Financial Analysis & Valuation
Project - 2020
Financial Modeling - MMS III
Faculty: Prof. Maneesh Gupta
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Authored by: Priya Mohabey - 20191123
Jayesh Sawadkar - 20191135
Shashank Sharma - 20191137
INTRODUCTION
India was the world’s second-largest steel producer with production standing at 111.2
million tonnes (MT) in 2019. The growth in the Indian steel sector has been driven by
domestic availability of raw materials such as iron ore and cost-effective labour.
Consequently, the steel sector has been a major contributor to India’s manufacturing
output. The Indian steel industry is modern with state-of-the-art steel mills. It has always
strived for continuous modernisation of older plants and up-gradation to higher energy
efficiency levels. Indian steel industry is classified into three categories - major
producers, main producers and secondary producers.
Market Size
India’s finished steel consumption grew at a CAGR of 5.2 per cent during FY16-FY20 to
reach 100 MT. India’s crude steel and finished steel production increased to 108.5 MT
and 101.03 MT in FY20P, respectively.
Export and import of finished steel stood at 8.24 MT and 6.69 MT, respectively, in
FY20P.
Investments
Steel industry and its associated mining and metallurgy sectors have seen major
investments and developments in the recent past.
According to the data released by the Department for Promotion of Industry and Internal
Trade (DPIIT), the Indian metallurgical industries attracted Foreign Direct Investment
(FDI) to the tune of US$ 13.40 billion in the period April 2000–March 2020.
Some of the major investments in the Indian steel industry are as follows:
In March 2020, ArcelorMittal Nippon Steel India (AM/NS) acquired Bhander
Power plant in Hazira, Gujarat from Edelweiss Asset Reconstruction Company.
In February 2020, GFG Alliance acquired Adhunik Metaliks and its arm Zion
Steel for Rs 425 crore (US$ 60.81 million), marking its entry into the Indian steel
market.
For FY20, JSW Steel set a target of supplying around 1.5 lakh tonnes of TMT
Rebars to metro rail projects across the country.
Government Initiatives
Some of the other recent Government initiatives in this sector are as follows:
Government introduced a Steel Scrap Recycling Policy to reduce imports.
An export duty of 30 per cent has been levied on iron ore (lumps and fines) to
ensure supply to the domestic steel industry.
Road ahead
The National Steel Policy, 2017 envisages 300 million tonnes of production capacity by
2030-31. The per capita consumption of steel has increased from 57.6 kgs to 74.1 kgs
during the last five years. As per Indian Steel Association (ISA), steel demand will grow
by 7.2 per cent in 2019-20 and 2020-21. There is a huge scope for growth offered by
India’s comparatively low per capita steel consumption and the expected rise in
consumption due to increased infrastructure construction and the thriving automobile
and railways sectors
COMPANY BACKGROUND
Tata Steel is currently the world’s second-most geographically diversified steel producer
with an annual crude steel capacity of 33 million tonnes per annum. The company is
one of the few steel operations that is fully integrated – from mining to the
manufacturing and marketing of finished products. Continuous improvement in its
product and service portfolio, along with success in value creating initiatives for
customers, allows the company to serve global growth markets. Today, it operates in 26
countries and has a commercial presence in over 50 countries with employees across
five continents. The company’s raw material operations are spread across India and
Canada which helps it to be self-sufficient in steel production.
Business Verticals of TATA STEEL
KEY INVESTMENTS
Investment in TRF Limited
In March 2019, the Company acquired 25,00,00,000, 12.5% Non-Convertible
Redeemable Preference Shares of face value `10 each of TRF Limited on private
placement basis, aggregating to `250 crore.
Investment in Tata Metaliks Limited
In March 2019, the Company acquired 27,97,000 equity shares of face value `10
each of Tata Metaliks Limited at a price of `642 per equity share aggregating to
`179.57 crore and 34,92,500 Warrants of face value `10 each at a price of `642
per Warrant, with a right exercisable by the Company to subscribe for one equity
share per Warrant of face value of `10 each, aggregating to `224.22 crore (25%
paid on application).
EIC ANALYSIS
Economic Analysis
The World Steel Association (world steel) forecasts that steel demand will
contract by 6.4%, dropping to 1,654 Mt due to the COVID-19 crisis. In 2021 steel
demand is expected to recover to 1,717 Mt, an increase of 3.8 % over 2020.
India has implemented the most stringent nationwide lockdown measures in the
world, bringing industrial operations to a standstill. Construction activity was
halted entirely at the end of March, and recovery is expected to remain slow due
to the slow return of labour. Supply chain disruption coupled with slower demand
recovery will hit the automotive sector hard. The machinery sector is expected to
see a continued decline, with weak private investment and supply chain
disruption.
Supported by government stimulus, recovery in construction will be led by
infrastructure investment such as railways. The government’s support to rural
income, as well as expected consumption related to the upcoming festive
season, will help a substantial recovery of demand for consumption-driven
manufacturing goods in the second half. As a result, India is likely to face an
18.0% decline in steel demand in 2020, which will rebound by 15.0% in 2021.
Sector Analysis
India was the world’s second largest steel producer in 2019. India surpassed
Japan to become the world’s second largest steel producer in 2019 with crude
steel production of 111.2 million tonnes (MT). In India, as per Indian Steel
Association (ISA), steel demand is estimated to grow 7 per cent in FY20 and
FY21.
In FY20, crude steel production and finished steel production in India was 108.5
MT and 101.03 MT, respectively.
Export and import of finished steel stood at 8.42 MT and 6.69 MT, respectively, in
FY20.
India’s per capita consumption of steel grew at a CAGR of 4.43 per cent from 46
kgs in FY08 to 74.10 kgs in FY19.
Government has taken various steps to boost the sector including the
introduction of National Steel Policy 2017 and allowing 100 per cent Foreign
Direct Investment (FDI) in the steel sector under the automatic route.
According to the data released by the Department for Promotion of Industry and
Internal Trade (DPIIT), Indian metallurgical industries attracted Foreign Direct
Investment (FDI) to the tune of US$ 13.40 billion between April 2000–March
2020.
The Government’s National Steel Policy 2017 aims to increase the per capita
steel consumption to 160 kgs by 2030-31. The Government has also promoted a
policy which provides a minimum value addition of 15 per cent in notified steel
products covered under preferential procurement.
In 2019, the Government introduced Steel Scrap Recycling Policy with an aim to
reduce imports.
Indian steel industry: Production (in million tonnes)
Category 2015-16 2016-17 2017- 2018-19 2019-20*
18
Pig Iron 10.24 10.34 5.73 6.41 5.51
Sponge Iron 22.43 28.76 30.51 34.71 37.14
Total Finished 106.60 120.14 126.85 101.29 102.06
Steel
Political
As part of their business expansion, Tata Steel made some high risk investments
in countries such as Bangladesh, Iran. For example: the plan set up in
Bangladesh is getting delayed by the question of gas supply, whereas the issue
of lease of the mining of the iron ore in the Iran country is responsible for the
increase in the cost of the production.
By improving the infrastructure of the country, Tata Steel and other steel
companies can save some amount, as they spend huge amounts on freight and
transportation.
There are no quantitative restrictions on import of iron and steel items. The only
mechanism regulating the imports is the tariff mechanism. Advance Licensing
Scheme allows duty free import of raw materials for exports. The Iron and Steel
industry has been included in the list of `high priority' industries for automatic
approval for foreign equity investment up to 100%. Price and distribution of steel
were deregulated from January 1992.
The government acts as a resource allocator (the mining policies of the
Government), as Competitor (the public sector steel companies) and as
Regulator to TATA Steel.
Economic
Due to the subprime crisis in the US, European markets faced the problems of
the recession that created the bad impact on Tata steel as the Netherlands,
United Kingdom and Germany are the main markets for the CORUS.
Steel industry may get affected because of the cyclical economic condition
because many industries like automobiles, appliances and construction depend
on the steel industry and if industries face any kind of downturn in the economy
Tata steel also may also face the losses .
Steel production processes are completely dependent on the energy market
which can affect Tata steel in the economic manner. With the acquisition of
CORUS company gained the growth prospective in nature but, the cost of
acquisition goes beyond the financial expectations.
The Government introduced ‘Special Economic Zones’ (SEZ) in June 2005, with
the aim of creating competitive economic regions. TATA Steel plants in the SEZs
are not subject to restrictive normal laws for the purpose of export operations and
also receive additional advantages including tax holidays. Freedom to source
inputs domestically or externally without any specific approval or duty payable
and sales tax reimbursement on domestic purchases.
Socio-Cultural
Tata Steel got awarded for the commitments in the business ethical behaviour
and improving the lives of the employees and their families. For this purpose
Tata steel got awarded by the GOLDEN PEACOCK GLOBAL AWARD.
Tata Steel also focused on creating the social environment. They constantly
made the improvements in the health issues, economic wellbeing and education
facilities provided to the nation. This policy works out in nearly 800 villages in
Jharkhand. Orissa and Chhattisgarh.
Hospital on wheels is the basic innovation of the Tata’s whereas Tata is also
responsible for the habitation in slum areas in urban developing cities.
‘Operation Muskaan’, a project initiated by Tata Steel, under which hundreds of
people born with cleft lips or cleft palates were operated for free of cost.
Technological
‘METAL JUNCTION’, an e-portal system started by Tata Steelwhich is helpful not
only to Tata steel but also to the entire industry. With the help of this technology
e-market is the biggest market for the purchasing and selling of steel in the world.
To reduce the emission of the co2 in the environment Tata steel has invested
hugely with the research of the ultra-low carbon steel.
Tata is also engaged with the objective of the energy conservation schemes
where Tata is doing research to reduce the energy consumption in the production
process.
Captive iron ore is one of the biggest competitive advantages of Tata Steel. But
this raw material has phosphorus content at .080 per cent, which is not
acceptable by many buyers. By changing the converter blowing regime, bottom
injection practice, and the lance geometry, Tata Steel took the level down in
stages, thus using technological innovation to build on the competitive
advantage.
Environmental
The Dhamra port is the joint venture of the Larsen & Toubro and Tata Steel,
which came into existence for the protection of the Olive Ridley sea Turtles.
Dhamra port is also supporting the saving in the saltwater crocodiles as well as it
is contributing the help to save the wildlife in India. It is also providing the
breeding grounds for the horseshoe crabs and other rare species of the reptiles
and amphibians.
TATA steel aims to reduce CO2 emission from 1.8 to 1.5 tonnes per tonne of
liquid steel (9%) by 2012, under its global initiative called eco-citizen.
The Company raises 400,000 saplings every year across various locations and it
involves the local community in this process of sapling plantation in the area.
Tata Steel Rural Development Society (TSRDS) has created and supported
many ‘Save Forest Groups' in Noamundi and Joda, to safeguard existing
forestland. TSRDS has encouraged local people to protect the forest as a
valuable sustainable resource.
Legal
Tata Steel, with its captive mines in Orissa and Jharkhand meet its entire
requirement of iron ore and 65 percent of its coal needs.
Mines and Minerals (Regulation and Development and Regulation) Bill, 2010,
requires mining companies to share 26% of its profit with local inhabitants.
Royalties accounted for 4 percent of Tata Steel's stand-alone expenses last year.
The new charges could account for nine per cent of their total expenditure and
cost them 5-6 percent of their operating profits.
Tata steel ensures the EHS (Environmental health and safety) under which each
and every employee’s activity is managed by the EHS framework.
Unstable Government in Jharkhand and various tribal protestors are creating
some legal issues for the Tata steel to set up 12 MTPA green field plants.
KEY PERFORMANCE INDICATORS
MOVEMENT IN EBITDA
The EBITDA of the Company is at ₹20,744 crore, improved by 31% mainly on account
of improved steel margins, attributable to higher volumes and higher realisations.
IMPROVED EPS
The basic earnings per share was at ₹90.41 for Financial Year 2018-19.
RATIO ANALYSIS
Liquidity Ratios 2019 2018 2017
Current Ratio 0.7 1.4 0.9
Quick Ratio 0.2 0.9 0.4
Working Capital -8558 9037 -2946
Quality of Working -19813 -1987 -13183
Capital
Solvency Ratios 2019 2018 2018
Long Term Debt to 0.4 0.4 0.5
Equity
Liabilities to Asset 0.5 0.5 0.6
Interest Coverage 6.7 3.4 3.0
Debt paying ability 2019 2018 2017
Times Interest earned 8.402 4.361
6.305
Fixed charge coverage 7.743 4.034
5.698
Debt Ratio 0.471 0.534
0.490
Debt/Equity Ratio 0.378 0.497
0.399
Debt/ Tangible Net 0.383 0.505
Worth
0.405
Profitability Ratios 2019 2018 2017
Net profit Margin 0.07 0.07
0.15
Total asset Turnover 0.49 0.40
0.52
Return on Assets 0.03 0.03
0.08
Operating Income Margin 0.11 0.11
0.24
Operating Asset turnover 0.50 0.41
0.53
Return on Operating 0.06 0.05
Assets
0.12
Sales to Fixed Assets 0.69 0.57
0.69
Return on Investments 0.16 0.13
0.38
Return on Total Equity 0.08 0.06
0.16
Return on Common Equity 3.94 3.55
9.19
Gross profit margin 0.73 0.85
0.71
Investor's Ratios 2019 2018 2017
Degree of Financial 1.42 2.49 2.29
leverage
Earning per share 91.90 36.38 35.46
Price earning 5.63 15.78 12.94
% of earnings retained 0.89 0.70 0.70
Dividend payout 0.11 0.30 0.30
Dividend yield 0.02 0.02 0.02
Book value per share 614.72 511.21
536.72
Tata steel shows increasing trend on profitability and also shows improved performance
and better efficiency for the last years
Company assets is able to generate production and also able to convert sales which
results into improve the performance of the company's by showing increasing trend
The company's assets are able to generate good profit from the last 3 years. Utilization
of assets have improved performance & efficiency of the company.
Company is showing increasing trend in its operating income from last year, so it
questions about sustainability & efficiency about the core operation of the company
Company shows improved operating asset turnover which means the company core
assets are contributing majorly towards increase the revenue of the companies
It can be interpreted that the operating income has shown continuous improvement from
the last three years. Thus proving the fact that operating assets were put to improve &
efficient utilization were done
Company assets is able to generate the revenue for the organization, but not able to
improve the performance of the assets, but are sustainable to generate the revenue
from last three years
It can be seen that the company is continuously able to increase its return on the
investment which talks about the sustainability of the company. Increased trend in ROI
shows that company is able to bear its cost of capital and also to evaluate the efficiency
of the investments
The continuous growth in ROE shows that company's ability to turn the equity
investments into profits. By looking at the data we can say that company is using its
equity capital in proper way which increases the performance of the company and
generating positive returns
It can be analyzed that the company is showing an increasing trend from the last three
year which shows the sustainability of the company. It can be seen that company is
successful in creating maximum wealth for its common stockholders
Company is not efficient enough in terms of productivity of the organization.
Sustainability is a big issue in the company as it is continuously decreasing from the last
three years which means the company is not able to face its indirect expenses.
The company is able to reduce its risk as compared to the last two years, although the
debt component have increased from last year, which means company is funding itself
more by debt
The increasing trend of the EPS shows that the each share of the equity could earn
more profit in year 2019 as compared to last two years
Its can be interpreted that company is able to reduce its risk by reducing the PE ratio
from last year, because investing in a higher PE ratio company could be more riskier
The increasing trend of the ratio shows that the company is more focused towards
future prospects by increasing the proportion of the retained earnings year on year
basis.
As it can be interpreted that reduction in dividend payout ratio shows that company is
ploughing back its profits for the future wealth maximization by not distributing the
profits to the investors in terms of dividend
As the company is at a growth stage the dividend paid to the investor's every year is
low.
Tata steel is able to improve its interest charges, as it has been improved by 33 % from
last year which shows that companies EBIT is improved and able to take care of
liabilities generated for the operating capacity.
Tata steel ability to cover its fixed charges has been increased by 36% which shows the
credibility of the company. This result shows that the company can adequately cover
fixed charges based on its current earnings.
As it can be interpreted that the proportion of total liabilities funded by total assets is
decreasing year on year, which in turn reducing the risk of the company
The company is able to improve its capital structure by reducing the debt in 2019, which
shows that the company has reduced its risk for the investors to invest in the company.
It can be seen that the ratio is continuously decreasing from the last three years, which
means that the company's level of creditor's protection in case of the firm's insolvency is
increasing, which gives investor trustworthiness to invest in the company although it has
been decreased by 24% from year 2017.
Profitability- The profits of the company from the last two years seems to be consistent
as the growth from year 17-18 amounts to 65% and in year 18-19 amounts to 63%
approx.
Efficiency- The purchase of stock in trade for mar-19 increases due to the higher
purchase of wire rods,rolled coils,etc which leads to inefficiency for the year which
increases to 179% as compared to the last year. Whereas last three years purchase of
stock in trade was reducing continuously(from 2016 to 2018).
Performance- The major change in the performance is due to the increase in the other
income,which is usually not good for the company,but in this case the other income is
increased due to the rise in interest income on financial assets carried at amortised
cost. Whereas the total revenue seems to be stagnant as the change in last two ranges
from 22% to 25%
Net Worth- Due to the increase in profits(reserves & surplus) the Networth of the
company is Increased.
Capital Structure- Increase in long term debt in 2019 has increased the cost of interest
without affecting the profits of the company
Working Capital- The working capital is decreasing in 2019 by 5.5% which is showing
negative [Link] quality of working capital is not good because the proportion of
inventories is around 66% of the [Link] which is the cause of [Link] cash
conversion cycle of the company is too high.
ANALYSIS
Tata steel is an Indian multinational steel-making company headquartered in Mumbai.
We manufactures steel product such as Cold rolled closed annealed, color coated coils,
hardened and tempered steel steel strips, precision tubes, etc. Our Board of directors
are Mr. Ratan N. Tata, T. V. Narendran(CEO), V. K. Sharma(Non- Executive Director),
Peter Blauwhoff(Independent Director). Our brands include Tata Tiscon, Tata Structura,
Tata Shaktee, Tata Bearings, Tata Steelium, Galvano, Tata ferromag, Tata precision
tubes, Tata wiron, Tata agrico.
The Indian steel industry has entered into a new development stage, post deregulation,
riding high on the resurgent economy and rising demand for steel. Steel industry was
de-licensed and de-controlled in 1991 & 1992 respectively. India was the 2nd largest
producer of crude steel in the world in [Link] 2019-20, production of total finished steel
(alloy/stainless + non alloy) was 102.62 million tons (MT). India’s finished steel
consumption grew at a CAGR of 5.2 per cent during FY16-FY20 to reach 100 MT.
Government is working on various fronts to make steel sector globally efficient and
competitive. National Mineral Development Corporation is expected to invest US$ 1
billion on infrastructure in next three years to boost iron production and increase the iron
ore production 75 MTPA until 2021 indicating new opportunities in the sector. About 158
lakh metric tonne (MT) steel is likely to be consumed in construction of all the houses
sanctioned under Pradhan Mantri Awas Yojana (Urban).
Infrastructure, oil and gas and automotive will drive the growth of the industry. India’s
finished steel consumption is anticipated to increase to 230 MT by 2030-31^ from 90.68
MT in 2017-18. It is expected that consumption per capita would increase, supported by
rapid growth in the industrial sector and rising infra expenditure projects in railways,
roads and highways, etc. India’s per capita consumption of steel grew at a CAGR of
4.12 per cent from almost 64 kgs in FY16 to nearly 74 kgs in FY19. The National Steel
Policy aims to increase per capita steel consumption to 160 kgs by 2030-31.
The Government released the National Steel Policy 2017 and laid down a broad
strategy for encouraging long term growth for the Indian steel industry by 2030-31.
Government has also promoted policy which provides a minimum value addition of 15
per cent in notified steel products covered under preferential procurement. Growth in
automobile production is also expected to augment growth in steel production.
Automobile production in India stood at 26.35 million units during FY20. Gross Value
Added (GVA) of the construction industry grew 4.4 per cent* during FY20* and is
expected to post strong growth in the current fiscal year, backed by higher expenditure
from the Government.
The performance of company in 2018 witnessed a slowdown in global growth, primarily
due to the decline in trade and manufacturing activity across most industrial sectors,
increased trade tensions among major economies, tightening of financial conditions and
policy uncertainty in many economies. Despite this slowdown, global steel demand
showed resilience and grew at 2.1%, supported by some recovery, in investment
activities and improved performance of emerging markets and developing economies.
In the coming year, global steel demand is expected to witness a gradual recovery,
though at a lower pace, owing to risk of uncertainty over the trade environment. Though
the economic fundamentals of the European Union economy remain relatively stable,
steel demand in 2020 will show some deceleration over the growth seen in 2018 and
2019, partly due to uncertainties resulting from global trade tensions and the
uncertainties about Brexit. In 2019, US growth is also expected to slow down with the
effect of fiscal stimulus tapering off and the normalisation of monetary policy. In India,
steel demand in the first half of the financial year was more stable than in the second
half and there has been a distinct decline in the automotive sector and other sectors in
the second half of the year. One of the key issues has been the credit flow in the system
and we hope that structural policy actions will be undertaken to ensure that increased
credit flow is restored and private investment is encouraged to revive the economy.
Tata Steel is among the top ten global steel companies with an annual crude steel
capacity of over 28 million tons per annum (mtpa). Market capitalization of Tata Steel
Ltd stands at 45,904.45 as compared to JSW steel who is leading player in the steel
industry with market capitalization of 69,567.60. Looking at the Sales Turnover, JSW
steel stands at 1st rank with 75,210.00cr and Tata Steel Ltd stands at 2nd position with
70,610cr revenue, but Tata Steel Ltd is able to generate 10,533cr Net Profit whereas
JSW is able to generate only 8,121.00cr Net Profit which is lower. Tata Steel Ltd is
among the lowest cost producers of steel in the world. It is the world's second most
geographically diversified steel producer, with operations in 26 countries and
commercial presence in over 50 countries.
The Working capital of the company is showing average increment of 15% in the
forecasted period from 2020-2024. Working capital can be the cause of concern as the
proportion of inventories is showing incremental trend whereas Accounts receivable
seems to inconsistent which is the cause of concern for the company. The forecasted
working capital of Tata Steel Ltd doesn’t seems to be consistent as the flow of working
capital is bit volatile from 2019 to 2024.
The CAPEX spending has seen a uphill trend since 2019 to 2024. Company is using its
fund to acquire and maintain its fixed assets such as property, plants, building,
technology, etc. The company had invested around Rs 1,367 crore for its India
operation, including about Rs 935 crore expenditure for its Kalinganagar plant in
Odisha. The increasing trend in change in Property & Equipment creates a strong
balance sheet of the company by increasing the fixed assets of the company. Investing
in capex will improve the efficiency of the company, and also allow the company to gain
a competitive edge.
The discount rate is derived from the cost of capital of the company . The one year beta
for Tata Steel Ltd comes to 1.14 and the average equity risk premium for India to be
1.01%. For risk-free data, I have considered 10-year treasury yield for India is 7.41%.
on April 30,2019. Also according to the Fixed Income Money Market and Derivatives
Association of India (FIMMDA), for the Credit spread debt I have considered, BBB
spreads over 10-year treasury yields which is 313 basis points on April 30,2019.
According to the above mentioned data, cost of debt, cost of equity comes to 6.84% &
8.56% respectively.
After considering all the assumption and forecasting the data from 2020 to 2024, the
Present value of Future Cash flows amounts to 9154.880385, which is done by
considering the NOPAT and deducting all Non cash expenses, changes in working
capital & majorly Capex. At 0% growth rate the company is overvalued by 782.71 per
share where the market value of the company is 547.80 as on 2019. At 5% growth rate
the company is overvalued, so looking at this DCF valuation the company is highly
overvalued.
The final consideration was dealing with the terminal value calculation. Present value of
Terminal value at 0% growth rate amounts to 1,41,936, whereas the present value of
terminal value at 5% growth rate amounts to 6,62,940.
References
[Link]
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%20developing,recovery%20of%209.2%25%20in%202021.&text=As%20a%20result
%2C%20India%20is,rebound%20by%2015.0%25%20in%202021.
[Link]
2020-worldsteel/1984078/
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