WORKING CAPITAL MANAGEMENT ON TATA STEEL

Under the guidance of Prof. Ramaswamy

PREPARED BY Name Pradipna lodh Ranu Parmar Yogendar singh tomar Madhumita Tripathi Rishab Goel Section Group No. F-41 Signature

IIPM IIPM TOWER,SATBARI, CHANDANHAULA,CHATTARPUR-BHATIMINESROAD NEW DELHI

ACKNOWLEDGEMENT We thank Mr.T.Ramaswamy in particular for assigning us this topic and encouraging us to write in the first place.We owe to Mr. T.Ramaswamy for his valuable comments.

We are indebted to all those who have been helpful through out the process of writing this report -Madhumita Tripathy,Pradipna Lodh,Yogendra Singh Tomar,Ranu Parmar,Rishab Goel But as the clich goes,we are solely responsible for any remaining errors of fact or judgement.

CONTENT TOPICS PAGE

EXECUTIVE SUMMARY MISSION VISSION THE STEEL INDUSTRY IN INDIA INDIAN STEEL INDUSTRY A SWOT ANALYSIS TATA IRON AND STEEL COMPANY TATA STEEL STRATEGIC GOALS LANDMARKS OF TATA STEEL RAW MATERIALS ORGANISATIONAL STRUCTURE OF TATA STEEL RISKS OF THE COMPANY WORKING CAPITAL MANAGEMENT

4 5 6 7 9 10 12 15 16 20 25 26

PROCESS OF EXTENDING CREDIT TO THE CUSTOMERS 30 FINANCIAL ANALYSIS FUTURE OUTLOOK BIBLIOGRAPHY 51 52 55

EXECUTIVE SUMMARY

Tata Steel, a steel manufacturing company in India, was rated amongst top 3 best steel companies in the world by World Steel Dynamics in the year 2004. It is one of the few companies that adopts the concept of Economic Value Add and thereby achieved an incremental EVA of Rs. 516 crores in the year 2004. The operations of the company have also increased in terms of turnover of its branded products by 84%. Thus, for a company having a high Networth of Rs. 4360 crores, it is very essential to possess a safe liquidity position. It should ensure that its money doesnt remain blocked in the market and there is constant flow of funds for operational, investment and financial activities. A company of a turnover of Rs. 12070 Crores is expected to have a good management of its Working Capital. Working Capital of a company is the difference between its current assets and the current liabilities. It includes the companys debtors, bank/cash, creditors, inventory, outstanding and other miscellaneous expenses. Each of these needs to be managed separately so as to have a control over the liquidity of business. Management of Working Capital includes various sub-components at the operational level of the company which directly affect the level of Working Capital. These include study of Letter of Credit, Bill Discounting, Factoring through Receivable Purchases and O.E.Finance, Channel Financing, Overdraft management. Proper Working Capital Management depends on how well these sub-components are handled. The company needs to overcome the shortcomings in this respect.The customer base of Tata Steel is found in the construction, auto and auto ancillary,white good appliance and the general engineering sector. Thus, in order to control theWorking Capital of the company, they need to control their exposure in terms of extending credit to its customers. They need to reduce the customers days sales oustandings and manage the overdue that accrues to them. Over the years, it has been observed that Tata Steel has shown a positive trend in its Working Capital.Tata Steel is known for its human resource policies and it also has a well maintained andvery efficient IT infrastructure. The entire functions of the company are well coordinated on a national scale. The objective of the company now is to increase the scale of its business by increasing its profits and the turnover and also by venturing into new line of business. It is now targeting to be the World Class Industrial Enterprise from a World Class Steel Company It is striving to have a huge global base.

MISSION

Consistent with the vision and values of the Founder Jamshedji Tata, Tata Steel strives to strengthen Indias industrial base through the effective utilization of men and material. The means envisaged to achieve this are high technology and productivity, consistent with modern management practices.Tata Steel recognizes that while honesty and integrity are essential ingredients of a strong and stable enterprise, profitability provides the main spark for economic activity. Overall, the company seeks to scale heights of excellence in all that it does in an atmosphere free from fear, and one which encourages innovativeness and creativity.

VISSION

Tata Group has always been driven by five core values:

Integrity. We must conduct our business fairly, with honesty and transparency. Everything we do must stand the test of public scrutiny. Understanding. We must be caring, show respect, compassion and humanity for our colleagues and customers around the world, and always work for the benefit of the communities we serve. Excellence. We must constantly strive to achieve the highest possible standards in our day-to-day work and in the quality of the goods and services we provide. Unity. We must work cohesively with our colleagues across the group and with our customers and partners around the world, building strong relationships based on tolerance, understanding and mutual cooperation. Responsibility. We must be responsible and responsive to the countries, communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over.

Goals
The Tata Steel Group is proud of its performance culture. We are committed to the pursuit of challenging targets, and to safety, environmental protection, continuous improvement, openness and social responsibility in every aspect of our business around the world. four key corporate goals to achieve by 2012:

Value creation: Deliver a 30% return on invested capital (ROIC) Safety: Achieve an industry leadership position by driving down our lost time injury frequency rate (LTIF) to a maximum of 0.4 incidents per million hours worked Environment: Reduce carbon dioxide (CO2) emissions to less than 1.9 tonnes per tonne of crude steel (t/tls)1 People: Rank as an employer of choice in the top quartile across all industries.

THE STEEL INDUSTRY IN INDIA

The steel industry is generally a stable industry except for the cyclical movements of prices due to its commodity nature. But the last one and half years proved otherwise for the Indian steel makers. It has been a rollercoaster ride for the Indian steel industry with fortunes fluctuating drastically, both positively and negatively. First was the boom in domestic steel market. It was followed by rapid growth in exports to China. The same Chinese demand resulted in shortage of raw material forcing many Indian steel makers to cut the level of production when the demand was peaking. Then was the news of Chinese slowdown, which effectively curtailed the expectations on steel exports to China. It was followed by the unrest among the domestic steel users about steel prices, which resulted in the steel minister talking about steel regulator. The Indian steel industry was in doldrums in the late nineties. The steel demand growth rate was stagnated below 4 percent. Almost all the majors steel makers in India with the exception of TISCO were making losses because of excess capacity and low price levels. Analysts have even written off some of the major steel makers. But things changed with the boom in the domestic steel demand in early 2002. The Infrastructure initiative taken by the government like the Golden Quadrilateral highways project, an increase in housing activity and an improvement in the off take of consumer durables and passenger cars were the main reasons behind the demand pickup. This demand growth helped steel makers to raise prices. The steel prices of Cold Rolled steel and the Hot Rolled steel were almost doubled at the end of 2003 compared with the 2001 price levels. The result, the steel majors were out of red and the steel stocks were showing a sharp upswing. Added to the domestic boom was the upsurge in Chinese steel demand. The steel demand in China was growing at a rate of more than 10 percent per year and accounted for around 90 percent of the growth in global steel demand in 2002 and 2003. This proved to be a good export opportunity for Indian steel makers. In the first six months of 2003 alone, Indian steel makers exported steel worth $621 million, which is 137 per cent more than the total exports worth $262 million during the whole of 2002. For a moment it looked there was no stopping for the Indian steel makers. But fortunes of Indian steel makers changed dramatically by the end of 2003. The same upsurge in steel demand in China which helped the Indian steel makers to boost exports played the spoilsport. Coking coal (coke) and Iron ore are the main raw materials for integrated steel producers (ISP) which account for more than forty percent of the steel output in India. As around 900 kg of coking coal is required to make one tonnes of steel, coke is among the high-value inputs for steel making. Among the ISPs, TISCO has captive coalmines to satisfy its input needs. But the government owned integrated steel makers SAIL and RINL (Rashtriya Ispat Nigam Ltd-which owns Vizag Steel Plant) depend on imported coke. They import around 15 million tonnes of coke every year. China is one of the main suppliers of coke along with Australia, New Zealand and Canada. Due to the strong domestic demand, China has more or less stopped the export of the coke. The stoppage of coke exports from China has created supply vacuum. As a result the coking coal prices quadrupled in one-year, from around US $ 100 per tonne in early 2003 to US $ 400 in March 2004. This shortage forced SAIL and RINL to cut their

production at the peak of steel demand. For example, SAIL's Rourkela Steel plant reduced the daily hot metal production from 5000 tonnes to 4100 tonnes in early 2004. The Durgapur Steel plant cut average daily production of hot metal from 6000 tonnes to 5000 tonnes. If the integrated steel makers faced the problem of coke shortage, the secondary producers faced the problem of steel scrap shortage. Typically, the secondary steel makers use steel scrap as the raw material. The booming steel demand in China resulted in a supply shortage for steel scrap in Asia. The rising prices of steel raw materials have increased the cost of production by 30 to 40 percent for the Indian steel makers in early 2004 compared with 2002 levels. This has severely affected the bottom line steel makers as they were not able harvest on the rising steel demand and prices in the domestic market. Some of the steel companies seem to be awakening to the reality. Jindal group recently announced that it is merging two of its steel companies Jindal Iron and Steel Company(JISCO) and Jindal Vijaya Nagar Steel (JVSL). JISCO is the manufacturer of valueadded steel products and JVSL is making steel from iron. Media reports speculate that TISCO and Ispat Industries are looking for acquisitions. But these activities are negligible compared with pace of consolidations happening in the rest of the world. The biggies have to come together to form steel giants, who can challenge the global stars like Arcelor or Ispat International. The industry has miles to go in this regard. INDUSTRY STRUCTURE: INDIA Four Major Strategic Groups1 1) The Integrated Steel Producers: SAIL, TISCO, RINL Approximately 45% market share. 2) Secondary Majors: Jindal, ESSAR, LLYODS, Ispat Approximately 20% market share. 3) Mini Steel plants 4) Rerollers

INDIAN STEEL INDUSTRY A SWOT ANALYSIS

Strengths: Abundance of Iron-Ore and other minerals for steel Skilled manpower and low unit labor costs High ash content of domestic coking coal Low labor productivity Weaknesses: High costs of some basic inputs like power, coal, fuel, etc. High social costs Poor quality of basic infrastructure Distribution network Low IT usage in efficiency enhancement Fragmentation Opportunities: Low per capita consumption Unexplored rural market Low export market penetration Threats: Substitution by aluminum, plastic and composites one of the most remunerative markets Automobiles Poor R&D and threat of technological obsolescence in a large part of the market Availability of imported low ash coking coal.

TATA IRON AND STEEL COMPANY

Established in 1907, Tata Steel is Asia's first and India's largest integrated private sector steel company. With its captive iron ore and coal mines and one of the world's most modern steel making and finishing facilities at Jamshedpur in eastern India, which includes a state-of- the art Cold Rolling Mill complex, Tata Steel is among the lowest cost producer of steel in the world. Since inception in 1907, Tata steel has pioneered the steel industry in India to occupy a leading position in the global steel industry today. The steel business unit, which forms 86% of Tata Steel's turnover, manufactures and markets steel products broadly, categorized into Flat Products and Long Products. Considering India is a developing country and is expected to grow @ 6 to 7 % per year, infrastructure and construction industry is expected to continue to grow at a healthy rate. Development of infrastructure viz. roads, bridges, dams, ports, etc is a key enabler to achieve vision 2020 laid by the government. In 2001-02, in order to create focus, the steel business was restructured into profit centers & cost centers.2 The 4 million tonnes Jamshedpur plant, which produces both flat and long products, is undergoing a million tonnes capacity expansion to be completed by September 2005. The company intends to raise its capacity to 15 million tonnes per annum by 2010 through organic growth and acquisitions. The Jamshedpur capacity will produce 7.4 million tonnes and the balance capacity will be put up or acquired elsewhere in India and overseas. Tata Steel recently announced its first major overseas investment in NatSteel, Singapore, which will give it a manufacturing footprint in six countries in the Asia Pacific region and China. Tata Steel is also exploring opportunities in the Ferrochrome and titanium businesses in South Africa and the southern Indian state of Tamil Nadu, India respectively. Tata Steel's relentless quest for excellence through initiatives like ASPIRE, which combines TPM, Six Sigma, Total Operational Performance, Suggestion Management and Quality Circles, has reaped rich benefits. The company has been conferred the prime Minister's Trophy for the Best Integrated Steel Plant five times from the Indian Ministry of Steel. It was the first Tata Company to win the JRD Quality Value Award, categorizing its operations as "world class" under the Tata Business Excellence Model. It has been ranked among the top four world class steel companies by World Steel Dynamics, USA, for the past four years. It was also awarded Asia's Most Admired Knowledge Enterprise Award-2003 by Teleos, an independent Knowledge Management company of South Korea. Products Tata Steel's products include hot and cold rolled coils and sheets, galvanized sheets, tubes, wire rods, construction re-bars, rings and bearings. In an attempt to 'discommoditise' steel, the company has introduced brands like Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee (Galvanized Corrugated Sheets), Tata Tiscon (re-bars), Tata Pipes, Tata Bearings, Tata Agrico (hand tools an implements) and Tata Wiron (galvanized wire products). The Construction Solution Group explores new avenues for steel utilization by techniques that are economical, use less natural resources and energy. Tata Steel has also developed "galvannealed" cold rolled steel with technical assistance from Nippon steel & Arcelor for high-end auto applications. Strategic Business Units Apart from the main steel division, Tata Steel's operations are grouped under the
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fallowing strategic business units. Bearings Divisions: Manufactures ball bearings, double row self-aligning bearings, clutch release bearings and tapped roller bearing for two wheelers, fans, water pumps, etc. Ferro Alloys and Minerals Division: Operates chrome mines and has unit for making Ferro chrome and Ferro manganese. It is one of the largest players in the global Ferro chrome market. 13 Rings and Agrico Division: The ring plants manufactures forged and rolled rings for bearings and automotive components .Tata Agrico is the first organized manufacturer in India of hand tools and implements for application in agriculture. Tata Growth Shop (TGS): Has designed, developed, manufacture, erected and commissioned thousands of tones of equipments ranging from overhead cranes to high precision components, including a rocket launch pad for the Indian Space and Research Organization. Tubes Division: The biggest steel tube manufacturer with the largest market share in the country, it aspires to strengthen its market presence by expanding and modernizing its commercial and precision tube manufacturing capacity. Wire Division: A pioneer in the manufacture of steel wires in India, it produces coated and uncoated wires, branded as Tata Wiron. The division also operates a wholly owned subsidiary in Sri Lanka. TIS GROUP ASSOCIATE COMPANIES and % STAKE OF TATA STEEL 1. Tata Refractories Limited (TRL)51% 2. The Tinplate Company of India Limited (TCIL)..30.60% 3. Tata Yodogawa Limited (TAYO).36.53% 4. Tata Sponge Iron Limited (TSIL)..39.74% 5. Tata Pigments Limited (TPL)...100% 6. TRF Limited (TRF)...34.77% 7. Stewarts and Lloyds of India Limited (S&L)99.99% 8. Tata Metaliks Limited (TML)...46.66% 9. Jamshedpur Injection Powder Limited (JAMIPOL).28.22% 10. Tata Ryerson Limited (TRYL)..50% 11. TM International Logistics Limited (TMILL)...51% 12. Metaljunction.com Private Limited...50%

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TATA STEEL STRATEGIC GOALS

and products

Establish industry leadership.

TATA STEEL CORPORATE SOCIAL RESPONSIBILITY Tata Steel believes that the primary purpose of a business is to improve the quality of life of people.Tata Steel will volunteer its resources, to the extent it can reasonably afford, to sustainand improve healthy and prosperous environment and to improve the quality of life ofthe people of the areas in which it operates.

TATA STEEL RESEARCH POLICY Tata Steel believes that research provides the foundation for sustained, long-term,stakeholder delight. Tata Steel shall nurture and encourage innovative research in acreative ambience to ensure that the competitive advantage in its overall business isretained and surpassed. Towards this goal, the Company commits itself to providingall necessary resources and facilities for use by motivated researchers of the highest caliber. Research at Tata Steel shall be aligned to the technological initiativesnecessary to evolve and fulfill the overall business objectives of the Company. TATA STEEL ENVIRONMENTAL, OCCUPATIONAL, HEALTH AND SAFETY POLICY Tata Steel reaffirms its commitment to provide safe work place and clean environment to its employees and other stakeholders as an integral part of its philosophy and values. We will continually enhance our Environmental, Occupational Health & Safety (EHS) performance in our activities, products and services through a structured EHS management framework. Towards this commitment, we shall: achieve EHS objectives and targets go beyond

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consumption and promoting waste avoidance and recycling measures occupational health and safety risks by adopting appropriate state-of-art technology and the best EHS management practices at all levels and functions. l and competence of our employees and contractors so as to enable them to demonstrate their involvement, responsibility and accountability for sound EHS performance.

SUBSIDIARY / ASSOCIATES / JVS Tinplate Company of India Limited (TCIL): With a market share of over 35%, it is theindustry leader in India. It has the capability to supply all tinning line product including electrolytic tinplate / tin-free steel and cold-rolled products.Tayo Rolls Limited: The country's leading roll manufacturer and supplier, the companyproduces rolls which find application in integrated steel plants, the paper, textile and food processing sectors, and the government mint. It also produces special castings for use in power plants. Tata Ryerson Limited (TRYL): Is in the business of steel processing and distribution. It offers hot and cold rolled flat steel products in customized sizes and quantities through processing services. It also provides materials management services. Tata Refractories Limited (TRL): Produces High Alumina Refractory, Basic Refractory, Dolomite Refractory, Silica and Monolithic Refractories. It is one of the few companies worldwide to produce silica refractory for coke ovens and the glass industry. TRL offers Total Refractory Solutions, which include design, procurement, re-lining applications etc. (www.tataeref.com) Tata Sponge Iron Limited (TSIL): Has the first Indian sponge iron plant based on indigenously developed Direct Reduction Technology. Its major product lines are sponge iron lumps and fines.(www.tatasponge.com) Tata Metaliks: Is among the top wealth creating companies (measured in terms of EVA) in the country. Tata Metaliks is engaged in the business of manufacturing and selling foundry grade pig iron (www.tatametaliks.com) Tata Pigments Limited: Its range of products includes synthetic iron oxide pigments used to lend colour to paints, emulsions, cement floors, plastics etc. Its three main products Tata Red, Tata Yellow and Cemplus enjoy premium positioning. Jamshedpur Injection Powder Limited (Jamipol): Manufactures carbide and magnesiumbased de-sulphurising compounds which are used for de-sulphurising hot metal for the production of low-sulphur, high-quality steel. TM International Logistics Limited (TMILL): Provides material handling and port operation services at Haldia and Paradip Ports in addition to freight forwarding and chartering services to Tata Group companies and other enterprises. MetalJunction.com Private Limited (MJ): A joint venture company between SAIL and Tata Steel, it is in the business of providing e-business services and solutions to Indian industry. MJ has two divisions--metaljunction.com (e-selling business unit) and commercejunction.com (eprocurement business unit). It also offers complete e-sourcing services
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TRF Limited: It is one of India's leading companies in the business of design, manufacture, supply, installation and commissioning of engineered-to-order equipment and systems in the areas of bulk material handling, loading and unloading, processing, reclaiming and blending of bulk materials. With world-class technical associates, TRF has also made its mark in the fields of coke oven equipment, coal dust injection systems for blast furnace and coal beneficiation systems. Jamshedpur Utility and Service Company Limited (JUSCO): Re-engineered out of Tata Steel's town services, JUSCO a wholly owned subsidiary of Tata Steel and is the country's first enterprise that provides municipal and civic services for townships. JUSCO is the only EMS 14001 civic services provider in the country. The Indian Steel and Wire Products Limited (ISWP): Recently acquired by Tata Steel, ISWP has two units-a wire unit comprising wire drawing mills, wire rod mills and fastener division and a steel roll manufacturing unit named Jamshedpur Engineering and Machining Company (JEMCO). Lanka Special Steel Limited: The only unit in Sri Lanka manufacturing galvanized wires. Sila Easten Company Limited: Established to develop limestone mines in Thailand, mainly for the captive use of Tata Steel. Environment Management: Jamshedpur was India's first planned industrial township. In more recent times, Tata Steel has received ISO 14000 certification for environment management for its steel works. Most of its other, mines and collieries also have been accredited with ISO certification. Corporate Social Responsibility The welfare of its employees and the upliftment of the communities in which it operates are critical part of Tata Steel's guiding values and principles, inextricably interlocked with productivity at the steel plant .This belief has resulted in a mammoth social outreach programme covering the town of Jamshedpur (population 0.65 million) and over 600 villages in and around its manufacturing and raw materials operations. The company-run town of Jamshedpur has India's only ISO 14001 certified municipal services and is also amongst the six participating cities of the UN Global Compact Cities Pilot programme for addressing intractable social, economic and environmental issues in the urban context. The company has dedicated agencies for community welfare work in diverse areas such as education, community health and HIV/AIDS awareness, income generation for economic well-being, environment management, relief, sports, art and culture, etc. Regarded globally as a benchmark in corporate social responsibility coupled with its record of 75 years of industrial harmony, Tata Steel's commitment to its employees and the community remains the bedrock of continued sustainability.

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LANDMARKS OF TATA STEEL 1882 At the age of 43 Jamshetji Nusserwanji Tata read a report by a German Geologist, Ritter Von Schwartz on the availability of iron ore in Chanda District in the Central Provinces, which gave him the idea of giving India a steel plant. 14 November 1900 Jamshetji was in England seeing the Secretary of State for India, Lord George Hamilton. He decided to build a steel plant in India. 24 February 1904 P N Bose, an Indian Geologist who discovered the Gorumahisani hills with its input storehouse of iron ore, informed J N Tata about his findings. 1907 CM Weld and Srinivasa Roa discovered the village of Sakchi at the confluence of two rivers; Subernarekha and Kharkai and the Railway Station of Sakchi. 26 August 1907 Tata Iron and Steel Company was floated. 16 February 1912 First Steel was made. 31 October 1912 The Bar Mills commenced rolling. 2 January 1919 Visit of Lord Chelmsford to rename Sakchi as Jamshedpur and Kalimati Railway Station as Tatanagar Railway Station. 5 March 1920 Jamshedpur Labour Association formed. The principle of Joint Consultation introduced for the first time in India. 8 August 1925 Mahatma Gandhi, Chittaranjan Das and CF Andrews visited Jamshedpur to discuss labour problem with RD Tata. 14 September 1937 Research and Control Laboratory opened. 26 July 1938 JRD Tata succeeded Sir N B Saklatvala as the Chairman of the Company. 20 December 1955 Agreement signed with Kaiser Engineers for two million tones expansion programme. 1 April 1973 Amalgamation with West Bokaro Limited for coal mines operation. 19 April 1993 Mr. Ratan Tata took over as the Chairman. 16 September 1997 Received Prime Ministers Trophy for the best integrated steel plant for the year 1995-96. 24 April 2000 Inauguration of the Cold Rolling Mill Complex. 27 September 2002 Won the Golden Peacock Award for Corporate Social Responsibility & Excellence in Corporate Governance. 3 December 2003 Placed second in Leadership Development among companies in Asia Pacific in a study conducted by Hewitt Associates.

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RAW MATERIALS

With a century of experience in sourcing raw material through scientific research & development and sustainable mining, Tata Steels three main areas of raw material operations are iron-ore, chromite and coal. The Companys long-term strategy has been designed to have greater control over raw material resources and achieve its security across global operations. A pioneer in prospecting, discovering and mining iron ore, coal and other minerals, Tata Steel has nearly a century of experience in scientific and sustainable mining, mine planning, development and research. Company-owned and operated mines and collieries have since its inception, met most of the raw material needs of the Companys Steel Works. The Raw Materials Division of Tata Steel raises over 14 million tonnes of ores from its captive collieries, iron ore mines and quarries spread over the states of Jharkhand and Orissa.

The Companys Raw Materials operations in India are mainly spread in three broad areas iron-ore, chromite and coal. The chromite and manganese mines and their operations have been amalgamated under the 'Ferro Alloys & Minerals Division' that acts as a separate profit centre. Iron-ore and coal being the two key raw materials for steel making, efficient and scientific mining operations give the Company a competitive edge in steel production.

Steel production in India is projected to grow to over 120 Million tonnes by the year 2015. To cater to the raw materials requirement of increasing steel demand and other mineral based industries, Tata Steel has entered into an agreement with MMTC Limited, a Central Government undertaking to establish a joint venture company for acquiring, developing and operating mines and processing of minerals and metals. The Company has also signed a Memorandum of Understanding (MoU) with NMDC for exploring possibilities of entering into joint ventures for the purpose of acquisition, exploration and development of mines, extraction and processing of minerals, setting up integrated steel plants etc.
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Iron Ore and Coal

Ever since the discovery of the mineral in 1903, Iron ore mining has become an integral part of steel making at Tata Steel. The iron ore units are located in Noamundi, Joda and Katamati in the states of Jharkhand and Orissa. Tata Steel Limited also has manganese mines and dolomite quarries in Orissa, located around 150 kms from Jamshedpur, home to the Steel Company's manufacturing facility. The Steel Company's iron ore units produce various grades of high quality iron ore including rich blue dust ore. Operations at the mines, including services are managed by Integrated Management Systems.

Ferro Alloys and Minerals

Tata Steels Ferro Alloys & Minerals Division (FAMD) is the market leader of chrome in India and is among the top six chrome alloy producers in the world, with operations spanning two continents. It is also the leading manganese alloy producer in India and is a leading supplier of

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dolomite and pyroxenite. FAMD has leveraged the core strengths of Tata Steel to grow successfully into a strategic business unit and separate profit centre within the Company. ata Steels Ferro Alloys & Minerals Division (FAMD) is the market leader of chrome in India and is among the top six chrome alloy producers in the world, with operations spanning two continents. It is also the leading manganese alloy producer in India and is a leading supplier of dolomite and pyroxenite. FAMD has leveraged the core strengths of Tata Steel to grow successfully into a strategic business unit and separate profit centre within the Company. FAMD produces and supplies charge chrome, high carbon ferro chrome, high carbon silico manganese, high carbon manganese, chrome concentrate, pyroxenite and dolomite.

FAMD operates the largest chromite mine and the largest reserves of high grade manganese ore in India. It has state of the art chrome beneficiation and ferro alloy plants in Bamnipal, Joda and Attaghar, Cuttack (as a wholly owned subsidiary, TS Alloys Ltd. ) besides rendering marketing services for Tata Steel Kwa Zulu Natal Pty Ltd. (TSKZN a Subsidiary of TSL in Richards Bay, South Africa). The division is in the forefront of the Tata Steel Groups foray into the global ferro alloys and minerals business, leveraging upon its status as the only Indian ferro alloy player to build long term relationships with the most reputed global steel companies like Nippon Steel, Hitachi, JFE, SMI, POSCO, etc. Internationally acclaimed for the excellent and refined quality of its products, FAMD is a leader in supply of customised and niche products to customers worldwide.

The manganese business of FAMD caters to the growing in-house requirements of the TSL Group and other reputed steel companies both at home and abroad. While 100% of Jamshedpur Works requirement of bulk manganese ferro alloys is met by FAMD, efforts are on to meet the entire requirement of the Tata Steel Group companies by expanding scope of supplies to all overseas operating units like Natsteel Asia, Tata Steel Thailand and Corus. Over the last five years, TSL with its unique advantage of being the lowest cost manganese alloy producer in India, has attained the status of being the largest producer of manganese alloys in India. In Manganese Alloys, the Division achieved almost 100% share in supplies of Manganese alloys to the Groups Asian operations.
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FAMD also has a significant presence in the dolomite market in India and caters to a wide variety of customers like integrated steel plants, sponge iron plants and cement plants located in Eastern India. Currently, due to capacity restrictions, most of the pyroxenite produced is being consumed internally.

Continuous improvement, ethical business practices, aspirational goal setting and corporate citizenship are FAMDs guiding values. FAMD is a benchmark for corporate social responsibility and environment consciousness, with all mining and ferro alloy operations certified to SA 8000, OHSAS and EMS 14000. The Division was honoured with the CAPEXIL (Chemical and Allied Export Promotion Council of India) and EEPC (Engineering Export Promotion Council) awards for its export performance in the recent years.

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ORGANISATIONAL STRUCTURE OF TATA STEEL The entire structure of the organization of Tata Steel can be broadly divided into 3 levels,each level having separate roles and responsibilities. These 3 levels are upper management, senior management and the middle management. Each of these lower levels is responsible to perform its functions and thereby report to the next higher level in the organization on a periodic basis. Overall, we can say that the company has a flat structure, beginning from the top management to the lowest level of management. The Upper Management of the company has designation like the Managing Director of the entire company and the Group Executive officer. The Senior Management has the various Vice Presidents of the different departments which come directly under the Managing Director. Under the Vice Presidents we have the Chiefs of the various functions who coordinate the activities of its function along with the other departments. There can be more than one chief in a department depending upon the number of line of the products. This is seen in the Long Products Departments. The Chiefs are also accompanied by the Heads in some of the departments. Under these Chiefs and Heads, we have the various Sectional Heads who are the Unit Leaders, the Managers or the Officers. This structure is prevalent in the entire organization on a national scale. In the Finance and Accounts Department of Tata Center, Kolkata, the functions are handled by the Head of Marketing and Finance. Then, there are the various Manager Accounts who handle the different aspects of the department. Under these Managers are the officers who carry out the actual accounting work of the department.

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PRODUCT and SEGMENT OF APPLICATION 1) FLAT PRODUCT LPG / Tubes / Cold Rolling / pipes Auto/ Appliances / Panels / Furniture Roofing / Auto / Appliances Auto With a stretched capacity of 2.5 million MT of Hot Rolled, Cold rolled & Coated Products, Flat Products business group produces approx. 65% of total saleable steel. A constant pursuit to increase customer focus, enrich product mix, energy efficient technologies & optimum utilization of raw materials have resulted in a long term competitive advantage. LONG PRODUCT Auto Auto / Construction / Railways / Power Electrode / General Engineering Construction / General Engineering Construction

The Long Products Department was created in the year 1999-2000. It is the outcome of Tata Steels relentless trust towards customer-oriented organization. The department generates around 35% of works saleable steel in the company. Half of the division's product mix is value-added finished product comprising of Wire rods and merchant bars. The other half is semis in the form of c.c. billets. FEW KEY CUSTOMERS IN TARGETED SEGMENTS KEY SEGMENT PRODUCT MARKET KEY CUSTOMERS HR for LM / CM Tata Motors, Ashok Leyland HR for MC / HC ASIL, Hero, TPI, ITW HR for CF Wheels India, Kalyani Lemmerz, Toyota CR for high end (Auto, Appliance) Tata Motors, Ashok Leyland, Maruti, Mahindra & Mahindra, Hyundai CR for distribution Authorized Distributor Galvanized Corrugated (GC) Authorized Distributor HCWR Bansal, Ramswarup, Miki Wires, Arti Steel LCWR ESAB, Advani Oerlikon, Feero Wires TISCON (Re-bars) Gammon, DLF, Chevron Authorized Distributors

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CUSTOMER SATISFACTION DETERMINATION TYPE OF DATA PARAMETERS TOOLS Opinion Data Feedback, Survey, Complaints, Call Reports, Customer meets, Top executive customer meets Customer satisfaction Index measurement, Complaint analysis, Visit reports Behavior Data Repeat Business, Market Share Repeat Business, market share in key markets PROCESS FOR FOLLOW UP WITH CUSTOMERS ON PRODUCTS/SERVICES FEEDBACK Close proximity of sales offices Customer Champions RVM workshops Call centers Planned customers visits by sales Concept of dedicated CAMs Maintain adequate sales person per key customer Customer visits by application engineers/plant personnel Distributor monthly reports

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DETERMINATION OF CUSTOMER CONTACT REQUIREMENTS CUSTOMER GROUP PROCESS FOR CAPTURING REQUIREMENTS Distribution Channel 1. Distributor / Retailer meets feedback 2. Retail Value Management workshop 3. Fabricators/architects meets 4. Distributor/retailers visits 5. Call centers Enterprise Accounts / Key Commercial Channel / Original Equipment Customers 1. Customer value management workshop 2. Customer page 3. Customer visits by CAMs, application engineers, plant personnel 4. Visits by customer champions 5. Customer forum/ customer visits feedbacks CUSTOMER SATISFACTION DETERMINATION TYPE OF DATA PARAMETERS TOOLS Opinion Data Feedback, Survey, Complaints, Call Reports, Customer meets, Top executive customer meets Customer satisfaction Index measurement, Complaint analysis, Visit reports Behavior Data Repeat Business, Market Share Repeat Business, market share in key markets

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STRATEGIC CHALLENGES FACED BY TATA STEEL 1. Operational: Operational challenges includes some of the following i.e. increasing service level expectation of customers, commodity nature of steel, balancing the economies of scale in manufacturing and simultaneously servicing a fragmented domestic market, innovation as a substitute to investment. 2. Human Resource: Human Resource challenges are attracting and retaining talent, managing rising employee costs, empowering employees at lowest levels, developing employees for the future and improving the quality of life in the locations of operations. 3. Business: Business challenges includes shareholders and promoters expectation of returns on par or better than equivalent opportunities, balancing needs of all stakeholders, upholding the ethical standards in current environment. 4. Global: Consolidation in steel industry, emerging dominance of China, reducing trade barriers, driven by WTO, likely appreciation of rupee against dollar. 5. Societal: Lack of understanding of industry and business, law and order situation in the local areas and increasing expectations of the community in an underdeveloped state, witnessing the successful financial performance of the company.

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RISKS OF THE COMPANY Like all other companies Tata Steel also faces certain risks at the strategic, operational and the governance level. These risks vary according to the level in the organization. At the departmental level, there are risks related to audit monitoring and others which are dealt with by the Strategic planning process. At the business unit level, risks related to credit policy extended to customers, their rating, etc. are targeted for mitigating it. At the corporate level, risks faced are broader in nature based on the overall assessment of the business opportunities and projects. Types of Risks faced by Tata Steel Financial Risk: Any financial strategy has to pass a series of scrutiny so as to minimize the financial risks which is known as the Investment Management Process. The proposal is first analyzed by the Study Group technically, financially, and for the environment and regulatory aspects. After the proposal being sanctioned by them it is sent to the Investment Management Committee (IMC). This sensitivity analysis helps to reduce the risk for the organization. Price Risk: Price forecast is done through a price ladder mechanism and a pricing model (developed in-house) for linking the global prices to domestic price movements. The basic price ladders, forecasting model and the forecast values are continuously evaluated and improved. Strategic development also addresses the factor of dumping risk.

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WORKING CAPITAL MANAGEMENT INTRODUCTION Firms need money to pay for their day to day activities. They have to pay salaries, bills, suppliers & so on. The funds available to do this, is known as the firms working capital. Managing the working capital needs of the organization is important, because shortage of funds could disrupt the day to day operations where as by holding excess funds the interest burden of the firm starts mounting & eating into its profits. There are two concepts of Working Capital, Gross Working Capital & Net Working Capital. Gross working capital is the sum total of all Current Assets, Inventories, Debtors, Loans & Advances & Cash & Bank balances. Net Working Capital is the difference between Current Assets & Current Liabilities & therefore represents the funds which the firm has to finance through Borrowings. A firm needs to invest in Current assets to ensure Smooth and Uninterrupted Operations. How much the firm invests will depend on its operating cycle. Cash flows in a cycle into, around and out of a business. It is the life blood of the business and it is the primary responsibility of the management to keep it flowing to generate profits. A profitable business generates cash surpluses, which is used to expand the business. The faster the Business Expands, the more funds it will require for meeting its working capital needs. Good management of working capital will generate cash, help to improve profits and reduce risks. The two most important elements in the business cycle that absorbs cash are inventory (Stocks of Raw Materials and Spares, Work in Progress and Finished Goods) and Debtors (Money to Be Collected from Customers). Tata Steel endeavor to shorten the cycle by (i) collecting money from debtors quicker and (ii) reducing inventory levels relative to sales, so that they have to borrow less money to meet their working capital needs. As a consequence, the aim is to reduce the interest burden and free additional funds to support growth in its Operations and Sales. Working Capital Management includes the following at Tata Steel:

ent In order to analyze these, we need to go to the nitty-grittys of mode of financing by Tata Steel. These can be explained by the following: 1) O.E. Finance 2) Receivable Purchase 3) Channel Financing 4) L/C and Bill Discounting 5) Overdraft Management The art of managing credit risk is becoming more challenging than ever. Even a single event of default of a customer carries huge implications on the bottom line. The closure of a transaction from Customer Order to Payment realisation is becoming more and more important in the context of strategic benefits and achieving effective customer satisfaction. Thus, there is growing need for new tools in order to better understand, quantify and manage credit risk. Thus, it becomes very important for a corporate to decide how it shall be satisfying its customers along with managing its impact on the
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bottom line. CALCULATION OF CUSTOMER PROFITABILITY AT TATA STEEL Gross Realization Excise Freight = Net Realization - Cost to serve (calculated on the basis of per tonne of sales)

rate, the average rate being 13% approximately) administration) charged at the bank rate) = Net of Net Realization - Cost of production (costs incurred in Jamshedpur, the costs are standardized per tonne of sales, which is revised from time to time) = Net Profitability of the customer The above calculation is done on a monthly basis for each customer. This profitability statement forms the basis for deciding whether the company should continue with the customer or not. Credit Worthiness of the customers is assessed on the following parameters: a. Ability to Pay: Ability to pay is applicable to the organised sector only. It includes the following: Solvency, Financial Viability, Technological Soundness and Commercial Feasibility. b. Willingness to Pay: It is based on judgement of experts and is applicable to both organised and unorganised sector. It includes the following: Quality of Management, Credibility, Past Performance and Health of the group Company. Birth of the Credit Management Department at Tata Steel Prior to 1999, there was no separate department to look after the receivables. Initially people were happy that the plant is producing; there was no focus on sales of the produced materials. Hence there was a problem of large inventory. Gradually, people started realizing this and then the started focusing on sales, which lead to huge piling of receivables or collections. There was hardly any collection done on a regular basis. Since 1999 the entire scenario has again changed. The company started having a separate department which would look after the collections on a daily basis. Credit Management Process Tata Steel has to continuously decide as to how much credit should be given to its customers and also the credit limit i.e. their maximum exposure. Prior to given credit, the credit department analyses the credit worthiness of the customers based on their financial parameters. This is done with the help of a form in Lotus Notes. At the first place, the customer puts forward a request for credit to the CAM since they have a direct access to the CAMs only. Each customer is handled by a separate CAM (Customer Account Manager). They collect all the required information about the customers and fill the Lotus Notes form or the CMG Module which has a predefined template. Then the credit limit is fixed based on their credit evaluation. This credit evaluation also includes factors like the goodwill of the customer in the market and with their banks, the future prospects of the company in terms of expansion, etc. While extending credit to the
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customers it is communicated to them that their credit limit shall not cross the allotted limit. However, in certain cases where the customer needs an extension of the limit, they might be granted communicated to them that their credit limit shall not cross the allotted limit. However, in certain cases where the customer needs an extension of the limit, they might be granted on certain special grounds. The company has a wide variety of customers. These are from different categories of business. They can be either public undertaking or government department or Tata Group Company or private limited companies or traders or distributors. For credit appraisal and risk assessment, customers are broadly classified into three groups: Organised Sector Private & public ltd companies in the private sector, public sector companies including government undertaking Unorganised Sector Traders, partnership firms, SSI units etc. Government Departments Defence, irrigation, Power, Railways, PWD and CPWD Supporting Sections for CMG Co-ordination -Kolkata, Jamshedpur) nd HSM, WRM Despatch Flat and Long Product

Internal Customers of CMG Long Products

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Working capital=Current assets-Current liabilities(2011) =4894.55-10383.44 =-5488.89 In the year 2011 the working capital of tata steel was negative which means that a company is unable to meet its short term liabilities Working capital=Current assets-Current liabilities(2010) =4012.88-8699.34 =-4686.46 In the year 2010 the working capital of tata steel was negative which means that a company is unable to meet its short term liabilities Items under Current assets: Sundry Debtors,Bills receivable,cash in hand,cash at bank,Inventories Debtors means customers from whom we will get money.Debtors of tata steel in the year 2010 was 434.83 and in the year 2010 was 428.03. Items under Current liabilities:Sundry Creditors,Bills payable,short term debt.

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PROCESS OF EXTENDING CREDIT TO THE CUSTOMERS Whatever be the form of company, in the first place CAMs proceed by obtaining two copies of their previous years Balance Sheet. Since these companies are listed hence their Balance Sheet can be relied upon in the process of giving credit. It can tell us about the value of the company and the amount of working capital the company has. CAMs are responsible for entering the nonfinancial information of the company into Lotus Notes such as the products to be sold, credit period and the nature of the credit, etc. All these are then send to the Regional Finance Manager (RFM) via an electronic mail, along with the Balance Sheet of the company, who updates the Lotus Notes with the financials of the company. The RFM acts as a peer in judging whether the credit should be extended or not. Thus, they can also reject the credit proposal. Once this is done, it is forwarded to the Credit Management Group of Kolkata for the final approval. They have the right to accept, reject or suggests changes for the proposal even if the RFM does not possess any objection in extending the credit. The CMG assigns and approves the credit limit based on the recommendations made by the RFM. In case RFM/CMG rejects a credit request, CAM can appeal directly to COS/COMS for sanction of credit giving justifications. Once a credit limit is approved, it is saved into the customer database and would form the basis for future credit transactions with the customer. In case of Government Departments like Railways, PWD, etc. credit is extended on the basis of the past track record of the business transaction. These companies do not have a published Balance Sheet. For such enterprises RFM automatically gives his consent for the proposal. RFM can reject the same if he has any prior information of the customer market outstanding or poor payment record or existing dues in other branch. The Tata Group Companies shall also be considered at par with the Government Departments and no financials shall be required to approve credit limit for them. A Private Limited Company or Partnership has a Balance Sheet which cannot be completely relied upon. Hence they require many more information apart from it. It includes Credit Limit desired and the payment terms with the customer, monthly lifting of the Customer, Future expected monthly business potential, Price negotiated, Credit NR, Cash NR, Any comfort letter from the customers banker / sister company already dealing with Tata Steel, Past data (max 6 previous months) on Credit, Overdue >6 month, Sales & collection of the customers, Market Information on customers Turnover, PAT for the last three years, etc. In case of traders, transactions are made on the basis of the availability of the desired materials. It can also be on temporary basis. The dealings are finalized with those Traders who offer highest prices. Their credit worthiness cannot be judged on the basis of their Balance Sheet or any other financial statement. Credit to a trader is given for a specific sale and a period. After the sales are complete, the credit continues for the allotted period and thereafter it is reversed. Distributors are authorized customers by the Company having a long-term relationship. They are required to lift a minimum fixed tonnage of materials every month. The credit limit for them remains valid for the whole financial year. The COM&S or the VP is responsible for sanctioning of the credit to the distributors. Debtors Control After the credit is extended to a customer, the CMG keeps a regular track of the status of outstanding and overdue. At the beginning of each month, for each customer, ManagerMarketing sends an Accounts Statement indicating the receivables and overdue status of the party. In case overdue reaches 50% (and 25% in case of chronic defaulters) of the total
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outstanding, system stops any further delivery orders thereby stopping further sales. In case where customers total outstanding has become overdue > 2 months, while releasing Delivery Order COM&S will decide on the applicable ratio on the basis of which supplies will be effected (70:30, 80:20, 90:10 etc.). Collection under 70:30 rules, means, for every 100 rupees received in advance, material worth Rs.70/- will be supplied to customer and balance will be adjusted against old dues. Along with the control of debtors, their accounts needs to be continuously reconciled and confirmation should be obtained from the customer at regular intervals as regards of amount due to him. At the beginning of each month the Marketing Manager sends the Account Statement to all the customers for confirmation of balances. Interest Collection for Delayed Payments Tata Steel charges an interest to its customers if the payment made is late after the due date. The details on interest payment are mentioned at the time of credit sales in the Sales Order or the MOU. However, these need to be accepted by the customer. All the transactions are recorded in the SAP system which acts as a database and which is kept updated very instant. Thus, when the credit sales are made, all information like invoice date, interest free credit period, money receipt date, etc. are all recorded in SAP with respect to separate transaction. Thus, SAP automatically calculates the interest that has to be charged to each customer for every delay in payment. The CAM takes the SAP report of interest outstanding for each customer and sends it on a monthly basis to the customer for collection and follow-up. When the interest amount is received the customers account is set-off against the balance. CAMs review the status of interest accrual, its collection and reasons for non-recovery quarterly.

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CREDIT MANAGEMENT MODULE (BASED ON LOTUS NOTES) The Credit Management Module of Tata Steel is maintained in the Lotus Notes. This module is very exhaustive because it captures all the information about the customer to whom credit is being given. It begins by capturing the essential information relating to sales like: be purchased by the customer

(MT) A customer might already have an account with Tata Steel. In such cases the accounts status of the customer as on the date when credit sales is being made are also entered into Lotus Notes. These includes the amounts of outstanding and overdue as on a particular date, Cheque payment history, existing credit limit, interest free credit period, Guarantee provided, if any, level of secured and unsecured credit. It also mentions whether the customers company has been rated by a credit rating agency or not, how is its relationship with Tata Steel and what is its level of Management Quality. This module also asks whether the customers company has been referred to the BIFR. All details of relevant financial figures of the current financial year and the past two years are recorded in Lotus Notes. Some of such figures are Working Capital, Retained Earnings, EBIT, Net Worth, Total Assets, Total Liabilities, Debt, Interest on Debt, Equity, Inventory, Receivables, Sales, PAT, etc. Apart from these absolute figures certain ratios are also recorded, such as Structural Ratios (Debt-Equity Ratio and Interest Coverage Ratio), Liquidity Ratios (Current Ratio and Acid Test Ratio), Turnover Ratios (Asset 39 Turnover Ratio, Inventory Turnover Ratio and Receivable Turnover ratio) and Profitability Ratios (Gross Profit Margin Ratio and Net Profit Margin Ratio). On the basis of these financial figures the credit management group calculates the Z-score of the customer which forms the Corporate Bankruptcy Prediction. FACTORING OR BILL DISCOUNTING Tata Steel has two types of customers:

Whatever be the size of business of the customers, there is a persistent risk of failure of the customers to the company. The larger the volume of debtors, the larger would be the exposure of the company to the market. Thus, any company would try to convert its debtors to cash. This can be done either by restricting credit sales to cash sales or by selling its debtors to various factoring agencies most of which are banks. If sales are made on cash basis, then the customer can pay the money within 7 days of raising the invoice, in which case the customer would also be given a cash discount. For sales made on credit, the company can sell off their debtor which is known as factoring. Factoring helps the company by providing protection against the bad-debts. Bad-debts result in blocking of funds of the company and leads to non-conversion of debtors. They act as
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hindrances in the existing or new or expanding business. Thus, factoring is used to restrict the bad-debts and to protect the cash flow of the business. Factoring has the following advantages:

-debt by CAMs following up for payment

FACTORING FOR THE MANUFACTURING CUSTOMERS: The factoring facility that has been designed for customers which are big manufacturers and high-valued customers is known as OE Finance or Receivable Purchases. Tata Steel enters into an agreement with a Bank that it would sell off its bills of the debtors. This agreement is known as the Tripartite arrangement which is an arrangement between Tata Steel, the Bank and the Customer. At the time when the agreement is made, all the specifications are made clear to Tata Steel and the customer. When an invoice is raised in the name of a customer, within a day or two it is sent to the bank for discounting. As per agreement, the Bank entertains these invoices of the specified parties and makes an upfront payment to Tata Steel of the corresponding amount. For providing the facility of discounting of the bills, the Bank charges certain interest known as the discounting charges. This discounting charge is borne by Tata Steel. Thus, Tata Steel gets the debtors money and the debtors have to pay the Bank at a later date, according to the agreement. However, the debtors shall be paying after the expiry of the credit period. At the end of the credit period if the customer fails to pay on time, then Tata Steel is not liable to pay any overdue interest. This entire arrangement of factoring is without recourse in nature i.e. if there is any problem from the side of the customer, then Tata Steel will not take the responsibility for compensation. Thus, the Bank has to deal with the entire process of the transaction thereafter. Calculation of Discounting Charges: The number of days for which the bill has been discounted is the difference between the due date when the bill expires and the discounting date. The amount of discounting charges is calculated on the basis of this along with the rate at which the bank discounts the bill. Discounting Charges = Bill Amount * Days Discounting * Rate of discounting. FACTORING FOR DISTRIBUTORS The factoring facility that is extended for the distributors of Tata Steel is known as CHANNEL FINANCE. It helps in meeting the financing needs of the distributors. This has helped to reduce the capital outlay and improve cash flow position. It provides the distributors with new sources of funds which help them in carrying out their business with instant payment being made in cash. It reduces the interest rates that the distributors have to bear and also the facility of upfront cash discount. Tata Steel carries out its channel financing activities with the help of a separate company named Metaljunction.com. Thus, the entire factoring of distributors has been outsourced to an external entity. By doing this, Tata Steel has benefited in the sense that now they can get the entire payment without the delay due to credit limit, thereby reducing the overall exposure to uncertainty and chances of bad-debt. The quick receipt of money has now been possible because of the electronic transfer of money. The arrangement of Channel Financing is also carried on a non-recourse basis. In case of default by any of the distributors,
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Metaljunction.com shall have to handle it. Thus, Tata Steel can very successfully reduce its working capital in the form of debtors where the chances of becoming bad if high. Ultimately all this leads to reduction the cost of capital and specialization in hedging of financial risk of the company. How does Channel Finance work? 1. Distributor submits documents to Bank 2. TISCO provides LOR & LOC to Bank 3. Bank assigns credit limit to distributor 4. Distributor registers on Metaljunction for transaction 5. Raises a finance request 6. Bank confirms by giving an MRX no. Credits Tata Steels account & debits Distributor account 7. Finance manager makes a Money Receipt 8. Distributor pays bank after credit period along with Interest. OE FINANCE OE Finance is arrangement between Tata Steel and the Bank wherein all the prospective receivables against invoices issued are sold to the bank. It is invoice backed financing for the purchases made from Tata Steel, on a WITHOUT RECOURSE basis to Tata Steel as to principle and overdue interest. The programme size for this is around 150 crores. This arrangement does not block both Tata Steels and the customers line of credit because these are unsecuritized credit given to the party. Currently this type of financing is being done through Citibank and HDFC bank. The other banks to whom the proposal has been send are Standard Chartered Bank and Bank of America. It is a Tripartite agreement wherein the bank finances Tata Steels customers so as to enable them to pay early i.e.before the due date. OE Finance with HDFC: Under this scheme with HDFC, the tenor is based on the credit terms that are being offered by Tata Steel which can be upto 90 days. Also the limit which is set is based on the purchases made from Tata Steel and the internal credit limits setup, financials of the OE customers and the Banks internal credit guidelines. The OE customers are broadly classified under two categories: Category A: This includes factoring for large corporate who has or are targeting corporate banking relationships. For such customers, Tata Steel has to make an upfront payment of 6.5% to 7.5% interest charges for the period from the date of transaction to the date of maturity of the invoice. The rate 6.5% shall be for those who shall agree for direct debit to their account with HDFC Bank. Category B: These include those customers who are having no banking relationship with HDFC. Hence it is invoice backed finance. Here, Tata Steel has to make a monthly payment of interest @ 8.00% to 9.50% p.a. In case of default in payment by the customers, an overdue penal interest @ 4% p.a. is to be charged to the customers. Documents that is required in its operations: The invoice details are electronically sent to Tata Steel which shall include information like date of invoice, name of customer, due date of payment, etc. The proof of delivery or the invoice will be kept by Tata Steel and submitted to the Bank on demand (in case of audit) or in case of dispute / default. 46 Operations process flow: 1. In the first place, Tata Steel sends a recommendation of the customers along with credit limits. It also provides other details for both category A and category B.
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2. Then, HDFC does a credit appraisal on the customers and subject to the customer meeting the Banks internal credit guidelines, they confirm as to which category the customers will fall into Category A or Category B along with the limits. In case of customers falling into category A, the bank does factoring of the invoices raised by Tata Steel on the customers. The consent of the customers to pay HDFC Bank on due date is obtained by Tata Steel prior to the commencement of the transaction. In case of customers falling into Category B, once the documentation is completed, the limits shall be uploaded into the system and the transactions can start. For the customers, HDFC Bank will open a no cheque book current account for receipt of funds on due date. 3. Then, Tata Steel sends HDFC Bank a soft copy of the invoices with the other details. The file containing the details is uploaded through E-Net/an e-mail, confirming the details to be sent only from e-mail ids prior to operationalising the deal. 4. Based on the file upload/email, HDFC Bank credits the amount of Tata Steel. MIS confirming the transaction is sent to the concerned officials in Tata Steel (based on the mutually agreed format). 5. The entire invoice value is credited to Tata Steel. 6. The interest on the invoice amount for the number of days of discounting is recovered upfront by debit to Tata Steel account. 7. Tata Steel has to sign an undertaking that they hold the original invoices on the behalf of the Bank. The invoices will be made available to the bank at request or 9. On the due date, HDFC Bank will receive the payment by debiting the customers account. 10. In case the customers account does not have sufficient funds on the due date, the entire overdue amount will attract overdue penal interest @ 4% p.a. This interest is to be borne by the customer.

RECEIVABLE PURCHASES Tata Steel sells its receivables of the debtors which are outstanding to the bank on a particular date. It is known as factoring of the receivables. This factoring is done on WITHOUT RECOURSE to TISCO as regards the Principle and Overdue Interest. This arrangement is different from OE Finance in the sense that unlike OE Finance, here the debts are not sold off prospectively. In this the invoices which are to be factored are issued invoices. The company sells a set of receivables to the bank and gets the discounted amount on the date of discounting and also debits Tata Steels account by the amount of interest charges. The date of discounting is the date on which the agreement is signed between the company and the bank. When the bank pays the money to the company, the company gives a debit authorization for the discount amount to the bank. The bank charges an interest on discounting @ 7.5% which is borne by Tata Steel which is the same as OE Finance. The interest shall be calculated from the date of discounting till the Tuesday following the due date of the said invoices. Currently, Tata Steel is dealing its RPs with HDFC Bank. HDFC Bank shall conduct a due diligence audit of the invoices to be sold
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to the Bank and satisfy itself that the invoices existed on the day. In order to ease the collection efforts from the customers on the due date, Tata Steel collects the money from the customers and pays the same to the bank. The payment for the RP to the bank is made on a weekly basis on very Wednesday. By every Monday, all 25 branches, from all over the country, are intimated to forward the details of the invoices which are paid in a particular week. All invoices collected by Tata Steel from its customers throughout the week ended Tuesday is to be paid to the bank on Wednesday. These details are compiled at the Tata Center, Kolkata Office, Head of Marketing and Sales and then the Payment is forwarded to the bank along with a debit authorization to them. This payment is done through a High Value Cheque so that the bank can get the credit on the same day. Interest on discounting is charged by the bank on the difference of the number of days of Payment Date and Discounting Date. Thus, Amount of interest = Invoice amt.* Int. Rate* No. of discounting days

The facility of Receivable Purchase is present for both the Long Product and the Flat Product Department of Tata Steel. All the receivables from each of the department is handled by the Finance & Accounts Department at Tata Centre. The receivables of the following customers in the Long Product Department are treated for receivable purchases: HCC GAMMON Ramswarup Mahanadi Coal Fields The receivables of the following customers in the Flat Product Department are treated for receivable purchases: Blue Star HMS 1 Hongo LG Electronics Mark Auto Maruti Udyog Rasandik Toyota Motors Kirloskar The operating system for Tata Steel is SAP wherein all the invoice transactions along with credit sales taking place are recorded. Each customer has a unique customer code in SAP and any invoice raised in the name of a particular customer is recorded in SAP itself. This is for both Long and Flat Products. SAP contains a list of all the invoices of each of the customers as on the said date along with the receipt of money from the customer on a regular basis

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LETTER OF CREDIT (L/C) AND BILL DISCOUNTING L/C is a document issued by a bank that guarantees the payment, for a specified time period, of a customer's drafts up to a stated amount. It is a commercial instrument through which a bank or other financial institution instructs a correspondent institution to advance a specified sum of money to the bearer which can be an individual or a company. The document is called a circular letter of credit when it is not addressed to any particular correspondent. Letter of Credit is always raised for a particular amount. The institution drawing a L/C from a bank shall do it for a particular amount. Thus, this L/C can then be used maximum till that specified amount and cannot exceed it. It is used as an instrument for payment by most of the companies nowadays. Those who issue such letters are usually so well known that any bank will honor the letter upon proper identification. L/C is of two types: inland payment and foreign payments. It is largely used in case of international trade. It is considered to be one of the most secured means of obtaining prompt payment for the sale of goods. In Tata Steel, most of the payments from customers, in the Ferro Alloys and Manganese Division (FAMD), are received with the help of L/C. It is a kind of credit payment made to the company which is secured in nature. The entire procedure of operating through a L/C shall be explained with an example. One of the customers in the FAMD department is M/S Jindal Stainless Ltd. We take a scenario where Tata Steel has raised 7 invoices in the name of Jindals and payment is to be made through L/C. One L/C can have several invoices but one invoice corresponds to only on L/C. Tata Steel charges a certain amount of interest of the customer, say 8.5% to 10%, because the payment is a kind of delayed payment. Issuance of L/C and the instructions that are made for payment by the customer are as follows: of credit. This L/C value can be greater than or equal to the value of the sum of invoices raised by Tata Steel. Assume that the opening bank for Jindals is Canara Bank.

negotiating bank, L/C number, date and amount, Analysis Test Certificate. In this case, the name of the beneficiary is Tata Steel. The advising bank is Tata Steels bank, to whom the opening bank shall make the payment. Here the advising bank for Tata Steel is HSBC Bank. The negotiating bank as mentioned in the L/C is any bank in Kolkata. Every L/C has a period of validity after which it becomes expires. At the end of such a period the opening bank shall have to make the payment to the beneficiary. A part of the validity days of L/C is free of interest to the opening party and the remaining is charged a fixed interest. Other additional conditions that need to be mentioned in the L/C are whether partial shipment and transshipment is permitted or not, the latest date of dispatch of goods to the Jindals and the date of negotiation. Opening bank charges shall be charged to the openers bank account and the beneficiary bank charges shall be charged to the account of the beneficiary. The L/C shall be payable and reimbursable at Canara Bank. required documents. payment in the name of the beneficiary. When Tata Steel accepts to receive the payment of its bills (several invoices make up a bill), it sells it off to its bank i.e. the opening bank, HSBC. For such a transaction HSBC charges Tata Steel certain interest. This interest is charged for a duration from the date of drawing of invoices or bill to the date of expiry of the L/C. According
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to the arrangement with Tata Steel in the FAMD department, the company shall not bear the overdue charges in case of late receipt of payment from the customers bank. Thus, HSBC would transfer this burden on the issuing bank by charging a certain interest for late payment. Prior to HSBC, Tata Steel used to discount its bills with State Bank of India based on its competitive rates. This was started in October 2004 with a few customers. The problem with SBI was that the MIS system was not up to the mark and it was becoming difficult to track the documents. Thus, Tata Steel was in the need of another bank which could be competitive enough and then in late December 2004, HSBC matched their rates with that of SBI. It was then decided that Tata Steel would discount its bills with HSBC from 1st January, 2005 onwards. According to the agreement, Tata Steel would be discounting only commercial invoices having 30 days of interest free period. Problem of Interest burden on Tata Steel from HSBC in the FAMD Department Tata Steel sells of its L/C to HSBC Bank. Payment for the L/C from the customers shall be received at the end of the validity of the same. Thus, this leads to a blockage of liquidity for which HSBC charges an interest on Tata Steel. At the end of the period, in case of late receipt of payment, Tata Steel shall not bear the overdue interest charges. The crux of the problem lies in the fact that HSBC is claiming the all the parties are failing to pay on time. The payment is being received much later than the due date. The market interest rate for factoring through L/C is found to be 6.5%. However, HSBC is charging 7.25% to Tata Steel because of the claim. This increases the interest burden on Tata Steel since it has to pay extra interest charges, when the company is not clear with the fact that whether actually the parties are paying late or not. In case of late receipt of payment by the opening bank, HSBC would charge an interest of 15% p.a. on a daily basis to the customer. On an overall basis, HSBC is not losing out but Tata Steel is. Thus, the objective is to analyze the scenario and search for the hidden facts. For this purpose, the primary data, for January 2005 onwards, is collected from HSBC Bank. This data is in an excel format which consists of the following columns chronologically: HSBC Reference number for each bill, L/C number and date, issuing bank or the customers bank, Name of the Applicant or the customer, invoice number under each L/C, L/C amount, Bill amount, L/C amount which remains outstanding (L/C amount Bill amount), rate of interest charged on the bill to the customer, the due date of payment for the L/C, the date of discounting of the bills with HSBC, date when the Cheque is issued by the customers bank at the end of the due date, and the date when the Cheque is received by HSBC. Prior to the analysis, according to HSBC there is a huge difference in the number of days between the Cheques issuing date and the Cheque receipt date. The excel sheet is a consolidated one for all the parties of Tata Steel. But the analysis has been done only on the prime customers of the FAMD department i.e. Rathi Ispat Ltd., Jindal Stainless Ltd., Shah Alloys, Stainless India Ltd. Above 90% of the sales come from these customers. What was done? For each of the party, the difference in the days of receipt of Cheque by HSBC and issue date of Cheque is calculated. This gives the delays in receipt of Cheque. This should be minimum but according to HSBCs claim it is very high. According to the calculations, for only 11% of the cases for Rathi Ispat the Cheque was received within two days of its issuance in 2005, for Shah Alloys it was for only 4% of the cases, none in case of Jindal and only for 10% of the cases for Stainless India. These figures are very low for a company. For about 33% of the cases for the Rathis payment was received after 9 days which is an unfavorable figure. This is 60% for Shah Alloys, 25% for Jindals and 20% for Stainless India. On an overall basis, for
38

around 40% of the cases the payment is being received 9 and more days late. (Refer Exhibit 3 (i), (ii), (iii) and (iv)). These figures make the entire scenario non-competitive. Because of the above facts, HSBC claims the Tata Steel would not be charged an interest rate of 6.5%, instead it would be charged @ 7.25% on the bill for the number of days discounted. Thus, amount of interest = Bill Amount * rate of interest * Discounting no. of days. Thus, because of the fault of the customers Tata Steel has to bear excess burden of interest expenses for every bill that is discounted with HSBC. According to thecalculations done in this respect, the savings that could be done for each party due to the difference in interest rates is as follows: Rathi Ispat Rs. 321041.0405 Shah Alloys Rs. 248139.0777 Jindal Stainless Rs. 161362.7016 Stainless India Rs. 40788.32008 Thus, Tata Steel can save a big amount per customer if the management of the company can effectively negotiate with the customers to ensure prompt payment of the bill on expiry. On an aggregate, inclusive of Tata Steels 4 prime customers, the company can save an amount of Rs. 771331.13999 only in a short duration of three months for 2005 onwards. Thus, the company needs a modification in the terms of business with its customers. This shall great implications in the years to come. The following are the suggestions which could prove beneficial for the company: When the payment is received by the bank, it is recorded on that date. However, no direct intimation is received by Tata Steel regarding it from the customers bank. Thus, there can be chances of wrong information being deliberately imparted and entered by the bank. Thus, in order to avoid any kind of such situations from happening or that could happen, Tata Steel should make an arrangement where it would directly receive a copy of payment made by the customers bank for documentation. Tata Steel should make all sales on the condition that the customers bank would be making the payment by a post dated Cheque for 10 days. When the Cheque is issued 10 days earlier a copy of it should also be directly send to Tata Steel for records. If such a step is taken then it would benefit both the company and the customer. Tata Steel would be able to cut down on its interest expenses whereas the customer bank will save on the payment of interest @ 15% to the beneficiaries bank. This would in turn lower down the interest burden on the customer directly. While negotiating with the customer, Tata Steel can specify that the opening bank of the customer should have an electronic mode of transmission of payment to HSBC. If this is done then the entire delay in the receipt of payment due to postal reasons can be controlled. As observed, most of the opening banks are nationalized bank which are likely to be less electronically efficient as compared to the foreign banks that are nowadays entertaining discounting of bills. Since the opening bank should ensure that the payment is received on time by HSBC, HSBC should claim to the opening bank to explain the reasons for the delay. As it has become a regular happening, the opening bank should take care of the same by giving all the details to HSBC.

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OVERDRAFT MANAGEMENT Tata Steel carries out its financing activities through various banks. Two of its main banks that constitute more than 90% of the operational activities are State Bank of India and the Central Bank of India. Since years, Tata Steel was inefficient in managing its funds with the banks there were large balances of overdraft with them. This created a lot of burden upon the company. But this was realized soon and the overdraft was brought into control by the managers of the company. Money, which is received from Jamshedpur, is put into the current of with the banks on a daily basis from which payments shall be made. However, it is made sure that there is no overdraft limit being reached by the banks. Thus, according to the bank statement of State Bank of India we can make the following table.

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REDUCTION OF DAYS SALES OUTSTANDING FOR THE FLAT PRODUCTS The Flat Product Department has both cash and credit sales. Its customers largely cover several companies from the following industries:

The credit limits, various credit terms and amount of credit given to each of the above sector separately depend on the market scenario of the respective sector. Thus, in order to decide how much exposure Tata Steel should take in respect of these sectors we need to analyze each of the sectors separately and exhaustively. This is followed by a SWOT analysis of each one of them. CONSTRUCTION SECTOR Construction Sector is experiencing a boom in the Indian economy. It is showing a growth rate of 7% since 2002 onwards. Prior to this also it registered a very high growth rate upto 10% in 1997. The growth in this sector shows a very smooth upward trend. On the basis of this trend, the construction sector would grow at a rate of 8% till 2010, approximately. As predicted by Rupen Patel, managing director of the Rs 750-crore Patel Engineering, it is expected to clock a turnover of over Rs 2,000 crores in civil engineering and infrastructural projects in the next three years from 2005. Today, in 2005, we find the infrastructural activities are being undertaken in huge scale all over the country. This is mainly due to the support from the Government.12 Building up of over-bridges, railway tracks, etc. have increased a lot. Examples for some of such activities since 2005 onwards are as follows13: 4-lane highway on NH-58 from National Highways Authority of India (NHAI). -based Patel Engineering bagged orders for two irrigation projects in Andhra Pradesh worth Rs 878 crores. irrigation projects in Andhra Pradesh. Gammon India and Patel Engineering, meanwhile, are switching their focus back to the Indian market. ansport (roads, bridges, railways), energy and power (nuclear, hydel and thermal), housing (urban and rural), airports, shipping, irrigation and flood control worth over Rs 115 lakh crores are being initiated. Along with this, the Foreign Institutional Investors sees India as an engineering and construction hub. The value of FII holding is increasing at the cost of domestic holding. The sharp rise in overseas interest for engineering and construction firms comes on the back of strong order inflows, which have shot up in recent months. At least 10 foreign construction majors have set up shops in the last 6 months. As a result of the surge in order inflows, FII exposure in the biggest industry player Larsen & Turbo, which exited
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its cement business to re-emerge as a specialized engineering and construction company, has seen a sharp rise from 10% to 17.1% during the past year. With the removal of the restrictions on the FDI inflows by the Government, we find construction projects being undertaken on a very large scale. The SWOT of this sector is as follows: Strength: encouragement by the government. g volume of infrastructural activities being undertaking in India as well as globally. -class families which leads to a boom in the housing sector. Weakness:

100 acres to 25 acres. 60 Opportunity:

-material cost is expected to decline over the next 2 years. scale. Threat: Overall the construction sector can be rated as high in terms of opportunity and low in terms of risk. On the basis of the current outstanding of the different sectors the construction sector is having a total exposure of 2.61%. This means that out of the total credit, the credit to this sector is very low. The construction sector falls in the third quadrant of the growth-exposure matrix. Because of high opportunities coming up with, new infrastructural activities, Tata Steel can easily increase its exposure to this sector. AUTOMOBILE SECTOR With a market size of approximately Rs 540 billion and consistent growth figures of nearly 8% per annum, India's automobile sector consists of the passenger cars and utility vehicles, commercial vehicle, two wheelers and tractors segment. In the passenger car segment the big players are Maruti Udyog Ltd., Tata Motors Ltd. and Hyundai Motor India. In the motorcycle segment, we have Hero Honda Motors Ltd. and Bajaj Auto Ltd. India's automobile sales expanded by 15.9% in the year ended March 31, 2005 to 7,896,475 vehicles as against 6,810,537 vehicles sold in the fiscal year 2003-04. This includes sales of passenger cars, two-wheelers and commercial vehicles, including utility vehicles and multi purpose vehicles. Automobile exports, meanwhile, jumped 31.2% in 61 the year ended March 2005 to 629,887 units with passenger cars and motorcycles contributing to the bulk of exports.14
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INFAC is forecasting a 12-15% annual growth in the passenger car sales, 6-8% in commercial vehicles and around 10% in two wheelers. Almost all the major automobile manufacturers such as GM, Ford, DaimlerChrysler, Honda, Toyota, Hyundai, already have made significant investments in India. In the next 2-3 years from 2005, the passenger vehicle industry is expected to see investments of more than Rs 30 billion; two wheeler industry is expected to attract investment amounting to Rs 10 billion. Annual growth was 16.0 per cent in April-December, 2004; the growth rate in 2003-04 was 15.1 percent. The automobile industry grew at a compound annual growth rate (CAGR) of 22 per cent between 1992 and 1997. With investment exceeding Rs. 50,000 crores, the turnover of the automobile industry exceeded Rs. 59,518 crores in 2002-03. Including turnover of the auto-component sector, the automotive industrys turnover, which was above Rs. 84,000 crores in 2002-03, is estimated to have exceeded Rs.1, 00,000 crores in 2003-04.15 Current scenario in the auto sector16 and engine facility. in another $150m. 5,000 crores in investments up to 07. of the two companies may be around Rs 600 crores) -04 and 04-05, has pledged another Rs 100 crores in 05-06.

around Rs 41 crores. -3 years, the passenger vehicle industry is expected to see investments of more than Rs 30 billion; two wheeler industry is expected to attract investment amounting to Rs 10 billion investments, including money being pumped in by the components sector as OEMs ramp up capacity. The entire auto sector is expected to grow by 15% till 2010. The auto sector combined with the auto ancillary sector can be graded as high in terms of opportunity and low in terms of threat. At present Tata Steel is having a total exposure of 30.63% to the auto sector which has a high growth. Hence it just needs to maintain it. The Auto sector lies in the first quadrant in the growth-exposure matrix. AUTO ANCILLARY SECTOR A growth of 30% in automobile sales in 04-05 is encouraging ancillary majors to invest heavily in capacity expansions. It is spending around Rs 1,600 crores in creating new capacities over the next 2-3 years. The larger ancillary companies have benefited from strong demand for commercial vehicles, passenger cars and two-wheelers, auto components companies have been able to protect their profitability despite rising metal prices, mainly of steel. The growth in the Indian auto ancillary sector was around 16 percent by the end of the
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2004-05 fiscal, which is lower than the growth of 22-24% recorded in 2003-04. India has gradually become a sourcing hub for auto companies worldwide. The growth of auto component exports from India has spurred due to availability of skilled, low cost labour and the high quality consciousness.17 Among the companies outsourcing from India are General Motors, Ford, Daimler Chrysler, Hyundai, Fiat, Toyota, Delphi, Navistar, Visteon, Cummins and Caterpillar. A number of Indian companies with global ambitions are gradually moving towards creating a niche in the world market: Bharat Forge Ltd. and Tata Auto Components System (TACO). Over the past two years, 7 Indian component manufacturers have won the coveted Deming Prize, one of the highest awards on TQM (Total Quality Management) in the world. The global auto component industry was expected to touch $1.9 trillion by 2015, of which around 40% ($700 billion) was potentially expected to be sourced from low cost countries like India. Exports of auto components are expected to increase by 30-35% which account for 15% of the total output. With 21.5 percent CAGR, the figure is expected to touch $2.6 billion by 2006.18 The flat product department of Tata Steel is having a total exposure of 52.00% in the auto ancillary sector which is quite high. Along with this, the sector is showing a low growth rate. In the growth-exposure matrix the auto ancillary sector lies in the forth quadrant. So the company needs to reduce its exposure to this sector by some extent. This is necessary to ensure that the company would not suffer in case of adverse situations. The SWOT analysis of the auto and the auto ancillary sector is as follows: Strength:

vehicles. -06. better quality. Opportunity: . 18 www.ibef.org er are coming. models of vehicles being introduced.

effect in the auto-ancillary sector, boosting the same. Threat:

competition in the industry. he customers to adopt other means.

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WHITE GOODS APPLIANCES SECTOR The White Goods Appliance includes the following: Washing machines, Refrigerators, Air Conditioners, Cookers, Washer Dryers, Dishwashers, Electrical Lamps & Tubes, Storage Batteries, Dry Cells, Lead Acid Battery, etc. The important players in this sector are: Electrolux, National, Daewoo, Whirlpool, Godrej, BPL, Videocon, Samsung, LG, Onida and Maharaja. White goods industry has been growing at an average rate of 10-12% every year for the last five years. The Industry is focusing smaller goods in the range of 3 to 4 kg capacity as compared to larger machines as there are more and more nuclear families rather than joint families. The present its capacity is adequate to cater to the demands of domestic requirements as well as exports. The industry is de-licensed and also eligible for automatic approval for Foreign Direct Investment. There is greater consumer awareness about the quality and safety of these goods, driving the manufacturers to adhere to the quality standards. The state government will encourage producers of refrigerators, washing machines, kitchen appliances, TVs, furniture and other domestic goods. Refrigerator Industry number of brands have entered the market and the consumer has a wide choice. -01, 165 Litres had a larger share and now units of capacity 185-300 Litres are having increasing market share. million appliances, followed by washing machines at about a million appliances and air conditioners, which are about .6 million appliances. or industry is growing at a rate of 10 to 12 %, Washing machines which was growing very fast at about 20 to 25% has slowed down in the last two years to almost 4 to 5%, and air conditioners are still growing at 20 to 25%. Air Condition Industry Indian air conditioning industry is growing rapidly with a growth rate of 20% every year. However, the penetration of this category is very low. The industry is almost divided 50:50 into room air conditioning and package air conditioning. Example: Whirlpool ol is a mass player with 27% market share in Refrigerators and a 20% market share in washing machines. They are leaders in refrigerators. Chinese products in India and also have a high export market.

and the US. 19 www.google.com 66 The SWOT analysis of the White Goods Industry can be enumerated as follows:
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Strength:

continuously improve their products. -capita income. Opportunity:

Threat: On the basis of the SWOT analysis, we can grade the white goods sector as high in terms of threat and opportunity. It is showing a very high growth rate of 16.82% in the last financial year. From the following graph, we can notice the trend in growth of the white goods EQUITY ANALYSIS - INTRODUCTION There are two general schools of stock analysis: fundamental and technical. FUNDAMENTAL ANALYSIS Fundamental stock analysis requires, among other things, a close examination of the financial statements for the company to determine its current financial strength, future growth and profitability prospects, and current management skills, in order to estimate whether the stock's price is undervalued or overvalued. A good deal of reliance is placed on annual and quarterly earnings reports, the economic, political and competitive environment facing the company, as well as any current news items or rumors relating to the company's operations. Simply put, fundamental analysis concerns itself with the "basics" of the business in assessing the worth of a stock. Numerous ratios, derived from balance sheet and income statement data, are used in fundamental analysis including such widely used ratios as, Working Capital Ratio, Debtequity Ratio, Return on Equity Ratio, Earnings per Share, etc. Fundamental analysis may be the preferred method to use for mid to longer term investors. However, it is not suitable for use by day traders because of the amount of research required, and the fact that trades are entered into and exited within a very short time frame. The massive amount of numbers in a company's financial statement can be bewildering and intimidating to many investors. On the other hand, if you know how to read them, the financial statements are a gold mine of information. Financial statement analysis is the biggest part of fundamental analysis. Also known as quantitative analysis, it involves looking at historical performance data to estimate the future performance. Followers of quantitative analysis want as much data as they can find on revenue, expenses, assets, liabilities, and all the other financial aspects of a company. Fundamental analysts look at this information for insight into the performance of in the future. They don't ignore the company's stock price; they just avoid focusing exclusively on it. Some of the indicators commonly used to assess company fundamentals include: cash flow; return on assets; conservative gearing; history of profit retention for funding future growth; and soundness of capital management for the maximizing of shareholder earnings and returns.
46

Performing fundamental analysis can be a lot of hard work. But that is, arguably, the source of its appeal. By taking the trouble to dig into a company's financial statements and assess its future prospects, investors can learn enough to know when the stock price is wrong. Those investors able to spot the market's mistakes can make themselves money--a lot of it. At the same time, buying companies based on intrinsic, long-term value protects investors from the dangers of day-to-day market flux. However, the fact that fundamental analysis shows that a stock is under-valued does not guarantee that it will trade at its intrinsic value any time soon. Things are not so simple. In reality, real share price behavior relentlessly calls into question almost every stock holding, and even the most independent-minded investor can start doubting the merits of fundamental analysis. There is no magic formula for figuring out intrinsic value. FUNDAMENTAL ANAYSIS OF TATA STEEL Valuation of Intrinsic Value of the share of the company as on February, 2005. For finding the intrinsic value of the equity share of Tata Steel, we incorporate future as well in terms of projections made for the next 5 years and 6th year onwards. We undertake the following calculations, assumptions and conclusions on the basis of the previous 5 years financial figures: r the next 20 years is 8% and thereafter it shall stabilize at 5%. each of the previous years. These figures were found to be very fluctuative in nature, ranging from -1.89% to 30%. Thus, in order to project the income figures for the coming years we assume that the company will grow at a 86 conservative estimate of 10% per annum for the next 5 years followed by 7% in the long-run. ponents of the cost of sales with respect to the operating incomes for the previous 5 years in order to project the cost component for the coming years. We find that Tata Steel has been successful in reducing the cost component significantly in the last few years. But these gains would stabilize at some point of time. The company is already the worlds lowest cost steel producer. So we propose to assume that the cost structure remains static at the 2004 value. The ratio of cost of sales to the operating income came out to be 0.6623. (Refer Exhibit 4(i)). out to be 0.3377 (1-0.6623). Thus, on the basis of the projected operating income for the coming years we calculate the projected cash operating profit before taxes by using the formula COPBT for a year = Operating profit for the year * ratio of COPBT to the operating profits. capacity from 4.7 mT to 9.2 mT. This means company will spend on an average 1200 crores per year for next 6 years till 2010. So we assume that it uses Rs. 1200 towards asset creation. Also during early 1990s Steels sector went for capacity expansion which leads to glut situation during late 90s. This along with recession in world & Indian economy ensured poor growth of industry till 2001. It is only in 2002 that the industry turned around. Due to
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growing demand from China & increased infrastructure spending in India, Industry has good future growth. Thus projection using past data will not be accurate. of the previous years net block, Reinvestments for the year or the net purchases in the assets and the constant (assumed to be Rs. 1200) additional investments for the year. basis of the following formula: 87 Rate of dep. for a year = dep. Exp. For the year / (Net Block of the previous yr. + (Net purchases or sales of assets for the year / 2)). Thus, for the future we assume that the rate of depreciation would be the average of these separate rates for the 5 years. (Refer Exhibit 4(v)). t years is calculated using the formula: Depreciation = (Previous years Net Block + reinvestments for the year) * average rate of depreciation. (Refer Exhibit 4(vi)). tax for the last 5 years. Here we find the Effective Tax Rate and the Cash Tax Rate where Effective tax rate (in %) = (Provision for taxes / Adjusted PBT (deducting write offs)) *100 Cash tax rate (in %) = (Taxes paid / Adjusted PBT (deducting write offs)) * 100 It is then averaged out for the past 5 years. Therefore, Avg. CTR (in %) = 19.86 However, the corporate tax rate is expected to reduce from the current 36.75% to 30% in the future. Thus, we assume that the tax rate used for the projections for future would be at 30% level. (Refer Exhibit 4(ii) and 4(iii)). following: Investments in Fixed Assets, Investments in securities, Replacements and interest & dividend earnings. These projections are done with the help previous 5 years average figure as well as other assumptions made. These projections indicate cash outflows because of investments activities. (Refer Exhibit 4(iv)). ome is calculated for the last 5 years. This was 40% in 1999 and it fell down to 11.5% in 2004. Thus, we assume that this ratio would continue for the future also. The projected working capital can be calculated by using the formula: Projected W.C. = Projected operating income for the years * 11.5% (Refer After doing this we determine the changes in the Working capital over the next 5 years by simply calculating the difference in the amount of Working capital. for the company can be calculated to be 10.71%. profits after taxes and the projected free cash flow of the firm.
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Cash operating profits after taxes = (COPBT Dep.) * (1-T) (Refer Exhibit 4(viii)). Projected FCFF = Projected COPAT + Changes in W.C. + Projected CFIA While projecting the future FCFF for the 6th year onwards we use summation with the help of the infinite series, the actual formula being Projected FCFF for 6th year onwards = Projected FCFF of the 6th year (WACC Long-run growth rate) Each of these is discounted to the present value as on 2005 with the help of WACC. (Refer Exhibit 4(ix)). Hence, Present value of the firm as on February, 2005 = sum of all projected and discounted FCFF = 26850.37 Thus, the Fair Value of the firm / share (Rs.) = (Present Value of the firm (Secured Loans + Unsecured Loans)) / Equity share capital. Intrinsic / Fair Value of the share of TISCO (Rs.) = 424.18 Book value of a share = (Equity share capital + Reserves & Surplus Miscellaneous Expenses not written off) / Equity share capital Book Value Of the share of Tata Steel = 118.55 (Refer Exhibit 4(x)). Market Price of the share of Tata Steel as on 24th June, 2005 at 3.30 p.m. = 363.40 Thus, we can now say that the share of Tata Steel is selling below premium i.e. it is under priced. This shall give indications as to whether an investor should 89 respond to purchase or sale of the share in the stock market. This entire analysis of the intrinsic value of the share is known as the fundamental analysis of a company. However, the information received from the fundamental analysis is very conservative and narrow in scope of analysis. It does not incorporate in the market factors that largely influence the price of a companys share. Thus, we can say that fundamental analysis is always incomplete. In order to fill this gap of analysis, we carry out technical analysis of the share of the company. This type of analysis is done on a daily basis and takes into consideration the market sentiments towards a particular companys share. Balance Sheet of Tata Steel ------------------- in Rs. Cr. ------------------Mar '11 Mar '10 12 mths 12 mths Sources Of Funds Total Share Capital 959.41 887.41 Equity Share Capital 959.41 887.41 Share Application Money 178.20 0.00 Preference Share Capital 0.00 0.00 Reserves 47,307.02 36,281.34 Revaluation Reserves 0.00 0.00 Networth 48,444.63 37,168.75 Secured Loans 2,009.20 2,259.32
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Unsecured Loans Total Debt Total Liabilities

26,291.94 28,301.14 76,745.77 Mar '11 12 mths 22,846.26 11,041.16 11,805.10 6,969.38 46,564.94 3,953.76 428.03 512.76 4,894.55 16,814.04 3,628.78 25,337.37 0.00 10,383.04 3,547.98 13,931.02 11,406.35 0.00 76,745.77 12,582.24 503.19

22,979.88 25,239.20 62,407.95 Mar '10 12 mths 22,306.07 10,143.63 12,162.44 3,843.59 44,979.67 3,077.75 434.83 500.30 4,012.88 6,678.55 2,733.84 13,425.27 0.00 8,699.34 3,303.68 12,003.02 1,422.25 0.00 62,407.95 13,184.61 418.94

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

331.68

298.78

240.

Profit & Loss account of Tata Steel Mar '11 12 mths Income Sales Turnover Excise Duty Net Sales 31,901.94 2,594.59 29,307.35
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------------------- in Rs. Cr. ------------------Mar '10 12 mths 26,757.60 1,816.95 24,940.65

Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses

1,435.80 173.65 30,916.80 9,395.92 1,558.49 2,618.27 2,905.16 501.96 1,529.73 -198.78 18,310.75 Mar '11 12 mths 11,170.25 12,606.05 1,686.27 10,919.78 1,146.19 0.00 9,773.59 0.00 9,773.59 2,912.44 6,865.69 8,914.83 0.00 1,151.06 156.71 9,592.14 71.58

1,241.08 -134.97 26,046.76 8,356.45 1,383.44 2,361.48 2,419.89 417.90 1,287.04 -326.11 15,900.09 Mar '10 12 mths 8,905.59 10,146.67 1,848.19 8,298.48 1,083.18 0.00 7,215.30 0.00 7,215.30 2,168.50 5,046.80 7,543.64 45.88 709.77 122.80 8,872.14 56.37

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs)

72.

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FINANCIAL ANALYSIS Current ratio =Current Liabilities/Current Assets The current ratio measures the ability of the firm to meet its current liabilities from the current assets. Higher the current ratio, greater the short-term solvency (i.e. larger is the amount of rupees available per rupee of liability). The current ratio of tata steel is 1.81 which is good Debtors Turnover Ratio =AverageAccountsRe ceivable(Debtors)/NetCreditSales The ratio shows how many times accounts receivable (debtors) turn over during the year. If the figure for net credit sales is not available, then net sales figure is to be used. Higher the debtors turnover, the greater the efficiency of credit management. The debtor turnover ratio of tata steel is 67.93 Earnings Per Share (EPS): EPS measures the profit available to the equity shareholders per share, that is, the amount that they can get on every share held. It is calculated by dividing the profits available to the shareholders by number of outstanding shares. The profits available to the ordinary shareholders are arrived at as net profits after taxes minus preference dividend. It indicates the value of equity in the market. EPS = Number of Ordinary Shares Outs ding/Net profit AvailableToThe Shareholder It is seen that in Tata steel the eps has increased from 56.37 in the year 2010 to71.58 in the year 2011which is good Turnover The turnover of the company has consistently increased owing to the increase in global steel demand from 2003 onwards. The steel industry has recovered after a series of low growth for years. The turnover was around Rs 29073.50 in 2010-2011.It experienced a growth of 22% from the previous year. Return on Equity The Return on Equity has considerably increased owing to the increase in Profits after Tax. The ROE is the indicator of as to how much return the company has been able to earn per rupee invested by the shareholders of the company. The current rate of ROE is 46% which is high because the margins and sales have considerably improved. The company has been specifically able to control its costs and has emerged as one of the lowest cost steel producer in the world. Debt Equity Ratio The Debt Equity Ratio is interesting to watch in case of TISCO. Steel Industry by nature is capital intensive. Thus it requires higher debts. The Debt component has come down
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over the last three years. Currently it is at .77 coming down from 1.92 in 2002.The year 2002 was tough for the industry as a whole. The demand was going down and thus needed debt. In the year 2002 the company had paid an interest amount to Rs 430 crores and had debt amounting to Rs 4300 crores. In 2003-04 the debt component came down to Rs 3300 crores and the company incurred interest expenses amounting to Rs 230 crores. The global demand for steel is at an all time high now and the industry is getting financially stronger. The lower interest burden has helped in achieving higher profits. TISCO has reduced its total debts by Rs 475 crores as on October 31, 2003, resulting in lower interest cost. This is in line with the company's decision to prepay its high-cost debts. It is also in talks with lenders to settle more debt. The total debt of the company as on March 31, 2003, stood at Rs 4,225.61 crores as against Rs 4,705.48 crores in the previous fiscal. The interest burden for the first six months of 2003-2004 stood at Rs 133.48 crores as against Rs 166.61 crores in the same period of the previous fiscal, representing a 20 per cent reduction. The company is talking to a few lenders and is willing to pay 50 per cent of the premium on debt. The company clocked a 25.38 per cent 92 fall in interest from Rs 76.41 crores to Rs 57.02 crores for the second quarter of 20032004. Interest as a percentage of sales dropped from 3.88 per cent to 2.18 per cent for the same period. Net Working Capital The Net Working Capital for a company is the difference between the current assets and the current liabilities. Current Assets include receivables, bank and cash balance, inventory and other miscellaneous expenses. Current Liabilities includes creditors and outstanding. The tremendous fall in the net working capital is either due to the fall in the current assets or a rise in the current liabilities. Here we can say that the debtors have been under control to large extent and for the year 2004 it was extremely low. Having a low net working capital is good for a company. Along with this there was a rise in the current liabilities for the year 2004. GROSS WORKING CAPITAL Over the previous year, the working capital of the different departments has increased in terms of days of debtors and days of inventory. This has been observed for Long Products, Flat Products and Ferro Alloys & Minerals Division. Inventory The level of inventory in the different departments has increased to some extent. Debtors The debtors are under control for almost all departments. As per 2004-05 data the actual debtors were less as compared to the target debtors, which gives a positive signal that less money is blocked in the debtors. It reduces the liquidity of the company.

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FUTURE OUTLOOK The Indian steel industry has been passing through a rough phase in the recent times. Excess capacities, huge workforces and lack of better technologies plague the sector. Even, globally the situation is no different either. The current performance of steel companies across the world shows that they have much in common. They have all been hit hard by the demand crunch, with the vast majority sinking into a sea of red. A global cyclical downswing is very clear. The worry, however, is that the global steel industry is heading for larger trouble than what has so far been presumed. According to estimates by International Iron & Steel Institute (IISI), crude steel production in 1998 was down by only 2.3 per cent compared to 1997. And 1997 was a record production year of 799 million tonnes. The fluctuating growth rates shown by developed countries after the 1973 oil crises were offset by sustained demand for steel in the developing world. The Asian financial crises changed that scenario completely. Traders panicked and liquidated the excess inventory they had booked in anticipation of higher prices. This caused a sharper price drop than warranted. The panic also resulted in a disproportionate fall in steel raw material prices-- such as scrap, pig iron, DRI, coal and coke. The global recession also brought down ocean rates, which increased the ability of some manufacturers to reduce prices further. Analysts estimate that for most steel products the price drop has been as much as 50 per cent. This has shattered the steel industry worldwide. Restructuring seems to be the only way-out. But most steel companies in developing countries had undertaken massive privatization programme between 1992 and 1996. That doesn't seem to have helped them much. New private players who had entered the steel business in a big way find their capital costs far too exorbitant, bringing down their chances of survival sharply. The only conclusion that emerges is that developed countries have benefited at the expense of developing countries. The Road ahead.. 1. Tata Steel is in a growth mode even in the steel business through the organic (internal growth) and acquisition routes. 2. Tata Steel is targeting to be the World Class Industrial Enterprise from a World Class Steel Company. 3. Tata Steel is developing World Class products and brands to be sold through a World Class distribution system that would operate at World Class efficiencies with World Class Knowledge and expertise and yet have roots in the Indian environment that nurtures the Tata Group and Tata Steel.

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BIBLIOGRAPHY

http://www.moneycontrol.com/financials/tatasteel/balance-sheet/TIS#TIS http://www.moneycontrol.com/financials/tatasteel/profit-loss/TIS#TIS http://www.tatasteel.com/

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