.42 313.12 673.43 2227.91
ii. Other Non Current Assets 152.74 1562.13 1347.55 922.38
d. Dividend Payments / Drawings 147.11 295.19 368.98 719.51 719.51
e. Others
TOTAL LONG TERM USES 796.93 1708.22 3087.63 3383.00 4093.35
3. Long Term Surplus / Deficit 52.26 (120.74) (890.05) 679.07 203.09

(1 - 2)
4. Increase / decrease in
Current Assets
(as per details given below ) (130.22) 552.71 (839.58) 1275.06 154.02
Current Liabilities other
than Bank borrowings 10.69 1144.04 308.26 989.52 29.95
6. Increase / decrease in W.C Gap (140.91) (591.33) (1147.84) 285.54 124.07
7. Net Surplus / Deficit (3 - 6) 193.17 470.59 257.79 393.53 79.02
Bank borrowings 18.08 (8.47) (164.43) (53.70) (46.77)
Break-up of (4)
i. Inc. / dec. in stocks in trade 126.02 131.36 96.13 623.32 302.35
ii. Inc. / dec. in receivables (205.65) (115.19) (307.17) (69.48) (42.42)
iii. Inc. / dec. in Adv. payments 0.00 0.00 0.00 0.00 0.00
iv. Inc. / dec. in other C.Assets. (50.59) 536.54 (628.54) 721.22 (105.91)

3.7 Percentage Analysis of Different Cost Components Vis-À-Vis Net Sales
% of net sales
2001-02 2002-03 2003-04 2004-05 2005-06
Total Raw Material Consumed 20.91 20.07 20.98 20.84 19.98
Stores & Spares Consumed 5.92 5.86 4.47 4.29 4.87
Power & Fuel 10.74 9.03 6.77 5.37 5.93
Direct Labor 19.74 16.57 14.72 9.69 9.23
Other Mfg. Expenses 10.03 9.24 10.01 9.15 8.94
Depreciation 7.84 6.37 5.84 4.27 5.12
Selling, General & Adm. Expenses 12.21 11.15 9.86 9.00 8.94
Interest 6.02 3.93 2.12 1.58 1.11
Total operating Cost 93.58 81.00 74.23 62.19 63.44
There has been a considerable cut down in the various costs over the years depicting the improvement
in operational efficiency. This is due to :
Ø Increase in realization (Net realization per unit Net sales value)
Ø Reduction in consumption
3.8 Profitability Analysis

(as % of Net Sales)
2001-02 2002-03 2003-04 2004-05 2005-06
P.B.D.I.T 16.94 25.12 31.25 40.99 40.11
P.B.I.T 9.11 18.75 25.41 36.72 34.99
P.B.D.T 10.92 21.19 29.13 39.41 39.00
P.B.T 3.09 14.82 23.29 35.14 33.88
P.A.T 2.86 11.82 14.69 22.49 23.27

Profitability Analysis
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2002 2003 2004 2005 2006
P.B.D.I.T P.B.I.T P.B.D.T P.B.T P.A.T
Profitability has increased by about eight folds over the four years but there is only a nominal
increase of 75% in 2006 from 2005 this because:
Ø Operating cost has gone up proportionally higher than net sales from 2004-05 to 2005-06.
Ø Full benefit of investment to increase capacity was not realized in FY06.
3.7 Tax and Dividend Analysis (%)

2001-02 2002-03 2003-04 2004-05 2005-06
Prov. for Tax / P.B.T 7.49 20.26 36.91 36.01 31.32
Dividend Rate 39.98 79.96 99.95 129.95 129.95
Dividend / P.A.T. 76.84 28.64 23.46 22.08 20.43
Retained Profit / P.A.T. 23.16 71.36 76.54 77.92 79.57
Over the years, the company has highly succeeded in satisfying the investors by increasing the
dividend payout rate, at the same time retaining a considerable amount of profit. This is due to
the following reasons:
Ø Share capital has remained constant
Ø Company has financed growth projects through internal accruals
Ø There is substantial increase in PAT from 2001-05.Since dividend amount is constant or
there is minor increase in dividend, dividend payout ratio has come down.

3.8 Liquidity Ratios
2001-02 2002-03 2003-04 2004-05 2005-06

Term Liabilities / T.N.W 1.92 1.33 0.78 0.40 0.26
(Funded Debt / Equity Ratio)
Total Outside Liability/ T.N.W 3.14 2.62 1.76 1.16 0.81
(Total Debt Equity Ratio)
Current Ratio 1.03 0.88 0.66 0.78 0.82
Receivables / Current Liabilities 0.36 0.23 0.15 0.11 0.10
Inventory / Current Liabilities 0.34 0.28 0.29 0.36 0.42
Other CA/CL 0.27 0.30 0.17 0.25 0.23
P.B.I.T. /Interest 1.51 4.78 11.97 23.26 31.44
Interest / Total Borrowings 0.09 0.08 0.07 0.08 0.07
The liquidity ratios implies there has been a considerable decrease in the net current asset level depicting
the risk of solvency.

4. COMPARATIVE ANALYSIS
Profit & Loss A/C

*For Year 2006
*Rs in Crores
TATA SAIL JSW ESSAR ISPAT
Net Sales 15135.41 28081.41 8595.03 6168.66 4914.73
Operating Profit before
Interest 5701.50 4402.37 2444.22 1033.19 (173.48)
Operating Profit after
Interest 5533.06 3934.61 2037.41 475.12 (1158.55)
Profit/ (Loss) before Tax 5127.34 4498.20 1914.83 703.79 (1186.54)
Profit/ (Loss) after Tax 3521.34 2560.06 1562.63 690.34 (1191.00)
Dividend Payout 719.51 826.08 204.98 0.00 0.00
Retained Profit 2801.83 1733.98 1357.65 690.34 (1191.00)
Balance Sheet
*For Year 2006
*Rs in Crores
Total Term Liabilities 2516.15 4297.62 4173.03 8185.10 8261.09
Total Net Worth 9755.30 12601.41 5572.29 4031.47 3148.32
Total Liabilities 18425.88 30811.63 13065.47 13360.86 13025.36
Total Non-Current Assets 5227.69 1049.94 2195.87 3070.33 729.16
Total Intangible Assets 253.27 215.82 194.87 0.00 1098.51
Net Block 8707.32 12162.14 8189.10 6398.45 8901.44
Total Assets 18425.88 30926.81 13168.85 13360.86 13025.36


GWC CYCLE = (Inventory Period + Receivables Period)
NWC CYCLE = (Inventory Period + Receivables Period - Payables Period)

A Inventory Period
A1. Raw Material Conversion Period
a) Raw Material consumption 3,024.38 12,391.12 3,964.00 1,531.30 2,910.12
b) Raw Material cons. per day 8.29 33.95 10.86 4.20 7.97
c) Raw Material inventory 707.54 1,132.02 611.44 651.87 515.77
d) Raw Material inv. holding days 85.39 33.35 56.30 155.38 64.69
A2. Work In Process Conversion Period

a) Cost of production 8,193.60 22,272.36 6,073.60 4,817.56 4,928.65
b) Cost of production per day 22.45 61.02 16.64 13.20 13.50
c) Work In process inventory 23.93 224.82 38.89 93.47 8.16
d) Work In process holding days 1.07 3.68 2.34 7.08 0.60
A3. Finished Goods Conversion Period

a) Cost of goods sold 8,080.20 22,272.36 6,073.37 4,773.15 4,834.19
b) Cost of goods sold per day 22.14 61.02 16.64 13.08 13.24
c) Finished goods inventory 1,000.62 3000.00 195.29 238.69 207.33
d) Finished goods inv. holding days 45.20 49.16 11.74 18.25 15.65
Total inventory holding days

(A1+A2+A3) 41.77 56.63 35.91 58.23 54.31
B. Receivables Period
a) Credit Sales 15,135.41 28,081.41 8,595.03 6,168.66 4,914.73
b) Sales per day 41.47 76.94 23.55 16.90 13.47
c) Debtors 539.40 1,881.73 245.16 540.16 594.13
d) Debtors outstanding days 13.01 24.46 10.41 31.96 44.12

C. Payables Period
a) Credit purchases 8,080.20 22,272.36 6,073.37 4,773.15 4,834.19
b) Purchase per day 22.14 61.02 16.64 13.08 13.24
c) Creditors 2,534.03 2,426.23 509.41 1,071.99 898.65
d) Creditors outstanding days 114.47 39.76 30.61 81.97 67.85
GROSS WC CYCLE
(A+B+C) 144.66 110.65 80.79 212.67 125.07
NET WC CYCLE
(A+B+C-D) 30.20 70.89 50.17 130.70 57.22
4.2 Holding Norms

*For Year 2006
Raw Material-Days 85.39 33.35 56.30 155.38 64.69
Stores & Spares-Days 219.01 150.89 146.39 196.23 137.19
Stocks in Process-Days 1.07 3.68 2.34 7.08 0.60
Finished Goods-Days 45.20 49.16 11.74 18.25 15.65
Receivables-Days 13.01 24.46 10.41 31.96 44.12
Payables-Days 114.47 39.76 30.61 81.97 67.85
Holding Norms
200.00 26.7 31.6
150.00 -6.33 49.5
100.00 24.6
50.00
0.00
Raw Material Stores and Spares Stocks In Process

Finished Goods Receivables Payables

Ø The holding norms of TATA are showing a negative value because it is in terms of net
consumption value. For internal control purposes, this is used. While for external reporting,
it is expressed in terms of net sales
Ø The holding norms of TATA are far better when compared to their competitors as well as
industry norms
4.3 Contribution to Current Assets

*For Year 2006
Raw Material to CA 0.17 0.06 0.24 0.17 0.22
Stores and Spares to CA 0.10 0.06 0.06 0.11 0.06
Work In Process to CA 0.01 0.18 0.02 0.02 0.00
Finished Goods Inv. to CA 0.24 0.00 0.08 0.06 0.09
Total Inventory to CA 0.51 0.31 0.39 0.36 0.38
Debtors to CA 0.13 0.11 0.09 0.14 0.26
Contribution to Current Assets
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Raw Material Store And Spares Work In Process Finished Goods Debtors

Ø Although the work in process inventory of Tata steel has been maintained very less, because
of the raw materials and finished goods inventory inefficiency, the total inventory holding
is high.
Ø The debtors are managed efficiently by Tata steel.
4.4 Assessment of Working Capital Requirements

(Maximum Permissible Bank Finance) *For Year 2006
*Rs in Crores
1. Total Current Assets 4237.60 17498.91 2589.01 3892.08 2296.25
2. Current Liabilities 5053.81 12084.88 2165.94 837.76 1802.87
(other than Bank borrowings)
3. Working Capital Gap (1-2) (816.21) 5414.03 423.07 3054.32 493.38
4. Min. stipulated Net Working
Capital (25 % of Total C.A) 1059.40 4374.73 647.25 973.02 574.06
5. Actual / Projected Net W.C (959.83) 5070.77 281.52 2322.04 52.00
6. Item 3 minus Item 4 (1875.61) 1039.30 (224.18) 2081.30 (80.68)
7. Item 3 minus Item 5 143.62 343.26 141.55 732.28 441.38
8. Max. Permissible Bank Finance (1875.61) 343.26 (224.18) 732.28 (80.68)
(Item 6 or 7, whichever is lower)
9. Excess Borrowing, if any
representing shortfall in NWC 2019.23 N.A. 365.73 N.A. 522.06

4.5 Percentage Analysis of Different Cost Components Vis-À-Vis Net Sales

*For Year 2006
Total Raw Material Consumed 19.98 44.13 46.12 24.82 59.21
Stores & Spares Consumed 4.87 9.41 4.81 13.10 7.45
Power & Fuel 5.93 8.98 4.57 29.13 17.29
Direct Labor 9.23 14.80 1.85 1.60 2.64
Other Mfg. Expenses 8.94 2.23 6.74 2.49 2.08
Depreciation 5.12 4.30 5.80 7.82 11.63
Cost of goods sold 53.39 79.31 70.66 77.38 98.36
Selling, General & Adm. Expenses 8.94 5.01 0.90 5.87 5.17
Interest 1.11 1.67 4.73 9.05 20.04
Total operating Cost 63.44 85.99 76.30 92.30 123.57
Ø Operating cost of Tata is very less showing good efficiency of its operations
Ø Borrowings of Tata are also very less which is indicated by the low level of interest paid
Ø Direct labor cost of Tata is lesser than Sail but higher than the other three steel companies
4.6 Profitability Analysis

(as % of Net Sales) *For Year 2006
P.B.D.I.T 40.11 21.98 32.81 28.27 7.53
P.B.I.T 34.99 17.68 27.01 20.46 (4.10)
P.B.D.T 39.00 20.32 28.08 19.22 (12.52)
P.B.T 33.88 16.02 22.28 11.41 (24.14)
P.A.T 23.27 9.12 18.18 11.19 (24.23)

Profitability Analysis
50.00
40.00
30.00
20.00
10.00
0.00
(10.00) TATA SAIL JSW ESSAR ISPAT
(20.00)
(30.00)
P.B.D.I.T P.B.I.T P.B.D.T P.B.T P.A.T
Ø Profitability of TATA is far better when compared to others
4.7 Tax and Dividend Analysis (%)

*For Year 2006
Prov. for Tax / P.B.T 31.32 43.09 18.39 1.91 (0.38)
Dividend Rate 129.95 20.00 40.67 0.00 0.00
Dividend / P.A.T 20.43 32.27 13.12 0.00 0.00
Retained Profit / P.A.T 79.57 67.73 86.88 100.00 100.00
Ø The dividend payout of TATA to investors is really good. Also a substantial amount of their
profit is retained in the business.

4.8 Liquidity Ratios

*For Year 2006
Term Liabilities / T.N.W 0.26 0.35 0.78 2.03 4.03
(Funded Debt / Equity Ratio)
Total Outside Liability/ T.N.W 0.81 1.35 1.21 2.42 5.13
(Total Debt Equity Ratio)
Current Ratio 0.82 1.41 1.12 2.48 1.02
Receivables / Current Liabilities 0.10 0.15 0.11 0.34 0.26
Inventory / Current Liabilities 0.42 0.44 0.44 0.90 0.39
Other CA / CL 0.23 0.34 0.42 0.53 0.25
P.B.I.T. /Interest 31.44 10.62 5.71 2.26 (0.20)
Interest / Total Borrowings 0.07 0.11 0.10 0.07 0.12
Ø The liquidity of Tata is highly threatened when compared to the other steel cos.
Ø The funded debt with respect to equity is very less for tata depicting its less efficient usage of
leveraging.

5. FLAT PRODUCT PROFIT CENTRE (FPPC)
5.1 Operational Overview of FPPC

INPUT PROCESS OUTPUT
Iron Ore,
Cost Coal, Coke, Blast Hot Metal
Centre Sinter Furnace
Hot Metal + LD2 Liquid Steel

Scrap
Liquid Steel Slab Caster Slab
FPPC Slab HSM HRC
HRC CRM
Galvanized
CRCA

5.2 Controlling & Valuation Techniques
Valuation Techniques
Ø The Stores & Spares are valued at actual cost of production
Ø Work In Process & Finished Goods are valued using process/absorption costing for
reporting purposes and using standard costing for decision making purposes
Ø Obsolete Inventory is valued using XYZ Analysis
Control Techniques
Ø The Stores & Spares are controlled using ABC Analysis
Ø For Work In Process & Finished Goods, a sales plan is prepared based on the previous years
actual production and sale and a target is fixed based on it. The current year’s production
is so controlled not as to exceed the plan.
Ø Obsolete Inventory is controlled using XYZ Analysis
Ø For controlling the debtors, a credit limit is fixed based on the business value (order size)
and customer type. The credit controlling committee will continuously monitor the debtors
based on this technique.
5.3 Credit Sales Policy for Flat Products
1. Distributors
Sales to distributors are made on the basis of cash and carry. Tie up with banks where
distributors are financed by bank through an arrangement which is termed as Channel Finance.
2. OE Customers
Majority of the OE customers are routed through bank financing which is termed as OE Financing.
The arrangement is made with banks whereby banks pay to Tata Steel on the date of invoicing and the
customers pay to the bank on the due date as per terms of credit sales. Bank financing charges at the
agreed rate is borne by Tata Steel.

Tender Sales
A maximum of 45 days credit would be extended to such customers. At times, such credits
are secured by LC or BG, if felt necessary.
3. Other customers
Other customers having transactions with Tata Steel are also covered by financing scheme
through banks and the arrangement is termed as RP whereby the debit on account of sale is
transferred in favour of the bank. Financing charges on account of RP is borne by Tata Steel.
4. Allowances for trade receivables

Ø Customers making early payment before due date are entitled to a maximum cash
discount (EPD) @ 12% P.A.
Ø There are cases of quantity discount which are generally on a quarterly basis which
varies from product to product.
Ø Credit period varies between 30 to 60 days.

5.4 Gross Working Capital Projection for FPPC
The gross working capital projection is prepared from the inventory projection and debtors’
projection for the year 2007-08. The inventory projection is prepared from the production plan which is
prepared according to the capacity, yield loss and lead time, obtained from the operations department of the
FPPC. The debtors’ projection is prepared from the sales plan obtained from the marketing division of
FPPC prepared according to the market demand, market share, and market potential of the products.
Accordingly the Inventory Projection for the year 2007-08 is obtained as:
Opening Inventory (Closing Balance)
Add Production (Production Plan)
Less Sales (Sales Plan) Inventory Projection 2007-08
=Inventory Projection
and the Debtors’ Projection for the fiscal 2007-08 is obtained as
Opening Debtors (Closing Balance)
Add Sales (Qty*Value)
Less Collection (Credit Policy) Debtors Projection 2007-08
=Debtors Projection
FPPC Gross Working Capital - Summary (Rs Crs)

FPPC 37
Total 1007 40 Days
1067 Days
1070 35
Days
170 169
147
132 117
162
410 474 496
288 291 288
FY'06 A FY'07 A FY'08 New Projected

Debtors FG WIP Stores and Spares Stk

6. RECOMMENDATIONS
Measures to Improve Working Capital Management at Flat Product Profit

Centre (FPPC) of TATA Steel:
Ø The essence of effective working capital management is proper cash flow forecasting. This
should take into account the impact of unforeseen events, market cycles, loss of a prime
customer and actions by competitors. So the effect of unforeseen demands of working capital
should be factored in by FPPC. This was one of its reasons for the variation of its revised
working capital projection from the earlier projection.
Ø It pays to have contingency plans to tide over unexpected events. While market-leaders can
manage uncertainty better, even other companies must have risk-management procedures.
These must be based on objective and realistic view of the role of working capital.
Ø Addressing the issue of working capital on a corporate-wide basis has certain advantages.
Cash generated at one location can well be utilized at another. For this to happen,
information access, efficient banking channels, good linkages between production and
billing, internal systems to move cash and good treasury practices should be in place.
Ø An innovative approach, combining operational and financial skills and an all-encompassing
view of the company’s operations will help in identifying and implementing strategies that
generate short-term cash. This can be achieved by having the right set of executives who are
responsible for setting targets and performance levels. They could be then held accountable
for delivering, encouraged to be enterprising and to act as change agents.
Ø Effective dispute management procedures in relation to customers will go along way in
freeing up cash otherwise locked in due to disputes. It will also improve FPPC’s customer
service and free up time for legitimate activities like sales, order entry and cash collection.
Overall, efficiency will increase due to reduced operating costs.
Ø Collaborating with the customers instead of being focused only on own operations will also
yield good results. If feasible, helping them to plan their inventory requirements efficiently to
match FPPC’s production with their consumption will help reduce inventory levels. This can
be done with suppliers also.
Ø Working capital management is an important yardstick to measure a company operational
and financial efficiency. This aspect must form part of the FPPC’s strategic and operational

thinking. Efforts should constantly be made to improve the working capital position. This
will yield greater efficiencies and improve customer satisfaction.
Ø Inventories should be managed on a line-by-line basis using the 80/20 rule.
Ø Periodical analytical review can help the FPPC to focus its attention on critical areas.
Ø Placing the responsibility for collecting the debt upon the centre that made the sale. i.e., cold
rolled, hot rolled, galvanized etc.

Tata Steel - Financial Analysis

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tata Steel - Financial Analysis

Uploaded by

Copyright:

Available Formats

Working Capital Management

Ms. Sunanda Muralidharan Mr. Pradeep Kumar Bal

Amrita School of Business

Name: Sony Mathew

Date: 23 rd June 2007 Signature

Place: TATA STEEL (Jamshedpur)

Amrita School of Business

I acknowledge my gratitude to Ms. Sunanda Muralidharan (Associate Professor,

Amrita School of Business ii

Amrita School of Business iii

1.1. Company Profile 3

1.2. Flat Products 4

2. WORKING CAPITAL MANAGEMENT 5

2.2. Working Capital Analysis 6

2.3. Nature and Importance of Working Capital 6

2.4. The Importance of Good Working Capital Management 7

2.5. Working Capital Cycle 8

3. TIME SERIES ANALYSIS OF TATA STEEL FOR 2002-06 10

3.1. Working Capital Cycle 11

3.2. Holding Norms 12

3.3. Contribution to Current Assets 13

3.4. Schedule of Changes in Working Capital 14

3.5. Assessment of Working Capital Requirements 16

3.6. Funds Flow Analysis 16

3.7. Percentage Analysis of Different Cost Components Vis-À-Vis Net Sales 18

3.8. Profitability Analysis (As % of net sales) 18

3.9. Tax and Dividend Analysis (%) 19

3.10. Liquidity Ratios 20

4.1. Working Capital Cycle 22

Amrita School of Business 1

4.2. Holding Norms 23

4.3. Contribution to Current Assets 24

4.4. Assessment of Working Capital Requirements 25

4.5. Percentage Analysis of Different Cost Components vis-à-vis Net Sales 26

4.6. Profitability Analysis (As % of net sales) 26

4.7. Tax and Dividend Analysis (%) 27

4.8. Liquidity Ratios 28

5. FLAT PRODUCT PROFIT CENTRE (FPPC)… 29

5.1. Operational Overview of FPPC 29

5.2. Valuation and Controlling techniques 30

5.3. Credit Sales Policy for Flat Products 30

5.4. Gross Working Capital Projection for FPPC 32

Amrita School of Business 2

1. ABOUT THE COMPANY

Company in Observation: TATA STEEL

Amrita School of Business 3

1.2 Flat Products

Amrita School of Business 4

2. WORKING CAPITAL MANAGEMENT

Working Capital Components

Amrita School of Business 5

2.2 Working Capital Analysis

2.3 Nature and Importance of Working Capital

Amrita School of Business 6

2.4 The Importance of Good Working Capital Management

The Management of Working Capital

Amrita School of Business 7

Approaches to Working Capital Management

2.5 Working Capital Cycle

Amrita School of Business 8

Amrita School of Business 9

3. TIME SERIES ANALYSIS

Profit & Loss A/C

Amrita School of Business 10