Background Note

Tata Iron and Steel Company (TISCO) was established in 1907 by J N Tata1 at Jamshedpur in
Bihar, India. TISCO offered a wide range of products (See Exhibit I) and services including Hot
rolled/Cold rolled (HR/CR) coils2 and sheets, tubes, construction bars, forging quality steel, rods,
structurals, strips and bearings. It also manufactured material handling equipment, ferro alloys and
other minerals, software for process controls, and offered cargo-handling services.

In the early 1980s, TISCO initiated a modernization program of its steel plant (See Exhibit II).
Explaining the need of modernization, J J Irani, the then managing director of TISCO said, "We
would have been finished otherwise.... you cannot fight a modern-day war with weapons of the
Mahabharata. We would have been annihilated had we not modernized. We realized this and
embarked on the four phases of modernization. We addressed our drawbacks like the steel making
process, our weakest link."

By mid-1990s, TISCO had become India's most cost-effective steel plant. It also became Asia's first
and India's largest, integrated steel producer (ISP)3 in the private sector. By 2000, eight divisions of
Tata Steel were ISO-140014 certified, including Noamundi Iron Operations, West Bokaro
Collieries, Ferro Alloy Plant, Joda, Sukinda Chromite Mines, Joda East Iron Mines, Tubes Division,
and Growth Shop & Steel Works.
By early 2000, TISCO had completed four phases of the modernization programme with an
investment of about Rs 60 billion5. The company had invested Rs 4 billion on consultancy fees
during 1990 to 2000. The fifth phase of the program had commenced in April 2000

Company Ranking Score

TISCO 1 131
Usinor (Russia) 2 129
Posco (Korea) 3 127
CSN (Brazil) 4 123
Baosteel (China) 5 121
China Steel (China) 6 119
Gerdau (Brazil) 7 118
Nucor (US) 8 116
Car-Tech 9 112
Nippon Steel (Japan) 10 111
Severstal (Russia) 10 111
Dofasco (US) 11 109

The 'Top' Program

In the early 1990s, TISCO appointed McKinsey and Booz-Allen & Hamilton to study its operations
and suggest ways to cut costs. Irani explained the rationale, "Cost-cutting measures are more
important in the present situation where one can no longer control steel prices which are dictated by
international markets." The consultants suggested TISCO to focus on various components affecting
the cost of steel, which included cost of raw materials, cost of conversion, fuel rate in the blast
furnace and mining of coal. TISCO was advised to use the most modern technologies to cut costs
further.

In the second half of 1998, in association with McKinsey, TISCO implemented TOP program at its
G blast furnace8. TOP was widely regarded, as a program, which would have a maximum positive
impact to the bottomline, with minimum investment, required in minimum time (See Exhibit IV). It
aimed achieving large improvements in throughput, quality and cost in the short term. In the long
run, TOP was expected to enable the TISCO to achieve high rates of performance improvement
(See Exhibit V).

Since TISCO's scale of operations was quite large, the whole organization was divided into
manageable 'units' to facilitate the implementation of TOP. A unit team was formed comprising a
unit leader and two facilitators. Initially, McKinsey provided the facilitators. The unit leader was
responsible for the performance of that particular unit. The team worked full time on the TOP
program for a period of 12 weeks. Around eight units were addressed simultaneously during the 12
weeks, and this was also known as 'Wave.' The entire Wave was divided into five phases (See
Exhibit VI).
The unit team's objective was to explore ideas to reduce the cost or delays made by the unit by
about 40%. In the process, the team was expected to identify and understand how each cost element
could be reduced. The team had to establish relationships between key performance indicators and
the elements that had an impact on them. Each team was asked to set itself a target based on the
TOP norms; develop ideas to improve from the present level of performance to the target level; and
implement those ideas.

The Phase I of a Wave was two weeks long. During this phase, the cost base was examined and the
items that had a maximum impact on the bottomline were identified. Individual components of the
larger cost elements were identified by drawing cost trees9. The cost elements, which could be
reduced were highlighted and the reduction targets were set. In the Phase II of the Wave, ideas were
explored to reach the set targets. At the G blast furnace, throughput10 and fuel costs were identified
as the key performance indicators in the Phase II. Among the different individual components of
fuel costs, coke and coal were the largest cost elements. They accounted for about 50% of the total
costs. A reduction target was set to bring costs down to 570 kgs per thm11 from 610 kgs per thm. In
the Phase III of the Wave, ideas were generated to achieve the target output of 3800 tons per day.
Considering the techno-economic feasibility, 36 ideas were short-listed. The ideas were then
grouped based on the capital expenditure required for implementing each idea. The Phase IV of the
Wave started with the implementation of these ideas. Simultaneously, the G blast furnace also
implemented 185 ideas, which did not require any capital investment.

By March 1999, the G blast furnace achieved a savings of Rs 87 million against the targeted savings
of Rs 40 million. TISCO set up a potential savings target for its G blast furnace at about Rs 300
million per annum, accounting for more than 10% of its profits in the fiscal 1999. By late 1999,
TOP was in Phase V of the Wave (See Exhibit VI).

n 2000, similar Waves were also adopted in TISCO's shop floors. The TOP program had helped
TISCO to shift its focus from just producing volumes to costs and quality. Moreover, TOP enabled
TISCO to improve customer satisfaction and loyalty.
Implementing Best Practices

In 1999-2001, TISCO took measures to reduce costs further by adopting innovative strategies and
other cost-cutting exercises. For example, TISCO stopped using manganese, an expensive metal
used to increase the strength and flexibility of steel. The company made efforts to reduce its product
delivery time from 3-4 weeks in 1998 to 2 weeks in 2000. The company aimed to further reduce the
time to one week.

TISCO also took steps to reduce its manpower costs. Between 1996 and 2000, TISCO reduced its
workforce from 78,000 to 40,000 employees. Analysts opined that cutting its workforce by 38,000
employees was not an easy job and the company was able to do it with a lot of communication with
employees.
TISCO had adopted Performance Ethic Programme (PEP), under which, it planned to promote
hardworking young people to higher positions depending on their performance, rather than
following the convention of seniority. This exercise was expected to cut the management staff from
4000 to 3000.
PEP had two core elements. Firstly, it proposed a new organizational structure, which was expected
to foster growth businesses, introduce more decision-making flexibility, clear accountability, and
encourage teamwork among the managers and the workforce. Secondly, PEP proposed to introduce
a Performance Management System (PMS). It would identify and reward strong performers, and
also offer development opportunities for each employee. PMS would also ensure that every
employee's job profile was clearly defined. By introducing PMS, TISCO wanted to make
performance appraisals transparent and fair and reward the good performers.

The company also planned to introduce a new compensation package based on performance from
November 2001. Muthuraman explained the benefits of PEP, "Youngsters are getting higher salary
than some of the seniors, and after the restructuring, the average age of the managers has fallen by
10 years. Through PEP, TISCO also reduced the hierarchical levels from 13 to 5."

In a bid to reduce costs further, TISCO used IT as a strategic tool. In 1999, the company formed a
small cross-functional in-house team consisting of consultants from Arthur D Little and IBM
Global Services.

The team was responsible for re-designing two core business processes - order generation and
fulfillment and marketing development. The program began with a study on cost-competitiveness.
The aim of the program was to enhance customer focus enabling better credit control and reduction
of stocks, thereby reducing the costs. After considering several packages, the team decided to use
SAP R/3. TISCO wanted the team - also known as ASSET (Achieve Success through SAP Enabled
Transformation) - to integrate SAP into the existing information system and make it compatible
with future SAP implementations. After SAP solutions were introduced in TISCO, the business
processes became more efficient. It also improved customer service and productivity, and reduced
costs. The introduction of SAP also decreased manpower cost from more than US $ 200 per ton in
1998 to about US $ 140 per ton in 2000. There was a significant reduction in inventory the carrying
cost, from Rs 190 per ton in 1999 to Rs 155 per ton by 2000. There were also significant cost
savings through efficient management of resources.

The Future

Analysts felt that TISCO's modernization program was very successful. The Steel Authority of
India Ltd. (SAIL) adopted a similar program with an investment of Rs 70 billion. However, the
program was not successful. In contrast, in spite of the depressed market and lower margins, the
decrease in the production costs enabled TISCO to achieve a profit after tax of Rs 5.53 billion in
2000-2001, and Rs 4.22 billion in 1999-2000 compared to Rs 2.82 billion during 1998-99 (Refer
Exhibit VII).

TISCO planned to enter new areas including setting up of a 0.1 million-ton ferro chrome export
oriented project. The project was planned in Australia because of the lower power costs. TISCO
was to get power at a tariff of 1.8 cents for about 15 years that is about one-fifth of the tariffs in
India. Power accounted for 60% of the cost of ferro chrome manufacturing.

TISCO was also planning to enter titanium mining through alliances with major global companies.
To provide employment to the employees opting for VRS at over-manned units, TISCO planned to
enter the call center business in Jamshedpur. To develop this business, TISCO entered into a
marketing alliance with Tata International, the trading arm of Tata Group. TISCO also planned to
exit from some of its non-core activities.

Critics felt that TISCO might face problems due to the decrease in demand for steel in the global
and local markets and increasing competition from cheap imports, and anti-dumping duties imposed
on the domestic steel manufacturers by the US. They felt that it was doubtful whether steel, even at
the lowest cost, would deliver returns higher than the cost of capital in India. However, some
analysts remarked that in the long run, TISCO's strategy to export to Jordan, Iraq and the Southeast
Asian countries might reduce dependence on the US markets thus helping the company. They said
that its entry into value-added products was expected to safeguard the company from the
fluctuations in the steel prices.

Questions for Discussion

1. TOP was described as "maximum impact to the bottomline, with minimum investment, in the
minimum time. What was the rationale behind the implementation of TOP? Briefly analyze the
process and explain the advantages of TOP.

2. The cost-cutting measures seemed to have helped TISCO to a large extent. Apart from TOP,
what are the other steps taken by TISCO for reducing costs?

3. The lowered production costs enabled TISCO to record a profit during 1999-2000, despite a
depressed market and low margins. Do you think the low costs would help the company in the long
run?

Justify your answer.

Address:
Bombay House, 24 Homi Mody Street
Fort, Mumbai 400 001
India

Telephone: (91) 033-2882727

Fax: (91) 033-2889881
http://www.tatasteel.com

Statistics:
Public Company
Incorporated: 1907
Employees: 48,821
Sales: Rs 66.4 billion ($141.41 million)(2000)
Stock Exchanges: Bombay
Ticker Symbol: TISCO
NAIC: 33111 Iron and Steel Mills; 331221 Rolled Steel Shape Manufacturing

Company Perspectives:
Consistent with the vision and values of founder Jamsetji Tata, Tata Steel strives to strengthen
India's industrial base through the effective utilization of staff and materials. The means envisaged
to achieve this are high technology and productivity, consistent with modern management practices.
Tata Steel recognizes that while honesty and integrity are the essential ingredients of a strong and
stable enterprise, profitability provides the main spark for economic activity.

Key Dates:
1907: Tata Steel is established by Jamsetji Tata.
1924: On the brink of disaster, Sir Dorabji Tata pledges his personal fortune to secure bank loans to
keep the company afloat.
1939: By now, TISCO operates as the largest steel plant in the British Empire.
1951: A Modernization and Expansion Program (MEP) is launched.
1955: The MEP is upgraded to the Two Million Ton Project (TMP).
1970: TISCO employs 40,000 people at Jamshedpur and 20,000 workers in neighboring coal mines.

1978: The Indian government forces TISCO into modernization efforts.

1989: The Tata Group doubles its stake in TISCO to thwart takeover attempts.
1990: TISCO begins expanding and establishes subsidiary Tata Inc. in New York.
1996: The company begins a joint venture with Inland International to build a steelworks facility in
India.
1998: TISCO records a 61 percent decline in net income due to a downturn in the steel industry.
2000: TISCO completes a ten-year, $1.5 billion modernization program.

Company History:

Tata Iron & Steel Company Ltd. (TISCO) is the iron and steel production company associated with
the Tata group of some 80 different industrial and other business enterprises in India, founded by
members of the Tata family. TISCO operates as India's largest integrated steel works in the private
sector with a market share of nearly 13 percent and is the second largest steel company in the entire
industry. Its products and services include hot and cold rolled coils and sheets, tubes, construction
bars, forging quality steel, rods, structurals, strips and bearings, steel plant and material handling
equipment, ferro alloys and other minerals, software for process controls, and cargo handling
services. Through its subsidiaries, TISCO also offers tinplate, wires, rolls, refractories, and project
management services.
Tata's Early Beginnings in the 1800s
The story of TISCO is the story of one family or, more accurately, one man whose vision and
determination to give India a modern industrial economy helped provide a platform for the
country's independence half a century after his death. At the same time, he helped create what was
by 1970 India's biggest nonpublic enterprise. Jamsetji Nusserwanji Tata was born into a well-to-do
family of Bombay Parsees in 1839. The Parsees, a religious minority group, had carved a niche for
themselves in business, in this case in the economy of Victorian India, which was dominated by
British interests and was being developed as a client imperial economy. Tata's father was a
successful merchant with interests in the cotton trade to Britain. Tata joined the family business
after an education at Elphinstone College in Bombay and was sent to Lancashire, England, in 1864
to represent the firm there. This was to be the first of many travels in Europe, North America, and
the Far and Middle East during which he formulated his ideas on the best strategy to realize his own
ambitions for success in business and to contribute to the economic development of India.
Tata's own background was in cotton production. He believed that mills could function successfully
in India in close proximity to the cotton-producing areas in the west of the country, thereby putting
them in a strong position to undercut their Lancashire competitors. He obtained air conditioning
equipment from suppliers in the United States and the latest cotton spinning machinery installed to
provide the optimum climatic conditions for spinning. His early ventures showed promise and in
1874 he founded his first company, the Central India Spinning, Weaving and Manufacturing
Company. Three years later, on the same day that Queen Victoria was declared empress of India, he
opened the Empress mill in Nagpur.
As Tata was taking his first steps toward establishing a viable cotton spinning business, Indian
nationalism also was beginning to find a focus for its aspirations through the Indian National
Congress. Tata was present at its inaugural meeting and his devotion to the cause of an independent
India was undoubtedly a motivating factor in his own drive for success in business. Cotton was only
a start. From his travels in other industrialized nations he had come to identify three essential
elements for a modern industrial economy: steel production, hydroelectric power, and technical
education. Although he did not live to see any of his schemes in these areas come to fruition, he laid
the foundations on which his sons, and then later generations of his family, were able to build to
realize his ambitions.
Development of Tata Iron & Steel Company: Late 1800s-1980s
From the mid-1880s, Tata commissioned a series of surveys in India's coal-producing areas, such as
Bihar and Orissa in the northeast of the subcontinent, to locate iron ore within easy reach of coal
deposits and water, both essential elements in steel production. He visited the United States to seek
the advice of the world's foremost metallurgical consultant, Julian Kennedy, and went to
Birmingham, Alabama, to study the coking process in action. In England in 1900, he discussed his
plans with the secretary of state for India, Lord George Hamilton. In India, the way had been
opened for private enterprise with the introduction of a more liberalized mineral concession policy
in 1899. With Julian Kennedy's help, American specialists were brought in and began surveying in
1903. After a series of disappointments, rich iron ore deposits were identified in the dense jungle in
Bihar at the confluence of two rivers near Sakchi three years after Jamsetji Tata's death in 1904.
Also involved in the surveying was Tata's nephew, Shapurji Saklatvala, whose health suffered so
much that he was sent to London to recuperate. There, he joined his uncle's London office, which
had been established some years earlier to represent the interests of the family cotton business. His
energies were soon channeled away from business matters and into politics, and he became
Communist member of Parliament for Battersea North in 1922.
Four years after Tata's death, his sons Dorabji and Ratanji began development of the Bihar site. A
factory and township were carved from the jungle and named Jamshedpur. A conscious decision
was made to retain control within India of the new enterprise, the Tata Iron and Steel Company, by
seeking out Indian investors. In the face of warnings that India could not afford a flotation of this
size, the Tata brothers set out to raise Rs 23.2 million in shares. Within eight weeks some 8,000
Indian investors came forward and the whole share issue was taken up. The Tatas retained 11
percent of the stock for themselves. There were enormous initial problems in clearing the Sakchi
site and, once production began, in ensuring that the coal was of a uniform quality. By 1916,
however, production was meeting expectations and during World War I the company exported
1,500 miles of steel rails to Mesopotamia. Rapid expansion to support the Allied war effort was
followed by Depression during the 1920s with escalating prices, transport and labor difficulties, and
a major earthquake in Japan, by now TISCO's biggest customer. The company had to suspend its
dividend for 12 out of 13 years in this period and was on the brink of closing in 1924 when Sir
Dorabji Tata had to pledge his personal fortune to secure the necessary bank loans to keep the
business afloat. TISCO emerged from the 1930s, however, as the biggest steel plant in the British
Empire. World War II brought a resurgence in demand for Tata products and the company
specialized in the manufacture of armored cars, known as Tatanagars, which were used extensively
by the British Army in the North African desert.
Following six years of almost continuous production to serve the war effort, it became imperative in
the late 1940s to begin replacement of the plant. In association with Kaiser Engineering of the
United States capacity was expanded and a Modernization and Expansion Program (MEP) was
launched in 1951, upgraded four years later to the Two Million Ton Project (TMP) to give TISCO
the capacity to produce two million tons of crude steel. This was achieved in 1958 but further
expansion was put on hold during the 1960s while the country passed through a period of
devaluation and recession. By 1970, however, TISCO employed 40,000 people at Jamshedpur, with
a further 20,000 in the neighboring coal mines.
Government attempts to nationalize TISCO in 1971 and 1979 were defeated, in part, it was
believed, to retain an efficient private sector yardstick against which the performance of public
sector companies could be judged. An ever-increasing range of government legislation to bring
private sector businesses into line with national economic planning on the Soviet model, however,
hampered Tata's freedom to develop in the postwar period. In 1978, the government restricted
TISCO's dividend to 12 percent to force it, as India's only private sector steel producer, to plough
money into modernization. Expansion was restricted by a government committed to helping
nationalized industry. Further difficulties were created in the late 1970s by chronic shortages of
coal, power, and rail transport. An estimated Rs 45 crores of salable steel was lost during 1979-80
because of these shortages. TISCO soldiered on, however, and in the following decade began to
benefit from a relaxation of government control as a more pragmatic attitude to the importance of
private sector industry emerged. In 1989, the Tata group increased its stake in the steel firm to ward
off any attempts by outside shareholders to gain control of the company. By 1990, TISCO remained
India's largest nonpublic company, announcing a 30 percent increase in profits against a backdrop
of general depression in the Indian economy as a whole.
Growth of the Tata Empire Over the Course of the 20th Century
The growth of Jamshedpur and the involvement of the firm in every aspect of its industrial and
municipal life was the subject of several studies. Jamsetji Tata was both a nationalist and a
philanthropist. He showed a paternalistic concern for the well-being of his employees, which set the
tone for future company policy. The British proponents, pioneers of social reform Sydney and
Beatrice Webb, were invited out to India from England to advise the Tatas on the best form of
social, medical, and cooperative services for the newly established Jamshedpur and as a
consequence schools, recreational facilities, creches, and other amenities were established on site at
an early stage. An eight-hour working day had been introduced in 1912, an officially recognized
Tata Workers' Union established with Gandhi's associate, C.F. Andrews, as its first president, and
profit-sharing schemes were brought in in 1934. Against this, it was argued that the Workers' Union
operated in fact as a management tool to impose its will on a workforce so heterogeneous by nature
that rival unions made little headway. Despite the reputation of the Tata family for concern over
workers' rights, there was much unrest among the workforce during the 1920s over wages and
conditions and it has been claimed that this, as much as anything, contributed to advances. The
commitment of the Indian Trades Union Congress after independence to the same goals as central
government--economic self-sufficiency and prosperity--allowed the Tatas a relatively free hand in
dictating their own industrial relations policy. Whatever the arguments, TISCO could claim in 1989
that it had not lost a day's work through industrial action in 50 years, and its management illustrated
its commitment to the welfare of its employees by commissioning an audit of its "social
performance" by a team of eminent public figures.
TISCO's success spawned numerous offshoots making use of Tata products, some of them part of
the Tata Group. These included the Tata Engineering and Locomotive Company (TELCO). This
ripple encouraged other areas of Indian industry to become suppliers of spare parts for new products
and by 1970 TELCO had more than 500 Indian ancillary suppliers.
The second element in Jamsetji Tata's plan for India's modernization was the development of a
hydroelectric capability. Within reach of Bombay's thriving, basically steam-driven cotton spinning
industry lay the monsoon-swollen rivers of the western Ghats. If Bombay's captains of industry
could be persuaded to invest in the necessary conversion from steam to electricity, the natural
resources existed to provide this new source of power. To encourage the process, the Tatas bought
up sufficient mills to create the necessary demand before launching Tata Hydro-Electric Power
Supply Company in 1910. By 1915, the required dams and reservoirs, ducts, and pipelines had been
laid to feed the new turbines. Two further power stations followed in 1916 and 1919. Between the
wars the family had to sell some 50 percent of its stake in the hydroelectric company to a U.S.
syndicate to support other less successful firms within the group. By the 1960s, power stations had
been supplemented by four thermal installations, which together satisfied Bombay's entire domestic
and industrial requirement.
TISCO, TELCO, and Tata Hydro-Electric Power Company were only three parts of the Tata empire
that by the late 1970s included 30 separate companies. Together the group accounted for 1.8 percent
of India's GNP, with TISCO alone providing 0.4 percent, far more than any single equivalent firm
in the United States or United Kingdom. In 1970, the managing agency system that had
characterized much of Indian industry since the British period was abolished. Under this system,
British investments in the subcontinent were managed by firms of agents who charged commission
for their services. Tata Industries Ltd. acted in this capacity for many of the firms in the Tata Group,
and until 1970, central control was not difficult. After this date, shares in the 30 or so Tata
enterprises were retained by Tata Industries, whose chairman from 1938 was Jehangir Ratanji
Dadabhoy Tata, a distant relative of the founder of the Tata industrial dynasty. He was succeeded in
1981 by Ratan Naval Tata, whose father had been adopted by Ratanji Tata's widow in 1917.
Following the Monopolies and Restrictive Practices legislation of 1969, which represented the
views of a government hostile to large private enterprises, the Tata group was self-conscious within
India about the size of its operation and great emphasis was placed on publicizing the independent
nature of each of its firms. It was pointed out that 75 percent of the firms' shares was owned by
trusts established by the Tata family to promote research and welfare projects. In reality, the Tatas
had been adept in holding together their empire with a steady growth in the group's assets, much
informal consultation between firms, a recurrence of names in the lists of directors, and a shared
head office in Bombay.
The continued prosperity of the group during the difficult postwar years for private sector firms was
probably also helped by its refusal to take up an overtly political stance in opposition to prevailing
government policy. The only exception was in 1956, when it backed the short-lived Forum of Free
Enterprise against a government committed to assigning a dominant role to public sector industry.
Government monopoly legislation also restricted diversification into high-profit areas such as
fertilizers or pharmaceuticals, an obvious move for a group such as Tata whose traditional staple
was high-cost, low-profit industry. There were no restrictions on overseas investment or new
technology, however, and inroads into both these areas were made. India needed firms such as
TISCO or TELCO if the country was to maintain a viable industrial capability. Therefore, even
when government controls officially restricted growth, the Tata Electric Company was given the
green light during the 1970s to build privately a new 500-megawatt plant, and sanction was given to
TELCO to increase its output from 24,000 to 36,000 vehicles per year.
TISCO developed as one of the independent but interrelated companies within the Tata group.
Among the better known of these firms is the Indian Hotels Company, whose centerpiece, the Taj
Mahal Hotel, in Bombay, was conceived by Jamsetji Tata and opened in 1913, as the first hotel in
the country using electricity. Tata Chemicals was launched in 1939, and its Mithpur plant produced
mineral extracts required for glass, ceramic, and leather production. The plant had a checkered
history in its early years owing to delays in perfecting the soda ash process. With the support of the
Tata group and the usual Tata resourcefulness in times of crisis, however, the company stayed in
business. For example, when a drought in 1962 threatened to close the plant, management prevailed
upon the local population to ration the domestic consumption of water. This "lakeless week" was a
great success and ensured that sufficient supplies of water remained for the company to continue in
production. Another venture in 1962 involved joining with James Finlay and Company of Scotland
to form the Tata-Finlay Company, which bought Finlay's 53 tea estates and has become the biggest
tea producer in the world.
In the field of electronics, Tata joined the Burroughs Corporation of Detroit in 1977 to market the
U.S. firm's computer systems and to begin to develop the manufacture of mainframe computers in
India. With such an array of experience and expertise, the group entered the consultancy market
with the establishment of the Tata Consulting Engineering and Tata Economic Consulting Services.
One Tata initiative that slipped through the net was air travel. An air service was inaugurated to
carry the mail between Bombay, Karachi, and Madras in the 1930s. In 1946, however, Tata Airlines
went public as Air India Ltd, and the company was nationalized in 1953 to form Air India and
Indian Airways.
The third requirement of Jamsetji Tata for a successful and independent India was a system of
technical education. His scheme to launch a Science University in India in 1898 was opposed by the
viceroy Lord Curzon as overambitious and inappropriate for Indian needs. Tata persevered,
however, and offered to underwrite the project with an endowment derived from his Bombay
properties. He did not live to see the scheme realized. After Curzon's departure, the government of
India showed itself more amenable to the proposal, and in 1911, Bangalore was chosen as the site
for an Indian Institute of Science with joint funding from the Tata family, central, and provincial
governments. The institute produced a number of eminent scientists and became a focus for much
pioneering research. Tata funds have gone into other projects such as the Bhabha Atomic Research
Center in Bombay, which has developed techniques for more efficient power generation. One of
Jamshedji's greatest legacies was a concern for creating better educational opportunities for his
countrymen. By the 1920s, one in five of Indian recruits to the Indian civil service had benefited
from Tata scholarships.
This commitment to education, welfare, and other humanitarian projects continues today and is part
of the Tata distinctiveness. TISCO, for example, took part in a Green Millennium Countdown
program and planted 1.5 million trees. In 2001, it also supported the Lifeline Express program that
provided healthcare to those living in remote areas. TISCO is also known for providing relief during
natural disasters and was awarded the Outstanding Corporate Citizen Award from the Economic
Times.
The Tata family was often accused of paternalism toward its workers, of an often ill-judged concern
for the continued existence of every member of the corporate group irrespective of profitability, and
of an over-concentration on traditional high-cost but low-profit industries. TISCO, however, cut its
workforce from 78,669 employees in 1993 to 48,821 in March 2001. The management culture of
the group as a whole was changing in the new millennium. Tata directors were focused on
profitable operations as well as securing leading industry positions for each Tata company.
Since the abolition of the managing agency system in 1970, TISCO and the various Tata companies
operated entirely independently, but they retained many personal, family, and business ties. TISCO
and most of the larger firms in the "family" shared the same head office in Bombay. The Tata sense
of identity survived a postwar period of almost continuous economic and political adversity. At the
start of the new millennium, the Tata group included 80 companies involved in various industries
including engineering, chemicals, energy, materials, consumer products, IT and communications,
and services.
TISCO Operations During the 1990s
During the 1990s, TISCO was faced with trying economic times as it forged ahead with
modernization and expansion. During the decade, the steel firm began its fourth stage of upgrades
and improvements. As part of the modernization, TISCO planned to increase its annual steelmaking
capacity in Jamshedpur to 3.2 million metric tons by 1999, up from 2.7 million tons in 1996.
The steelmaker also broadened its geographic reach. In 1990, a U.S. subsidiary, Tata Inc., was
established and the following year, the firm opened offices in Singapore and Dubai. It was during
1991 that restrictions on licensing, price, and distribution were lifted in India, allowing TISCO to
expand its capacity. India also began allowing foreign manufacturers involved in such steel-
dependent industries as electronics and automobiles to operate in the country. As demand increased,
TISCO set plans in motion in 1995 to construct India's largest blast-furnace mill with an eventual
annual capacity of ten million metric tons. By 1996, steel consumption in India had grown by ten
percent in each of the last four years. That year, TISCO expanded further and teamed up with
Inland International Inc. to create Tata-Ryerson, a joint venture that would provide industrial
materials management services in India.
During the mid-to-late 1990s, however, India's steel industry and economic climate weakened.
Many construction projects in the region were put on hold. As steel demand and prices fell,
TISCO's profits plummeted. In 1998, the company reported a 61 percent fall in net income. As
such, TISCO began aggressive cost-cutting measures and drastically cut its workforce. While most
companies involved in the steel industry reported losses, TISCO was able to keep its bottom line in
the black.
Despite the trying economic conditions, TISCO was able to complete its $1.5 billion modernization
program in April 2000. It began operation of a 1.2 million metric ton cold rolling mill and also
became one of the lowest-cost producers of hot-rolled coils. During fiscal 2000, TISCO reported
earnings of $90.1 million, an increase over $60.2 million earned in the previous year.
In 2001, after 30 years of service, Jamshed Irani, TISCO's managing director, retired, leaving B.D.
Muthuraman at the helm. Under a new director, TISCO pledged to continue cutting costs and focus
on new growth areas such as making investments in the telecom industries. Although conditions in
the steel industry remained uncertain and the economic climate in India remained unstable, TISCO
appeared to be well positioned to handle the problematic environment.
Principal Subsidiaries: Tata Refractories Ltd (51%); The Tata Pigments Ltd.; Kalimati Investment
Company Ltd.; Tata Korf Engineering Services Ltd. (60.1%); Tata Incorporated; Stewarts & Lloyds
of India Ltd.; Tata Technodyne Ltd.
Principal Competitors: Essar Steel Ltd.; Jindal Iron & Steel Co. Ltd.
The Tata Iron and Steel Co Ltd
Non-convertible debenture programmes aggregating AA+ (Reaffirmed)
Rs10.65 billion

Rs4 billion commercial paper programme P1+ (Reaffirmed)

Fixed deposit programme FAAA (Reaffirmed)

The ratings continue to reflect The Tata Iron And Steel Company Ltd.'s (Tisco) strong business
profile characterised by its pre-eminent position in the domestic steel industry, and a strong global
cost position arising out of its highly integrated operations and superior operating efficiency. The
ratings also reflect the financial flexibility that the company enjoys as a flagship of the Tata group,
and its increasing sales of value-added products following the stabilisation of its recently
commissioned cold-rolling (CR) mill.
Although the company's gearing of about 1 (excluding the impact of deferred tax) as on March 31,
2002, is inconsistent with the outstanding rating category, the ratings continue to draw comfort from
the fact that there are no significant cash outflows (interest and principal repayments) on the loans
drawn by Tisco from the Steel Development Fund (SDF), which constitute about 30 per cent of its
total debt.
The current ratings assume that Tisco's gearing would decline going forward as the company has no
significant capital expenditure or investment plans.
At the time of the last rating review in January 2002, Crisil had assumed that Tisco would not
participate in the Tata group's foray into the telecom business. Crisil had, however, factored in the
company's proposed ferrochrome project in South Africa, and a brownfield steel capacity expansion
at Jamshedpur. Subsequently, Tisco has dropped its telecom investment plans and has not yet
finalised the brownfield project.
These are positive developments because, in the absence of significant capital expenditure in future,
the company would be in a position to reduce its debt levels, which are consistent with its AA+
rating category. The ratings continue to factor in the company's modest investments of about Rs0.6
billion in its Rs2.5 billion in the South African ferrochrome joint venture project. The ratings,
however, assume that Tisco would not make substantial investments in any other non-core business.
Tisco is currently carrying out feasibility studies for a titanium project in Tamil Nadu, but an
investment decision on this is expected only after a couple of years. Crisil would factor in the
impact of any significant investments as and when they are made, depending on the quantum
invested and the funding mix for the same.
Strong global cost position: Tisco is one of the lowest cost steel producers globally. This has
enabled the company to effectively negotiate steel price cycles and remain profitable even during
severe downturns. The company's cost competitiveness arises from its highly integrated operations
backed by superior operating efficiency.
Tisco derives a significant cost advantage from its low-cost captive sources of iron-ore and coal.
The company's cost of coking coal, an important element of production cost, is among the lowest in
the world, despite using a 50:50 blend of captive coal and imported coke. Blended coal is used to
reduce the high ash level of Indian coal, which is not suitable for metallurgical operations.
Tisco's cost structure also benefits from the modernisation programmes and process improvements
that it has continuously undertaken.
Consistent cost reduction: Tisco has significantly reduced its costs by implementing the Total
Operating Performance (TOP) concept across all processes. Cost savings have primarily accrued
from improvements in throughput in different equipment, and processes and reduction in specific
raw material consumption. The company has also satisfactorily dealt with its high labour costs
through continuous manpower rationalisation.
The company recognises the need to further reduce costs and improve efficiencies. Tisco plans to
achieve additional cost savings in the areas of strategic sourcing, inbound and outbound logistics,
manpower and administrative costs.
Improving product mix: Tisco successfully commissioned a 1.2 million tonne per annum (tpa) CR
mill, which includes a 0.4 million tpa galvanising line, in two phases in FY2001 and FY2002. The
company sold about one million tonnes of CR products in FY2002, thereby significantly improving
its product mix (see chart below).
Tisco has also been accepted as a supplier to leading automobile makers such as Tata Engineering,
Ford, Maruti Suzuki and Mahindra and Mahindra. The company's product mix is expected to
improve further in the future with increasing CR sales and consequently, reduced sales of its lower-
end hot-rolled (HR) products.
The company also plans to increase finishing capacity in the longs segment by setting up balancing
equipment, which would reduce the proportion of semi-finished steel (billets) in the product mix.
Besides, it has initiated the concept of branding a commodity like steel with Tata Tiscon (reinforced
bars) and Tata Shakti (galvanised sheets) being some of its branded products. All these initiatives
have improved the company's average realisations and hence profitability, as can be seen from the
company's results for the first half of 2003.
Weak industry fundamentals: Tisco's business risk profile is, however, constrained by the steel
industry's below-average risk profile. The steel industry is bogged by persistent excess production
capacity and a high level of fragmentation. These adverse factors expose companies to severe
pricing pressures, which affect profit margins. The industry is also characterised by cyclicality in
demand and capital-intensive operations, which, in turn, affect the financial profile of steel
companies.
High debt levels constrain financial risk profile: Tisco's financial risk profile is constrained by the
company's high debt levels resulting from the large capital expenditure incurred in the past. The
company's financial risk profile is characterised by a relatively high gearing and consequently,
modest debt protection ratios (interest cover and cash accruals in relation to debt).
Moreover, the company's profit margins fluctuate widely depending on steel prices. Tisco's
operating margins, though superior to those of most domestic and international companies, declined
sharply to about 19 per cent in FY2002 from about 25 per cent in FY2001. Net profit margins,
which are constrained by high interest costs and depreciation and also by the extra-ordinary
expenditure on account of its voluntary retirement schemes, declined to about 3 per cent in FY2002
from about 8 per cent in FY2001.
In the first half of FY2003, however, Tisco reported a sharp increase in profitability with a profit
after tax of about Rs2.7 billion on net sales of Rs35.9 billion (Rs0.48 billion and Rs31.06 billion
respectively in the first half of FY2002). Profitability improved primarily due to the increase in steel
prices, and also due to the company's improving product mix. Going forward, Crisil expects Tisco
to sustain this strong financial performance.
No major investments factored in: The current ratings do not factor in any significant investments
apart from the company's ferrochrome project in South Africa. The project is expected to
commence by October 2003 and be completed by the end of FY2005. Given the management's
project implementation track record, the project should be commissioned successfully.
The ratings assume that Tisco will only make negligible investments over the next two years for
feasibility studies in its proposed titanium project. The ratings could be adversely impacted if the
company makes investments in any unrelated businesses, or goes in for inorganic growth through
large debt-funded acquisitions.
Industry Outlook
The fortunes of the domestic steel industry are linked to economic growth and the level of
government spending on infrastructure. Steel-makers experienced a tough year in FY2002, with
prices falling to historically low levels amid a worldwide demand downturn. Global steel prices,
however, have staged a recovery in 2002 led by improving demand, especially in China, and some
amount of production cuts globally. Accordingly, domestic prices have also firmed up. While the
recent trend towards protectionism is an unwelcome development overall, it has also helped boost
prices.
An improvement in the industry's long-term prospects, however, seems unlikely unless its core
problems such as overcapacity and fragmentation are addressed. A strong global economic
recovery, which would result in higher steel consumption, is essential for prices to firm up and
remain stable. Meanwhile, due to the continued slowdown in the global economy, domestic demand
growth is expected to be low at 3-4 per cent over the next year. Prices are also expected to remain at
current levels or even weaken marginally in the near future.
Key Rating Sensitivities
Going forward, any significant cash outflow on account of the outstanding SDF loans could impact
Tisco's ratings. The key to the ratings would be the company's ability to improve or maintain its
gearing at current levels despite the various investments that it may make. Any investment in non-
core areas or any large debt-funded acquisition could result in a revision in the rating, as and when
precipitated.