Question Paper Integrated Case Studies - IV (362) : October 2006 Case Study

Question Paper
Integrated Case Studies IV (362) : October 2006

Case Study * (100 Marks)
Read the case carefully and answer the following questions:

1.
Perform SWOT analysis of Mittal Steel.

(10 marks)
< Answer >
2.
Based on the financial statements provided in the annexure compute key ratios and analyze the
performance of Mittal Steel.
< Answer >
(10 marks)
3.
Analyze the factors affecting the demand and supply of world steel industry. Also compare the
performance of Mittal Steel as against the industry.
< Answer >
(6 + 7 = 13 marks)
4.
What are the key factors that determine the dividend pay-out of a firm? Discuss the dividend policy
of Mittal Steel.
< Answer >
(8 + 5 = 13 marks)
5.
Discuss the Acquisition strategy of Mittal Steel. What are the various reasons behind the strategic
acquisitions?
< Answer >
(14 marks)
6.
Discuss Liquidity and Cash management with regard to Mittal Steel. Explain how the company has
hedged its interest and forex risk.
< Answer >
(6 + 6 = 12 marks)
7.
Steel industry is characterized by high capital costs and operating cost and maintenance cost. Evaluate
how Mittal Steel is geared up against these costs.
< Answer >
(12 marks)
8.
Discuss the strategic determinants of the Capital Structure with respect to Mittal steel.
(6 marks)
9.
Analyze the future outlook of the steel industry and Mittal Steel.
(10 marks)
< Answer >
< Answer >
Mittal Steel
Our strategy is to be a low-cost, high-margin, high-quality producer on a global basis. With this in mind we
will continue to remain vigilant in terms of growth opportunities. This will include looking at downstream and
upstream operations to support our steel-making facilities. We are investing heavily in capital expenditure at
present with the intention of moving our products up the value chain, particularly in the developing countries.
Our aim is to become the worlds most admired steel institution and therefore we must excel in every area and
*
The above case is prepared only for the purpose of examination and not to
illustrate either effective or ineffective performance of the organization. The case
contains real information adapted and combined with other information to
generate discussion or analysis on the desired topics.
every aspect of our business.

Lakshmi N Mittal, CEO and Chairman of Mittal Steel.
The year 2004 was a year of consolidation for Mittal Steel, a flagship company based in UK. Towards dominating steel
making operations in four continents Mittal Steel had initiated the process of combining three of the worlds largest
steelmakers. The first phase of the complex merger involved combining the Ispat International NV with LNM Group both
based in Netherlands and both controlled by the Mittal Family. The second phase involves the combining of Mittal Steel with
US based International Steel Group Inc., resulting in a global industry-wide consolidation. This move changed the landscape
of the steel industry from being regionally concentrated to a global industry.
THE INDUSTRY BACKGROUND
Steel production has been primarily divided into integrated and mini-mill segments. Over the years a new segment has
emerged, combining the strengths of both the integrated and mini-mill process, called the integrated mini-mill
producers.
Integrated steel making involves the traditional process of converting coal to coke, combining with iron ore and limestone to
produce pig iron, which is combined with scrap to produce liquid steel which is casted into slabs and other forms. This
process involves a series of several steps that include blast furnace operations, metallurgical refining and other processes.
Due to its high capital costs, operating costs and maintenance costs involved, the integrated steel production has declined
considerably in the recent years. In contrast to integrated steel production, the mini-mill production is characterized by lower
cost of capital, lower operating costs resulting from a streamlined melting process, employing an Electric Arc Furnace (EAF)
sans several steps including energy intensive blast furnace. As against the primary producers, integrated mini-mills produce
steel with the quality of integrated producers using scrap substitutes derived from virgin iron ore with fewer impurities.
The EAF route of making high quality alloy steel, has witnessed high technological up-gradation for the past 40 years to
improve upon the efficiency, productivity, quality and also cost reduction. This route is preferred for its low investment cost
and high flexibility and it is expected to increase production to 50% from the present 33.33% of the world steel capacity.
Steel scrap which is the major source of metallic feed for EAF process is the major contributor to the cost using EAF route.
The search for alternatives to scrap has led to the evolution of Sponge Iron (DRI) which is high quality metallic product
produced from iron ore/pellets and can be used as a partial substitute to scrap. Continuous technological advances and
developments have reshaped the EAF steel making route. Further improvements are expected in this route in productivity,
energy economy, reduced electrodes and refractory consumption making EAF the lowest cost route. It derives a cutting edge
over the scrap based mini-mills by employing scrap substitutes such as Direct Reduced Iron (DRI) and does away with price
volatility, limited availability which is a characteristic attached to scrap employed by mini-mills.
Steel makers primarily produce two types of products: (i) Flat products (ii) Long products.
Flat products are derived from semi-finished slabs. Slabs obtained from rolling ingots, having rectangular cross section are
used as a starting material to produce flat products such as sheet or plate.
Long products are derived from semi-finished steel products called billets. Billets are rolled or continuously cast to produce
finished products like wire rod, merchant bars and reinforcing bars.
Direct Reduced Iron (DRI) is a high quality substitute for scrap and is used as feedstock for electric arc furnace. It is
produced by direct reduction process which involves removal of oxygen from the iron ore without melting it.
World Steel Scenario
Steel industry, over the past century, has witnessed a steady growth through the years and grown stronger. In 1997 and 1998
the industry witnessed a sudden decline in demand due to economic crises in Asian economies. The revival of Asian
economies combined with strong growth in North America resulted in revival of the steel industry. The world reached 1
billion tonnes of steel production in 2004 and is expected to scale new heights in the coming future (Exhibit 1).
On the consumption front, the increase of 26% during 1998-2003 is commendable (Exhibit 2) when seen with the increase in
World GDP of 19%. The key player in this arena has been China which accounts for 70% followed by Eastern Europe.
Growth in production is also comparable with increased demand (Exhibit 3). Asia accounted for a significant increase in
production. During the same period, there was a significant shift of trade in the Asia-Oceanic area. All these trends
contributed to the increase in steel prices worldwide.
Exhibit 1
WORLD CRUDE STEEL

CAPACITY AND PRODUCTION
1100
Capacity
Production
Million Tonnes
1000
900
800
700
2005
2004
2002
2003
2000
2001
1998
1999
1997
1995
1996
1993
1994
1991
1992
1989
1990
1988
1987
1985
500
1986
600
1998 World Crude Steel Production 777 Miot

2004 World Cruds Steel Production 1052 Miot
2005 World Crude Steel Production 1104 Miot (est.)
Source: OECD, Unpublished Data.
Exhibit 2
1100
1000
950
932
900
WORLD
APPARENT
STEEL
CONSUMPTION
858
832
800
746
World AC 933 Miot in

2004 +9%
World AC 980 Miot in
2005 +5%
In the last 10 years
AC has increased by
more than 50%
753
695
700
605
619
624
647
678
645
600
4
200
5
200
1
200
2
200
3
200
8
199
9
200
0
199
5
199
6
199
7
199
199
2
199
3
199
4
500
Exhibit 3: Steel Production, Consumption and Trade in 1998 and 2003 and the Outlook for 2005
(Million of tonnes, except as noted)
Europe
Item
Western
and Central
Apparent consumption:
1998
176
2003
179
Eastern
1/
17
30
AsiaOceania
NAFTA
Latin
Africa
America
Middle
East
Total
271
445
144
121
27
28
32
37
679
854
11
14
2005
186
Share of total, 2005
20%
Production, crude steel:
1998
208
2003
212
2005
222
21%
Exports 2/:
1998
49
2003
59
2005
59
24%
Imports 2/:
1998
41
2003
48
2005
47
19%
1/: Russia, Ukraine, Kazakhstan, et al.
39
4%
509
54%
133
14%
29
3%
15
2%
38
4%
949
74
108
120
11%
307
449
521
49%
129
121
127
12%
37
45
45
4%
9
11
11
1%
13
19
20
2%
777
964
1,065
44
64
66
27%
66
81
76
31%
15
18
15
6%
12
19
19
8%
4
5
5
2%
2
3
3
1%
191
248
243
5
6
6
2%
61
48
7
119
34
7
114
39
9
46%
16%
4%
Excluding intra EU-15 trade.
7
10
9
4%
23
24
23
9%
192
247
247
2/:
Note: Apparent consumption, exports and imports data reflect product tonnages (i.e. not crude steel equivalents).
During the last fifteen years, steel industry has undergone significant restructuring. In the light of declining demand in
Central and Eastern Europe capacity has reduced, however, to meet the global competitiveness the facilities have been
modernized. The restructuring in 1990s among the producers in European Union has led to marked regional consolidation.
Similar consolidation has been experienced in United States due to reconfiguration of bankrupt firms. The fall in capacity
from closure of several individual firms has been accompanied by increased capacity from new investments in new markets
(Exhibit 4).
Exhibit 4: Steel Industry Concentration, 1970, 1990, 2003 and the Outlook for 2008-10
Year
Number of firms
producing more than
10 million tonnes
per year
10 Largest Producers of Crude Steel
Annual production
(million tonnes)
Individual
Average
firms
9-33
17
11-29
15
16-43
26
Share of world production

Individual
firms
1-5%
2-4%
2-4%
Total
(of top 10)
29%
20%
27%
1970
8
1990
10
2003
19
Outlook 2008-2010 Moderate
20-70
35
2-6%
30%
25
change
Vigorous change
25-90
45
2-8%
35%
30
Sources: Based on data of the IISI (World Steel in Figures 2004), Metal Bulletin (Metal Bulletin Handbook, 1972), and
OECD Secretariat estimates.
Despite significant restructuring, the steel industry remains highly fragmented globally. The two to four percent share in
global production each pertaining to large ten producers in 2003 continues from 1970s. In contrast to the top 5 iron ore
producers who account for about 90% of the global iron ore market, in automobile sector the top five biggest players account
for 65% of market share. The top 5 producers of steel account for less than 20% of the global steel production. This reveals
the extent of fragmentation still prevailing in the steel industry.
KEY PLAYERS
The increase in size of the large steelmakers actually has been due to restructuring, modernization and combining of existing
units. The consolidation in the initial years was limited to geographical or was a within country phenomenon. However,
cross-border consolidation has been on an increase. The ten largest producers of crude steel for 2004 have been Mittal Steel
with 59.0, Arcelor with 50.6 million tonnes, Nippon Steel with 31.4 mt, JFE with 31.1 mt, Posco with 31.1 mt, Shanghai
Boasteel with 31.4 mt, US Steel with 20.8 mt, Corus Group with 19.9 mt, Nicor with 17.9 mt and ThyssenKrupp with 17.6
mt. (Exhibits 5 and 6).
Exhibit 5: Top Steel Producers in 2004 (millions of metric tonnes crude steel output)
Rank
Company
1
Mittal Steel*
2
Arcelor**
3
Nippon Steel
4
JEE Holding
5
POSCO
6
Baosteel
7
US Steel
8
Cotus
9
Nucat
10
ThyssenKrupp
11
Riva
12
Gerdau Group
13
Severstal
14
China Steel
15
Sumitomo Metal
16
Evraz Holding
17
Sail
18
Anshan
19
Magnilogorsk
20
Wuhan
* Pro-forma ISG
** Pro-forma CST
Source: IISI Mittal Steel.
Country
Netherlands
Luxembourg
Japan
Japan
Korea
China
US
UK
US
Germany
Italy
Brazil
Russia
Taiwan
Japan
Russia
India
China
Russia
China
Output
59.0
50.6
31.4
31.1
31.1
21.4
20.8
19.9
17.9
17.6
16.7
13.4
12.8
12.5
12.3
12.2
12.1
11.9
11.3
9.3
Exhibit 6: Top Steel Producers in 2004 (millions of metric tonnes crude steel output)
Source: IISI Mittal Steel.

CURRENT INDUSTRY SCENARIO
2004 witnessed tremendous growth in steel markets. The global steel consumption increased by 8.8% over the 2003 level
with figures reaching 935 million tonnes of finished products. The increased growth can be partly attributed to increased
consumption in China due to its high GDP growth and increased capital investment. Increased consumption was also
recorded in North America and newly industrialized states of former Soviet Union (Exhibit 7). The other factor attributed to
increased consumption was the recovery of markets in United States, Europe, Japan and Asia. The buoyant market conditions
of 2004 continued their trend in 2005 and are expected to extend to 2006.
Exhibit 7: Steel Consumption by Region
Source: www.mittalsteel.com
World crude steel production increased to 1,066 million tonnes in 2004 indicating a 9% higher level from 2003. The
production of steel is prevalent in every country however, six countries or regions dominate 80% of the world production.
Asia is by far the largest producer of steel in the world, followed by Western Europe/Africa (Exhibit 8). Accompanying by
increased consumption (Exhibit 9) was the increased production of crude steel in China of 272 million tonnes contributing to
26% of global steel output. The growth of production in China is expected to grow in 2005 and 2006.
Exhibit 8: World Crude Steel Production
Annual Summary
Million metric tonnes
Europe
of which:
EU (25)
EU (15)
CIS
North America
of which:
United States
South America
Africa
Middle East
Asia
of which:
China
Japan
Australia/New Zealand
World
Source: www.worldsteel.org.
1999
284.0
2000
308.9
2001
304.7
2002
308.5
2003
319.4
2004
338.6
2005
331.5
2006
2.1
175.9
155.2
85.7
130.0
186.7
163.4
98.5
135.4
180.5
158.5
99.6
119.9
180.9
158.7
101.1
122.9
184.0
160.5
106.2
126.2
193.4
168.3
113.1
134.0
186.5
164.1
112.9
127.0
3.6
2.5
0.2
5.3
97.4
34.6
12.8
9.8
308.8
101.8
39.1
13.8
10.8
331.9
90.1
37.4
14.9
11.7
353.9
91.6
40.9
15.8
12.5
394.9
93.7
43.0
16.3
13.4
442.4
99.7
45.9
16.7
14.3
508.7
93.9
45.3
17.9
15.3
583.8
5.8
1.2
7.1
7.2
14.8
124.0
94.2
8.9
789.0
127.2
106.4
7.8
847.7
150.9
102.9
7.9
850.3
182.2
107.7
8.3
903.8
222.4
110.5
8.4
969.1
280.5
112.7
8.3
1,066.5
349.4
112.5
8.6
1,129.4
24.6
0.2
3.7
5.9
Exhibit 9
APARTMENT CONSUMPTION FINISHED STEEL CHINA
MILLION METRIC TON
400
China
350
Europe
300
250
200
150
100
50
0
74 78 82 86 90 94 98 102106110 114 118 120124128132136140144
Apartment Consumption 1980 = 33 Miot

Apartment Consumption 2004 = 257 Miot
Estimated AC 2005 = 284 Miot
IISI Estimate AC 2010 = 326 Miot
Source: www.oecd.org
The production of steel in rest of the world is expected to grow by 4.5% and is to continue at similar rate in 2006.
The increased demand and production has had its profound impact on its price. The expectation is that the price of steel will
increase gradually and in tandem with the prices of its raw material. The increased demand for steel has its impact on the key
commodity inputs such as iron ore, scrap, coke, alloys also. The year 2004 witnessed an increase of all input costs which was
expected to rise unprecedentedly the next year resulting in increased steel prices.
Steel prices are very sensitive to a number of supply and demand factors. The key to maintain a competitive position is
through product differentiation, customer service, cost reduction and cost management.
MITTAL STEEL: THE COMPANY
Mittal Steel is a public limited company, formally known as Ispat International N.V. that was incorporated on May 27, 1997
under the laws of Netherlands. On December 17, 2004 Ispat International N V completed its first phase of complex merger by
acquiring LNM Holdings N V and changed its name to Mittal Steel Company N V. Ispat International N V and LNM Holdings
are affiliates under a common control, with Mr Lakshmi N Mittal and his wife Mrs. Usha Mittal holding the controlling interest
of 100% of LNM Holdings and 82% of Ispat International. Mittal Steel is a leading producer of steel with its operations in
Algeria, Bosnia, Canada, Czech Republic, France, Germany, Kazakhstan, Mexico, Poland, Romania, South Africa, Trinidad,
Tobago and United States.
The history of L N Mittals Ispat International dates back to 1994 when it split off from Ispat Group in India. The foreign
businesses were hived off to L N Mittal who became the Chairman of Ispat International (UK) Ltd. Following a split in
family business, LNM Holding (named after the initials of Laxmi N Mittal) was formed and registered at Rotterdam in 1995
when he moved his corporate base from Indonesia to London. Starting with the purchase of a giant government steel works at
Kazakhstan in 1995 there was no looking back for LNM Holdings which controls a string of companies in different locations.
LNM Holding which constitutes Mittals private holdings too is concentrated in developing markets in Eastern Europe and
Central Asia, where a steady growth in demand for steel has been witnessed.
His hunt for turnaround opportunities in private sector in Germany, US and France in the late 1990s led to the incorporation and
listing of Ispat International NV on May 27, 1997 on Amsterdam and New York stock exchanges. Ispat International NV was
formed with assets from private sector acquisitions in Germany, France and US and Mexico and Trinidad. Its operations are
concentrated in Western Europe and North America (Refer Exhibit 10) where the steel industry experienced chronic overcapacity.
Exhibit 10: Mittal Steel Network

LNM Group
Ispat International NV
(100% owned by LNM)
(82% owned by LNM Group)
Ispat Nova Hut (Czech Republic)
Ispat Unimetal (France)
Ispat Sidex (Romania)
Ispat Germany
Ispat(South Africa)
Ispat International (Britain)
Ispat Karmet (Kazakhstan)
Ispat Sidbec (Canada)
Ispat Annaba (Algeria)
Caribbean Ispat (Trinidad)
PT Ispat Indo (Indonesia)
Ispat Inland (US)

Ispat Mexicana
Source: ICFAI Research Team.

Operating Strategy
Mittal Steel the largest steel producer has its steel operations in many countries. With aggressive acquisition strategy, its
philosophy is to improve on the operating performance of acquired facilities with focus on improved management practices,
capital expenditure programs, resulting in improved productivity and shipment of steel products. Its shipments grew from 1.5
million tonnes in 1992 to 42.1 million tonnes in 2004.
Mittal Steel is recognized for high degree in both product diversification and geographical diversification. Its products
include hot-rolled sheets, cold-rolled sheets, electro-galvanized and coated steel, bars, wire-rods, wire-products, pipes, billets,
blooms and other technically specified products which are sold for high-ended applications. Its operations are geographically
diversified with 47% of its presence in North America, 32% in Europe and the balance in the rest of the world (Exhibits 11
and 12).
Exhibit 11
Mittal Steel
Americas
Europe
Rest of World
Ispat Mittal Mittal

Mittal Mittal Mittal Mittal Mittal Mittal
Mittal
Inland Canda Steel
Steel
Steel
Steel Steel
Steel
Steel
Lazaro
Europe Poland Galati Ostrava Temirtau Annaba
Cardenas Steel
(in $
million)
Point
Lisas
Source: www.sec.gov
Exhibit 12: Product Mix/Geographic Presence
(9 months 2004, by shipments)
Mittal
Steel
South
Africa
Product Mix
Geographic Mix
Long
26%
RoW
21%
North
America
47%
Europe
32%
Flat
74%
43 million tonnes
43 million tonnes
The Company operates in a number of developing countries (Exhibit 13) most of which are undergoing substantial
transformation from centrally controlled economies to market oriented democracies. Approximately 71 percent of Mittals
sales for the year 2004 were directed towards developing countries. Also, many of its operating subsidiaries are primarily
export oriented. With substantial overcapacity in many products, Mittal has made a niche with respect to quality and the
ability to meet customers product specifications, delivery schedules and price. The company has built strong customer
franchise in most of its products and markets. The company is a leading supplier to the automobile industries in North
America especially, to car manufacturers. With continued partnering with key customers and with a reputation of high
quality, the company has created long-term growth opportunities.
Exhibit 13
Country
Former Name of Subsidiary
Algeria
Ispat Annaba Spa (Ispat Annaba)

Ispat Tebessa Spa (Ispat Tebessa)
RZR Ljubija a.d.
BH Steel
Ispat Sidbec Inc. (Ispat Sidbec)
Ispat Nova Hut a.s. (Ispat Nova Hut)
LNM Mrketing FZE
(LNM Marketing)
Ispat Unimetal S.A (Unimetal)
Trefileurope S.A.
Ispat Hamburger Stahlwerke GmbH (Ispat
Hamburg or IHSW)
Ispat Stahlwerk Ruhrort GmbH (ISRG)
Ispat Walzdraht Hochfeld GmbH (IWHG)
Ispat Karmet OJSC (Ispat
Ispat Europe Group S.A.
(Ispat Europe Group or IEG)
RZ Ladna Valavnica a.d.
RZ Valavnica za Lenti a.d.
Ispat Mexicana, S.A. de C.V.
(Ispat Mexicana or Imexsa)
Ispat Polska S.A. (Ispat Polska)
Ispat Sidex S.A. (Ispat Sidex)
Ispat Petrotub S.A. (Ispat Petrotub)
Ispat Tepro S.A. (Ispat Tepro)
Bosnia
Canada
Czec Republic
Dubai (United
Arab Emirates)
France
Germany
Kazakhstan
Luxembourg
Macedonia
Mexico
Poland
Romania
Current/Contemplated New Name of

Subsidiary
Mittal Steel Anna Spa
Mittal Steel Tebessa Spa
RZR Ljubija a.d.
Mittal Steel Zenica a.d.
Mittal Canada Inc.
Mittal Steel Ostrava a.s.
Mittal Steel Marketing FZE
Mittal Steel Gandrange S.A.
Trefileurope S.A.
Mittal Steel Humburg GmbH
Mittal Steel Hochfeld GmbH
Mittal Steel Hochfeld GmbH
Mittal Steel Temirtau OJSC
Mittal Steel Europe S.A.
Mittal Steel Skopje (CRM)
Mittal Steel Skopje (HRM)
Mittal Steel Lazaro Cardenas S.A. de C.V.
Mittal Steel Poland S.A.
Mittal Steel Galati S.A.
Mittal Steel Roman S.A.
Mittal Steel Iasi S.A.
S.C. Siderurgica S.A.

South Africa
Ispat Iscor Limited (Ispat Iscor)
Trinidad and
Caribbean Ispat Limited (CIL)
Tobago
United States of
Ispat Inland Inc. (Ispat Inland)
America
Source:www.Sec.gov.
Mittal Steel Hunedoara S.A.

Mittal Steel South Africa Limited
Mittal Steel Point Lisas Limtied
Ispat Inland Inc.
The key commodity inputs such as iron ore, scrap, coke and alloys have experienced increase in prices with increased
demand and prices of steel. The prices of scrap, the life line of steel industry experienced a steep increase. They averaged
$120/tonne in 2003 and increased to $230/tonne in 2004 and with a little fall in early 2005 they are expected to remain at the
same level for 2006. The demand for scrap is expected to grow by ten million tonnes over the next few years (Exhibit 14).
The integrated producers use iron ore and coal and as key inputs they are less affected by fluctuations in scrap market. In
2004, the market witnessed a shortage of iron ore leading to increase in prices of iron ore which are expected to further rise
due to increased expected demand for steel. The same increased price trend was recorded in case of coke and other raw
materials. With the increased prices of raw materials and transportation the integrated producers were largely affected.
Exhibit 14: Scrap Need
600
500
482
494
511
453
400
421
388
406
338
300
274
254
308
292
328
Scrap require row

Merchant scrap
277
House
200
DH
100
95
85
99
100
100
102
107
30
44
45
56
64
64
68
2005
2006
2007
2001
2002
2003
2004
Source: www.OECD.
FINANCIAL ASPECTS
Mittal Steel prepares consolidated financial statements which include the Financials of Mittal and its subsidiaries in
accordance with USGAAP. The acquisition of LNM Holding by Ispat International on December 17, 2004 to form Mittal
Steels has been accounted for on the basis of common control accounting or under the pooling-of-interest method.
The operating results of the Company for the year 2004 showed an increase in sales from $9.6 billion for the year 2003 to
$22.2 billion. This trend can be attributed to the increased global demand and prices of steel. Excluding the affects of
acquisitions, the sales of the company increased from $8.4 billion in 2003 to $12.5 billion in 2004 (Annexures I and II). The
average prices of steel experienced an increase by 54% for the year ended December 2004. The increased demand and
production also pushed up the cost of key input resulting in an increase by 31% of average cost per tonne for the year ended
December 2004. The net result of increased sales and cost of sales was the increase in overall gross profit by 142% or 34%
increase in gross margin.
In 2004, the companys selling, general and administrative expenses increased by 118% due to higher level of sales activity
and higher cost of logistics resulting in increase of operating income to $6.1 billion for the year 2004 compared to $1.3
billion in 2003. The increase in net interest expense from $175 million in 2003 to $186 million in 2004 was the result of
refinancing of debt at Inlands. The net result was the increase in the Companys net income from $1,182 million in year 2003
to $4,701 million in 2004 (Annexures I and II).
A quick look into the profitability of the company with industry standards reveals that the company had a gross margin of
27.1% as against the industry average of 21.01%, and the net profit margin was 17.98% as against the average industry with
10.02% (See Exhibit 15).
Exhibit 15: Ratios
Profitability Ratios (%)
Gross Margin (TTM)
Gross Margin 5 Yr. Avg.
EBITD Margin (TTM)
EBITD 5 Yr. Avg.
Operating Margin (TTM)
Operating Margin 5 Yr. Avg.
Pre-Tax Margin (TTM)
Pre-Tax Margin 5 Yr. Avg.
Net Profit Margin (TTM)
Net Profit Margin 5 Yr. Avg.
Effective Tax Rate (TTM)
Effective Tax Rate 5 Yr. Avg.
Source: www.reuters.com
Cost of Production
Company
27.10
18.16
23.16
13.94
20.55
10.55
20.65
8.85
17.98
8.02
12.94
12.58
Industry
21.01
13.57
17.86
10.17
14.95
5.10
14.15
4.09
10.02
2.77
29.75
28.60
Mittal Steel is one of the few companies which is vertically well integrated. It has acquired and owns coal and iron ore mines,
and a number of coal making facilities, engineering workshops and infrastructure facilities. This helps it to strengthen and
protect its sources of supply and at the same time insulate against increased cost of inputs. Its strategy is to procure the raw
materials at the lowest prices available, lowest cost ownership through aggregated purchasing and supply chain optimization,
cost advantage by exploiting global purchasing reach and leveraging on a global scale the cost advantages.
Iron Ore
A large proportion of the companys requirements for iron ore are fulfilled through its own captive mines and through the
long-term contracts. Its mines are located at Kazakhstan, the United States , Algeria and Mexico. The company has entered
into long-term contracts with iron ore mines in South Africa and iron ore suppliers in United States. A smaller proportion is
from contracts with International and local suppliers. Its principal suppliers are Companhia Vale do Rio Doce and
MineraAoes Brasileiras Reunidas S.A. in Brazil, Shougang Hierro Peru S.A. in Peru, Corporacion Venezolana de Guyana in
Venezuela and Quebec Cartier Mining Co. in Canada.
Exhibit 16
Minorca Mine, has an annual production capacity of 2.7 million tonnes which is a 100%
owned subsidiary of Ispat Inland.
Empire Mine, has an annual production capacity of 6.3 million tonnes, which is a 21%
owned subsidiary of Ispat Inland.
Ispat Inland has entered into a 12-year agreement with Cleveland-Cliffs as a customer to
its pellets from Empire Mine.
Consorcio Minero Benito Jurez Pea Colorada, S.A. de C.V. (Pea Colorada), is an
iron ore mining and pelletizing company. A 50% equity interest is held in the company by
Ispat Mexicana. An expansion program is being implemented (Joint venture) which is
expected to increase the capacity of the company.
Source: http://www.mittalsteel.com/mittalMain/attachments/Ispat_ann_rep_03.pdf
Coke
With its own coke making facilities in Poland, Kazakhstan, South Africa, Romania and Czech Republic and through joint
venture agreements with Sun Coal Company and Primary Energy LLC, the company is self-sufficient in coke requirements.
Over and above this, to optimize cost savings from transport efficiencies, the companys subsidiaries procure coke from local
sources.
Exhibit 17
The company has entered into a long-term contract to purchases approximately 65% of
Ispat Inlands coke requirements from a supplier who constructed a heat recovery coke
battery on land leased from Ispat Inland at the Companys Indiana Harbor Works.
PCI Associates, has constructed a pulverized coal injection facility on land located within
the Indiana Harbor Works. Ispat Inland owns 50% interest in the company whose facility is
adequate to serve the needs of Ispat Inland.
Electricity and Natural Gas
For its plants in the United States, the company purchases its significant electricity requirements from onsite generation units
owned by third parties. For the balance requirements, it taps local sources and other regulated utility companies on fixed
contract basis. It enters into short-term fixed price contracts with local suppliers for its natural gas requirements and the
balance of its requirements is purchased in the spot market.
DRI
Operating in mini-mills, integrated mini-mills and blast furnace processes for steel making the company adopts the DRIEAF-CCM route (Direct Reduced Iron Electric Arc Furnace Continuous Casting Method). It is the worlds largest
producer and captive consumer of DRI.
On the inputs front, in spite of tightened markets for key raw materials the company has been able to procure sufficient
supply of raw material to meet its production needs. It procures raw material under contracts that are short-term (subject to
price negotiations). The company is one of the worlds largest producers of DRI an input which is essential to ensure uniform
high quality of the finished goods. DRI is a cost effective substitute to scrap.
Exhibit 18
In 2003, Ispat International produced DRI to the tune of 7.2 million.

Ispat Mexicana possess a 4 million tpa pelletizer plant, a 2.4 million tpa HyL(III) DRI
plant and a 1.7 million tpa MIDREX MEGAMOD DRI Plant, eliminating the
dependence on costlier raw material imports. The two MIDREX DRI plants at Ispat
Sidbec aggregate to a production capacity of 1.5 million tonnes.
The total DRI production capacity of Caribbean Ispats total is 2.7 million tonnes which
not only adheres to the subsidiaries of Ispat but also leaves more to service the demand for
DRI from external customers.
Ispat Hamburg has one MIDREX DRI plant of 600,000 tpa.
The company has its own transport arrangement. Mittal Shipping Limited provides ocean transportation to the companys
manufacturing subsidiaries and affiliates with its location at London, a principal hub of global shipping business. In 2004,
Mittal Shipping Limited arranged transport for 27 million tonnes of cargo. Ispat Mexicana holds 50% interest in Corporacion
del Balsas, S.A. de C.V., which manages captive port facilities and 50% interest in Servicios Siderrgicos Integrados, S.A. de
C.V., which provides various products such as industrial gas and services to Imexsa and a 50% interest in Cal del Balsas,
S.A. de C.V.
Further, most of the companys manufacturing plants have their own deep water port facilities, railway sidings, large
engineering workshops, oxygen, lime, water treatment plants and research and development laboratories.
Business Acquisitions
A rapid growth of Mittal Steel can be attributed to its successful acquisitions over a relatively short period of time, entailing
significant investment [Exhibit 19]. Its continuing acquisition strategy dates back to 1998 when Ispat International was under
the Mittal Family control. The success of business acquisitions not only entails large investment, but is also accompanied by
increased operating costs, greater allocation of management resources, better financial and management control systems,
sufficient and qualified managerial talent and above all the ability to manage risks and liabilities associated with business
acquisitions.
Exhibit 19: Acquisitions by Mittal Steel
1989
Acquisition of Iron & Steel Company of Trinidad & Tobago
Caribbean Ispat (now Mittal Steel Point Lisas) was formed to lease, and then buy, the assets of the Iron & Steel
Company of Trinidad & Tobago, an integrated mini-mill steel complex.
1992
Acquisition of Sibalsa
Acquired from the Mexican Government. Today, the renamed Mittal Steel Lazaro Cardenas is the worlds only
dedicated producer and supplier of high quality steel slabs.
1994
Acquisition of Sidbec-Dosco
Canadas number four steelmaker (now Mittal Canada) was acquired from the Government of Quebec. The company
is the only integrated mini-mill in Canada and produces both long and flat products.
1995
Acquisition of Hamburger Stahlwerke
The German wire rod producer (now Mittal Steel Hamburg) brought new mini-mill expertise to the Group.
Ispat Shipping
(now Mittal Shipping) was formed to provide ocean transport solutions for the Group.
Acquisition of Karmet
One of the largest integrated single site steel plants in the world, the Kazakh company Karmet (now Mittal Steel
Temirtau) has its own coal mines, iron ore mines and power generation assets, making it one of the lowest cost steel
producers in the world.
1997
Flotation of Ispat International NV
Ispat International, the company controlling the Groups operations in Mexico, Trinidad & Tobago, Canada and
Germany, floated on the New York and Amsterdam stock exchanges. It was one of the largest and most successful
IPOs in the steel industry at that time.
There were acquisitions of two more German companies Ispat Stahlwerk Ruhrort (now Mittal Steel Ruhrort) and
Ispat Walzdraht Hochfeld (now Mittal Steel Hochfeld). The companies have a long-term contract with Thyssen to
buy hot metal and make some of the highest grades of steel.
1998
Acquisition of Inland Steel Company
Ispat International bought Americas fourth largest steelmaker, Inland Steel Company, renowned for its innovation
and product quality. It has two downstream joint ventures with Nippon Steel of Japan.
Acquisition of Unimtal
Ispat International acquired the French company, Unimtal Group (now Mittal Steel Gandrange), including
Trfileurope and SMR, becoming the largest producer of high-quality wire rods in Europe.
2001
Acquisition of ALFASID
LNM Holdings acquired ALFASID (now Mittal Steel Annaba) from the Algerian government. It is the largest
producer of steel in North Africa and has its own iron ore mines.
Acquisition of Sidex
LNM Holdings acquired Sidex, an integrated steelworks in Galati, from the Romanian Government. The company
(now Mittal Steel Galati) is the largest steelmaker in Romania. In 2004, the Group bought three more steel facilities
in Romania Tepro (Now Mittal Steel Iasi), Petrotub Roman (now Mittal Steel Roman) and Siderurgica Hunedoara
(now Mittal Steel Hunedoara).
2002
LNM Holdings signed business assistance agreement with Iscor.
The company agreed to provide techno- commercial assistance to the South African steelmaker over a three-year
period in exchange for Iscor shares. LNM took control of Iscor, now Mittal Steel South Africa, in June 2004.
2003
Acquisition of Nova Hut
LNM Holdings acquired Nova Hut (now Mittal Steel Ostrava) the largest steel producer in the Czech Republic.
2004
Acquisition of Polskie Huty Stali
LNM Holdings acquired Polands leading steel producer, now renamed Mittal Steel Poland.
Acquisition of Macedonian facilities from Balkan Steel
LNM Holdings bought hot and cold rolling mills in Skopje (now Mittal Steel Skopje).
Acquisition of Tepro renamed Mittal Steel Lasi
Acquisition of Petrotub Roman renamed Mittal Steel Roman
Acquisition of Siderurgica Hunedoara renamed Mittal Steel Hunedoara
Acquisition of BH Steel
LNM Holdings bought Bosnias BH Steel (now Mittal Steel Zenica).
Acquisition of Atansore iron ore mines in Kazakhstan
Acquired controlling stake in Iscor (now Mittal Steel South Africa)
Merger of Ispat International and LNM Holdings to form Mittal Steel
2005
CREATION OF MITTAL STEEL AND MERGER WITH INTERNATIONAL STEEL
Ispat International acquires LNM Holdings to form Mittal Steel. At the same time, Mittal Steel announced the agreed
merger with International Steel Group of the US, in a cash and shares deal worth $4.5 billion to create the worlds
largest steelmaker.
The most recent acquisitions to its credit are its acquisition of 44.5% interest in Mittal Steel Skopje (CRM) in May, 2004 and
subsequent increase to 88.3% and a 77.3% interest in Mittal Steel Skopje (HRM) both located at Macedonia. In April 2004, it
entered into a JV with Government of Bosnia and acquired 51% interest in RZR Ljubija Iron Ore mines which have been
non-operational since 1990s. In April 2004, Mittal acquired 80.9% interest in Mittal Steel Hunedoara which is a downstream
steel products manufacturer. In December 2004, it increased its share in Mittal Steel Poland to 72.4% which is the largest
producer in Central and Eastern Europe.
January 2005, Mittal Steel entered into a share purchase agreement with Valin Group to purchase 37.17% of outstanding
shares of Hunan Valin Steel Tube & Wire Co. Ltd., a listed subsidiary of Valin Group. The purchase consideration was for
$314 million subjected to adjustment based on the net assets of Valin, which has been approved by the regulatory authorities
in the Peoples Republic of China.
Till date Mittal Steel has been successful in this dimension. It has proven its ability in integrating the newly acquired assets
with existing operations and has grown stronger. Integrating Ispat Internationals operations and personnel with LNM
Holding and of ISG, is a risky move to dominate steel making operations in four continents. If successful, it will result in the
shift of power on the global front. Among others, the acquisition calls for integrating products, sales and marketing
operations, coordination of future research and development, and the ability to steer over the employee morale. This strategy
of growth and development through successful acquisitions is expected to be continued in the future also.
Liquidity and Cash Management
The company maintains its liquidity primarily from cash generated from its operations and from working capital credit lines
at its subsidiaries level. For the year 2004, its cash from operations increased from $1,438 in 2003 to $4,611 in 2004 resulting
in increased cash and cash equivalent to the tune of $2.6 billion in 2004 from $900 million in 2003.
In March 2004, Ispat Inland ULC issued $800 million principal amount of senior secured notes, the entire proceeds from this
were used to retire the $661.5 million loan taken under a credit agreement in 1998 from a syndicate of financial institutions
and also to repay $105 million inventory revolving credit facility and the balance to repay receivables revolving credit
facility.
In June 2004, a 3-year revolving credit facility, secured by assets of certain subsidiaries, was availed from a consortium of
financial institutions to the aggregate of $400 million. In the same month the company was approved of $100 million term
facility with the International Financial Corporation.
Exhibit 20
(in $ million)
Limit
REGION
Americas
Europe
Rest of World
As of
December
31, 2004
589
698
827
Utilization
As of
December
31, 2003
569
161
92
As of
December
31, 2004
181
496
121
Availability
As of
December 31,
2003
372
124
20
As of
December
31, 2004
408
201
705
As of
December
31, 2003
197
37
72
Source: www.sec.gov
With a total working capital limit of $589 million in America, $698 million in Europe and
$827 million in the rest of the world, as on December 31, 2004, the company has availed a credit of $181 million in America,
$496 million in Europe and $121 million in rest of the world (Exhibit 20) which implies an availability of approximately
45% working capital limit for the future. The company has also entered into receivables factoring arrangement in Europe to
the tune of $144 million as on December 31, 2004 (Exhibit 20).
Exhibit 21
(in $ million)
REGION
Americas
Europe
Rest of World
Limit
As of
December
31, 2004
284
As of
December
31,2003
261
Utilization
As of
December
31, 2004
144
As of
December
31, 2003
159
Availability
As of
December
31, 2004
140
As of
December
31, 2003
102
Source: sec.gov
Interest and Forex Risk
With its global presence of subsidiaries, and its operations in different geographical locations, Mittal steel deals with a
number of functional currencies. The year 2004 witnessed the weakening of US dollar against the Euro, Algerian Dinar,
Czech Koruna, Kazakh Tenge, Polish Zloty, Romanian Lei, South African Rand, and the Canadian Dollar. Such exchange
rate movements have an adverse effect on the operations of several subsidiaries. This global scale operation gives rise to
interest rate fluctuations and exchange rate risk exposures. The company manages this risk through specific hedges. The
company uses both fixed and variable rate debts and enters into swap and collar contracts to finance and hedge interest rate
exposures. The company does not deal or issue derivative financial instruments.
To mitigate its foreign exchange exposure the company has established a control environment for risk assessment and
monitoring of derivative financial instruments. The estimated fair value of forward exchange contracts amount to $120
million at December 31, 2003 and increased to $177 million at December 31, 2004. The company also utilizes derivative
commodity instruments to hedge exposures to fluctuations in the costs of natural gas and certain nonferrous commodities.
Futures and swaps contracts are entered into by US operating subsidiaries to manage exposure. With counterparties of
international repute the company does not consider the contracts as credit risk. The company entered into contract to the tune
of $6 million at December 31, 2003 and increased the contracts to the tune of $109 million at December 31, 2004.
In 2004, the major risk factor for the European economy that affected the Steel industry in general was the rise of the Euro.
This threatened the export-led economy and the domestic demand for steel became weak. The Euro has appreciated more
than 40% since its lowest point.
The company reported a loss of $1 million in 2004 and a gain of $1 million in 2003 and 2002 for changes in the fair value of
open derivative instruments not designated as a hedge.
CAPITAL STRUCTURE
Share Capital
The issued share capital of the company comprised 194,509,790 class A common shares and 457,490,210 class B common
shares as on December 31, 2004. Except for disparity in voting and conversion right the two classes of shares are identical in
all other respects. Mr. Laxmi N Mittal and his wife Mrs. Usha Mittal together are Mittal Steels controlling shareholders and
hold 100% of the Class B common stock and 85.37 % of the Class A common stock (Exhibit 23). The ownership of Class A
common shares results in direct ownership of Mittal Steel and the ownership of Class B gives them indirect control (through
intermediate holding companies) over Mittal Steel.
The controlling shareholder by virtue of his holding has the right to appoint all the Board of Directors of Mittal Steel and
control all the policies and actions of the company requiring shareholders approval. Also the holding results in control over
the composition of change in shareholding pattern of Mittal Steel.
Exhibit 23
Controlling shareholder
Treasury stock
Other public shareholders
TOTAL
Directors and senior
management
Mittal Steel Class A

Common Shares
(1)
Number
% of
Class
166,048,123
85.37
8,802,397(4)
4.53
19,659,270
10. 10
194,509,790
100.00
403,268(6)(7)
0.21
Mittal Steel Class B

Common Shares
Total Common Shares

(1)
Number
Number
457,490,210
457,490,210
% of
Class
100
100
623,538,333
8,802,397
19,659,270
652,000,000
403,268(6)(7)
% of
Total
95.63
1.35
3.02
100.00
0.06
Source: www.sec.gov
There were 60 US record holders holding an aggregate of 27,824,355 New York shares representing 15% of Class A
common shares held. In Netherlands an aggregate of 926,645 of Class A common shares were held by outside shareholders.
The shareholders equity increased to $5,846 million in December 2004 from $2,561 million as at December 31, 2003. The
company also repurchased its own shares to the tune of 5.3 million for $54 million in 2004.
Debt
The companys external debt was $3.6 billion at the end of 2004 compared to $3.1 billion at the end of 2003. The total debt
comprises long-term debt, short-term debt, loan from subsidiaries and includes borrowing under working capital facilities.
The debts are fully secured by liens on the assets of the subsidiary raising such debt.
March 2004, Ispat Inland ULC issued $800 million principal amount of senior secured notes which was guaranteed by Mittal
Steel and Inland. This comprises $150 million floating rate notes with interest at LIBOR + 6.75% and is due in April 2010
and the balance fixed rate notes bearing interest at 9.75% due in April 2014.
Subsequent to purchase of $256 million capital stock of Inland by Mittal Steel, Inland redeemed the principal amount of
Senior Secured Notes to the tune of $227.5 million at a redemption price equal to 109.75% of the outstanding principal.
Of the total contractual obligations including long-term debt obligations of $9,094 million on December 31, 2004, the
companys short-term liability amounts to $1,589 million and obligations to the extent of $3,219 payable after five years
(Exhibit 24).
Exhibit 24
Long-term debt obligations

Operating lease obligations
Environmental commitments
I/N Kote debt guarantees
Pension agreements
Other post retirement benefits
Purchase obligations
Other long-term liabilities
Acquisition/Investment Commitments
Total
Less than
1 year
1-3 years
(in $ millions)
4-5 years
More than
5 years
$1,743
97
167
41
175
282
4,501
642
1,446
$9,094
$104
22
9
15
175
60
779
62
363
$1,589
$464
25
48
26
109
1,023
373
642
$2,710
$175
12
44
113
809
138
286
$1,577
$1,000
38
66
1,891
69
155
$3,219
Dividends
The companys policy is to distribute dividends pro-rata from the unreserved profits insofar as its shareholders equity
exceeds the sum of its paid-up issued share capital and certain reserves that are required to be statutorily maintained under
the Law of Netherlands or the companys Articles of Association. The dividends remaining unclaimed within five years plus
two days after the date on which they became due and payable revert to Mittal Steel.
LNM Holding the better half of Mittal Steel declared dividends to the tune of $164 million in 2003 and to the tune of
$2,386 million in 2004 to its sole shareholder before it was acquired by Ispat International. The companies dividend yield
stood at 1.50 versus the industry average of 1.10 and the payout ratio stood at 75.53 versus the industry average of 11.22
(Exhibit 25).
Exhibit 25
Dividends
Company
Industry
Dividend Yield
1.50
1.10
Dividend Yield - 5 Year Avg.
4.50
2.16
Dividend 5 Year Growth Rate
99.75
11.25
Payout Ratio (TTM)
75.53
11.22
Valuation
A review of Dow Jones Steel sector index has indicated that the steel sector has been under pressure lately. While steel
companies generally trade at low PE multiples, Mittal steel has a current P/E of 4.13 when compared to industry P/E ratio of
7.98. The examining of cash flow reveals that Mittal steel sells at 3.19 x cash flow whereas industry shares sell at 6.02 x cash
flow (Exhibit 26).
Exhibit 26: Valuation Ratios Ratio Comparison
Valuation Ratios
P/E Ratio (TTM)
P/E High - Last 5 Yrs.
P/E Low - Last 5 Yrs.
Beta
Price to Sales (TTM)
Price to Book (MRQ)
Price to Tangible Book (MRQ)
Price to Cash Flow (TTM)
Price to Free Cash Flow (TTM)
% Owned Institutions
Company
4.13
NA
NA
1.60
0.66
1.74
1.76
3.19
14.57
8.65
Industry
7.98
78.43
5.62
1.66
0.75
2.15
2.51
6.02
10.81
50.22
The company stock has been among the best performers over the couple of years with Market capitalization of $18.5 billion
when compared with Nippon and JFE with $15.4 billion and Posco with $12.8 billion (Exhibit 27). The earnings per share of
the company as on September 30, 2005 stood at $4.034 as against the approximately $ 4.808 for the three months ended
September 30, 2004 (Exhibit 28).
Exhibit 27: Earnings per Share
Quarters
2002
March
0.320
June
0.090
September
0.210
December
0.410
Totals
0.390
Note: Units in US Dollars
2003
2004
2005
0.430
0.834
1.784
0.110
1.320
0.500
2.360
1.980
2.070
2.420
7.304
1.570
0.680
4.034
Exhibit 28
Future Outlook
World steel making capacity is expected to continue to increase for the next few years from 2005 to 2008 as per OECD
estimates (Exhibit 29), principally due to the developments taking place in China. More than half of the world crude steel
making capacity is expected to arise in the Asia-Oceanic region. Also the industry expects more cross border tie-ups in the
coming years. However, the projected steel capacity increases are more than the projected steel demand resulting in structural
problems by 2008.
Exhibit 29: Planned Steel Capacity Additions, by Year
Year
2005
2006
2007
2008
Total
Amount
86,818,000
112,351,000
36,100,000
44,050,000
277,769,000
MEPS, a leading source of steel industry information, and others forecast the rise of consumption of finished steel to rise
from 2004 to 2008 with 3 percent annual increase. The Economist projected growth of 14.8 percent between now and 2008.
OECD paper estimates that the demand for steel would increase steadily over the next four years however not spectacularly
resulting in over capacity (Exhibit 30).

Exhibit 30: Announced Increases in Steel Capacity far
Exceed Projected Increases in Demand for Steel
Source: www.oecd.org; Unpublished Data.

With the merger with International Steel Group Inc., Mittal Steel has become the largest and profitable company in the
World, with operations in 14 countries located in four continents. Under the agreement ISG shareholders receive $21 per
share in cash and shares to the value of $21 based on the average closing price of Mittal Steel up to a maximum of 0.6087
shares. It is expected that the market conditions for Mittal Steels products will be favorable and shipments would increase
over the next two years primarily due to recent acquisitions and mergers.
The companys merger with ISG puts it in a strong position with respect to key input materials such as coke, coal and iron
ore and also in stronger position in key end sectors. ISG is one of the leading integrated steel producers in North America. Its
merger helps Mittal Steel to strengthen its base in industrialized economies especially North America and Europe.
Compatible with the philosophy of Mittal Steel, ISG has grown by acquiring out bankrupt steel making companies such as
LTV Steel, ACME Steel, Bethlehem Steel Corporation, Weirton Steel Corporation and Georgetown Steel Corporation. With
a dedicated sales force and sales made directly to end users, third party processors and service centers located primarily
located in Mid-West and along Western Sea Board of US, the ISGs base in US is unquestionable.
ISG has five integrated steel making plants, one basic oxygen furnace/compact strip mill, three electric arc furnace plants and
four finishing plants.
On January 14, 2005 the company entered into a share purchase agreement with Hunan Valin Iron & Steel and acquired
37.17 % of the outstanding shares of the listed subsidiary of Valin Group. On January 21, 2005 the company mandated ABN
AMRO, Citigroup Global Markets Limited, Deutsche Bank AG London and HSBC Bank to arrange a $3,200 unsecured
revolving credit facility. This facility is expected to be used to finance the consideration payable under the proposed merger
with International Steel Group. The above developments show that the industry future is bright and Mittal Steels is well
equipped to tap the opportunity.
Key Risks
Steel companies are susceptible to changes in governmental, political and economic developments. With Mittal Steel
operating in many countries it is subject to economic risks and uncertainties, which may have adverse impact in case of
deterioration or disruption of the economic environment of such countries.
The surging of steel markets has resulted in physical shortages for key raw materials like coke, coal, iron ore and scrap. Any
prolonged interruption in the raw material supply or increase in their costs could adversely affect its business, financial
condition and results of its operations. Also in 2004 the industry was caught up in logistical problems due to the hike in
freight rates and port congestions leading to a disruption in supply chains.
Apart from these the global steel market is highly competitive. Increased competition could erode market share, reduce prices
resulting in adverse effect on the business and the financial performance of the company. At the same time it may result in
shift to other substitute materials such as Aluminum (particularly in automobile industry), or plastics. The ability of Mittal
Steel to maintain a competitive position lies with, or The Man of Steel behind Steel.
ANNEXURE I
Annual Income Statement
In Million of US Dollars (except for per share items)
Particulars
Revenue
Other Revenue, Total
Total Revenue
Cost of Revenue, Total
Gross Profit
Selling/General/Admin. Expenses, Total
Research & Development
Depreciation/Amortization
Interest Expense(Income) -Net Operating
Unusual Expense (Income)
Other Operating Expenses, Total
Total Operating Expense
Operating Income
Interest Expense, Net Non-Operating
Interest/Invest Income - Non-Operating
Interest Income (Exp), Net Non-Operating
Gain (Loss) on Sale of Assets
Other, Net
Net Income Before Taxes
Provision for Income Taxes
Net Income After Taxes
Minority Interest
Equity In Affiliates
Net Income Before Extra. Items
Accounting Change
Discontinued Operations
Extraordinary Item
Net Income
Preferred Dividends
Income Available to
Common Stockholders Excluding
Extraordinary income
Income Available to
Com Incl. Extraordinary

Basic Weighted Average Shares
Basic EPS Excluding Extraordinary Items
Basic EPS Including Extraordinary Items
Dilution Adjustment
Diluted Weighted Average Shares
Diluted EPS Excluding Extraordinary Items
Diluted EPS Including Extraordinary Items
12 Months
Ending
12/31/04
22,197.0
22,197.0
14,694.0
7,503.0
804.0
553.0
16,051.0
6,146.0
(265.0)
124.0
(141.0)
128.0
6,133.0
817.0
5,316.0
(615.0)
4,701.0
0.0
0.0
4,701.0
12 Months
Ending
12/31/03
Restated
12/31/03
9,567.0
9,567.0
7,568.0
1,999.0
369.0
331.0
8,268.0
1,299.0
200.0)
231.0
31.0
70.0
1,400.0
184.0
1,216.0
(35.0)
1,181.0
1.0
0.0
1,182.0
12 Months
Ending
12/31/02
Restated
12/31/02
7,080.0
7,080.0
5,752.0
1,328.0
298.0
266.0
62.0
6,378.0
702.0
(232.0)
136.0
(96.0)
32.0
638.0
32.0
606.0
(11.0)
595.0
0.0
0.0
595.0
12 Months
Ending
12/31/01
Reclass.
12/31/01
4,486.0
4,486.0
4,273.0
213.0
155.0
177.0
75.0
4,680.0
(194.0)
(242.0)
5.0
(237.0)
13.0
(418.0)
(106.0)
(312.0)
(312.0)
0.0
(312.0)
12 Months
Ending
12/31/00
Reclass.
12/31/00
5,343.0
5,343.0
4,670.0
673.0
181.0
177.0
5,028.0
315.0
(241.0)
25.0
(216.0)
23.0
122.0
23.0
99.0
99.0
99.0
4,701.0
1,181.0
595.0
(312.0)
99.0
4,701.0
1,182.0
595.0
(312.0)
99.0
643.00
7.311
7.311
0.0
643.00
7.311
7.311
647.00
1.825
1.827
0.0
647.00
1.825
1.827
648.00
0.918
0.918
0.0
648.00
0.918
0.918
121.00
(2.579)
(2.579)
0.0
121.00
(2.579)
(2.579)
120.00
0.825
0.825
120.00
0.825
0.825
DPS Common Stock Primary Issue

Gross Dividends Common Stock
Pro-Forma Stock Compensation Expense
Net Income after Stock Based Comp. Exp.
Basic EPS after Stock Based Comp. Exp.
Diluted EPS after Stock Based Comp. Exp.
Interest Expense, Supplemental
Interest Capitalized, Supplemental
Depreciation, Supplemental
Total Special Items
Normalized Income Before Taxes
Effect of Special Items on Income Taxes
Inc Tax Ex-Impact of
Sp Items
Normalized Income After Taxes
Normalized Inc. Avail to Com.
Basic Normalized EPS
Diluted Normalized EPS
ADR Information
4.770
2,386.0
1.0
4,700.0
7.310
7.310
268.0
(3.0)
553.0
6,133.0
0.330
164.0
1.0
1,181.0
1.830
1.830
208.0
(8.0)
331.0
1,400.0
0.000
0.0
3.0
592.0
0.920
0.920
266.0
(5.0)
177.0
638.0
0.000
0.0
3.0
(315.0)
(2.600)
(2.600)
242.0
(2.0)
177.0
(418.0)
0.150
18.0
10.0
89.0
0.740
0.740
241.0
(2.0)
177.0
122.0
817.0
184.0
32.0
(106.0)
23.0
606.0
595.0
0.918
0.918
(312.0)
(312.0)
(2.579)
(2.579)
99.0
99.0
0.825
0.825
5,316.0
1,216.0
4,701.0
1,181.0
7.311
1.825
7.311
1.825
1 Share(s) Per ADR
ANNEXURE II
Annual Balance Sheet
Particulars
Cash & Equivalents
Short-term Investments
Cash and Short-term Investments
Accounts Receivable Trade, Net
Total Receivables, Net
Total Inventory
Prepaid Expenses
Other Current Assets, Total
Total Current Assets
Property/Plant/Equipment,
Total Gross
Accumulated Depreciation, Total
Property/Plant/Equipment,
Total Net
Goodwill, Net
Intangibles, Net
Long-term Investments
Other Long-term Assets, Total
Total Assets
Accounts Payable
Accrued Expenses
Notes Payable/Short-term Debt
Current Port of LT Debt/Capital Leases
Other Current liabilities, Total
Total Current Liabilities
Long-term Debt
As of
12/31/04
As of
12/31/02
As of
12/31/01
As of
12/31/00
2,495.0
1.0
2,496.0
2,006.0
2,006.0
4,013.0
666.0
444.0
9,625.0
As of
12/31/03
Restated
12/31/04
760.0
0.0
760.0
889.0
889.0
1,587.0
275.0
172.0
3,683.0
77.0
0.0
77.0
529.0
529.0
873.0
95.0
38.0
1,612.0
85.0
0.0
85.0
451.0
451.0
805.0
65.0
37.0
1,443.0
214.0
78.0
292.0
601.0
601.0
1,015.0
69.0
28.0
2,005.0
11,388.0
7,772.0
4,233.0
4,232.0
4,307.0
(3,826.0)
(3,118.0)
(1,198.0)
(1,123.0)
(1,008.0)
7,562.0
4,654.0
3,035.0
3,109.0
3,299.0
106.0
667.0
1,193.0
19,153.0
1,899.0
2,307.0
341.0
1,683.0
6,230.0
1,639.0
117.0
967.0
716.0
10,137.0
1,015.0
796.0
780.0
28.0
2,619.0
2,193.0
84.0
257.0
524.0
5,512.0
607.0
377.0
262.0
28.0
1,274.0
2,022.0
83.0
299.0
379.0
5,313.0
540.0
303.0
338.0
28.0
1,209.0
2,041.0
102.0
335.0
237.0
5,978.0
640.0
347.0
391.0
56.0
1,434.0
2,124.0
Capital Lease Obligations

Total Long-term Debt
Total Debt
Deferred Income Tax
Minority Interest
Other Liabilities, Total
Total Liabilities
Redeemable Preferred Stock, Total
Preferred Stock Non-redeemable, Net
Common Stock, Total
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Treasury Stock Common
Other Equity, Total
Total Equity
Total Liabilities & Shareholders Equity
Shares Outs Common Stock Primary
Issue
Total Common Shares Outstanding
Employees
Number of Common Shareholders
ADR Information
1,639.0
1,980.0
955.0
1,743.0
2,740.0
13,307.0
59.0
552.0
4,739.0
(123.0)
619.0
5,846.0
19,153.0
2,193.0
2,973.0
263.0
261.0
2,240.0
7,576.0
59.0
584.0
2,423.0
(110.0)
(395.0)
2,561.0
10,137.0
2,022.0
2,284.0
69.0
2,019.0
5,384.0
7.0
587.0
141.0
(103.0)
(504.0)
128.0
5,512.0
2,041.0
2,379.0
134.0
1,591.0
4,975.0
7.0
480.0
92.0
(241.0)
338.0
5,313.0
2,124.0
2,515.0
137.0
1,399.0
5,094.0
4.0
479.0
401.0
0.0
884.0
5,978.0
185.28
189.25
51.74
49.76
54.85
123.89
15,640
121.91
16,344
127.00
15,000
69
642.77
646.74
164,393
116,323
1 Share(s) Per ADR
ANNEXURE III
Annual Cash Flow Statement (Indirect Method)
Particulars
12 Months
Ending
12/31/04
12 Months
Ending
12/31/03
Restated
12/31/04
12 Months
Ending
12/31/02
Restated
12/31/04
12 Months
Ending
12/31/01
Reclass
12/31/03
12 Months
Ending
12/31/00
Net Income/Starting Line
4,701.0
1,182.0
595.0
(312.0)
99.0
Depreciation/Depletion
553.0
331.0
266.0
177.0
177.0
Deferred Taxes
86.0
141.0
(32.0)
(114.0)
3.0
Non-cash Items
444.0
(241.0)
(166.0)
(32.0)
(85.0)
Changes in Working Capital
(1,173.0)
25.0
(124.0)
303.0
187.0
Cash from Operating Activities
4,611.0
1,438.0
539.0
22.0
381.0
Capital Expenditures
(898.0)
(421.0)
(265.0)
(97.0)
(184.0)
Other Investing Cash Flow Items, Total
97.0
(393.0)
(95.0)
62.0
(11.0)
Cash from Investing Activities
(801.0)
(814.0)
(360.0)
(35.0)
(195.0)
Financing Cash Flow Items
(10.0)
0.0
Total Cash Dividends Paid
(763.0)
(164.0)
0.0
0.0
(18.0)
Issuance (Retirement) of Stock, Net
(35.0)
(8.0)
4.0
4.0
(1.0)
Issuance (Retirement) of Debt, Net
(1,521.0)
(110.0)
12.0
(122.0)
(120.0)
Cash from Financing Activities
(2,329.0)
(282.0)
16.0
(118.0)
(139.0)
Foreign Exchange Effects
254.0
23.0
5.0
2.0
(3.0)
Net Change in Cash
1,735.0
365.0
200.0
(129.0)
44.0
Cash Interest Paid
253.0
201.0
220.0
244.0
188.0
Cash Taxes Paid
454.0
30.0
64.0
4.0
3.0
ADR Information
1 Share(s) Per ADR
Sources: www.oecd.org/dataoecd.
References
1.
http://www.corusgroup.com/en/news/speeches/Speech-V_NASS_Annual_Steel_Industry_ Dinner/
2.
http://www.worldsteel.org/pictures/newsfiles/2005_Dec_Steel%20and%20Iron.pdf
3.
www.highbeam.com
4.
www.marketresearch.com
5.
www.mittalsteel.com
6.
www.reuters.com
7.
www.sec.gov.
END OF QUESTION
PAPER
Sugg
ested
Ans
wers
Inte
grat
ed
Cast
Stud
ies
IV
(362)
:
Octo
ber
2006
Section D : Case Study
1.
< TOP >

Strengths:
Largest producer of steel. Mittal has steel operations in many countries. With aggressive acquisition strategy, its
philosophy is to improve on the operating performance of acquired facilities with focus on improved management
practices, capital expenditure programs, resulting in improved productivity and shipment of steel products. Mittal Steel
is recognized for high degree in both product diversification and geographical diversification. Its operations are
geographically diversified with 47% of its presence in North America, 32% in Europe and the balance in the rest of
the world.
Mittal has made a niche with respect to quality and the ability to meet customers product specifications, delivery
schedules and price. The company has built strong customer franchise in most of its products and markets. The
company is a leading supplier to the automobile industries in North America especially, to car manufacturers. With
continued partnering with key customers and with a reputation of high quality, the company has created long-term
growth opportunities.
The companys profit margin is 27.1% as against the industry average of 21.01%, and the net profit margin was
17.98% as against the average industry with 10.02%.
Mittal Steel is vertically well integrated. It has acquired and owns coal and iron ore mines, and a number of coal
making facilities, engineering workshops and infrastructure facilities. This helps it to strengthen and protect its
sources of supply and at the same time insulate against increased cost of inputs. Its strategy is to procure the raw
materials at the lowest prices available, lowest cost ownership through aggregated purchasing and supply chain
optimization, cost advantage by exploiting global purchasing reach and leveraging on a global scale the cost
advantages.
Weakness the steel industry remains highly fragmented globally and cross-border consolidation has been on an
increase, could affect the revenue margins of Mittal. Steel prices are very sensitive to a number of supply and
demand factors. The key to maintain a competitive position is through product differentiation, customer service, cost
reduction and cost management. A review of Dow Jones Steel sector index has indicated that the steel sector has
been under pressure lately. While steel companies generally trade at low PE multiples, Mittal steel has a current P/E
of 4.13 when compared to industry P/E ratio of 7.98. The examining of cash flow reveals that Mittal steel sells at
3.19 x cash flow whereas industry shares sell at 6.02 x cash flow
Opportunities
The production of steel in rest of the world is expected to grow by 4.5% and is to continue at similar rate in 2006.
The expectation is that the price of steel will increase gradually and in tandem with the prices of its raw material.
World steel making capacity is expected to continue to increase for the next few years from 2005 to 2008 as per
OECD estimates. The companys merger with ISG puts it in a strong position with respect to key input materials
such as coke, coal and iron ore and also in stronger position in key end sectors
Threat:
Steel companies are susceptible to changes in governmental, political and economic developments. With Mittal Steel
operating in many countries it is subject to economic risks and uncertainties, which may have adverse impact in case
of deterioration or disruption of the economic environment of such countries.
The surging of steel markets has resulted in physical shortages for key raw materials like coke, coal, iron ore and
scrap. Any prolonged interruption in the raw material supply or increase in their costs could adversely affect its
business, financial condition and results of its operations. With its global presence of subsidiaries, and its operations
in different geographical locations, Mittal steel deals with a number of functional currencies. This global scale
operation gives rise to interest rate fluctuations and exchange rate risk exposures
2.
Key Ratios in Analyzing Mittal Steel
< TOP >
The key ratios in analyzing a companys performance are:

i.
ii.
Profitability ratios such as:

a. Net Profit Margin
b. Return on Investment
c. Return on Equity.
Liquidity and Leverage ratios such as:
a. Current Ratio
b. Debt-Equity Ratio
c. Interest Coverage Ratio
2004
2003
2002
2001
2000
23.95
12.71
8.56
-6.95
1.85
Return on
Investment(%)
104.6128
50.15444
53.62872
-52.861
34.50164
Return on Equity(%)
90.93397
47.48145
47.34375
-92.3077
11.1991
Current Ratio
1.544944
1.406262
1.265306
1.193548
1.398187
Debt_Equity Ratio
0.338693
1.160875
1.784375
7.038462
2.845023
Interest coverage Ratio
22.93284
6.245192
2.639098
-0.80165
1.307054
Net profit margin
The NPM of Biocon has more than double d uring the period 2004 from when compared with the previous year.
This shows that the overall efficiency in production, administration, selling, financing, pricing, and tax management
Return on Investment (ROI): This is also called the earning power of the company. This ratio can be used to
evaluate how well the firm uses its operation basis. For example, Return on Investment is 10% means, that for every
Rs.100 invested in assets, the affecting benefit is Rs.10
Return on Equity (ROE): This is the more simplified ratio, which measures the return available to the equity
shareholder from the equity capital. Higher ROE represents better performance.
Current Ratio: It measures the excess value of current assets over current liabilities. Higher current ratio indicates
that higher the amount of current assets in relation to current liabilities the greater is the assurance to meet the
current liabilities. For creditors, the excess of current assets provides a buffer against losses that may be incurred in
disposition or liquidation of the current assets other than cash.
Debt-Equity Ratio: It indicates the relative contributions of creditors and owners and helps determine how well
creditors are protected in case of insolvency. From the perspective of long-term debt-paying ability, the lower this
ratio is, the better the companys debt position
Interest Coverage Ratio: This ratio indicates the number of times the firm can cover or meet the interest payments
associated with debt. High times interest earned ratio indicates the greater ability to pay. The company.
3.
Steel industry, over the past century, has witnessed a steady growth through the years and grown stronger. In 1997 < TOP >
and 1998 the industry witnessed a sudden decline in demand due to economic crises in Asian economies. The
revival of Asian economies combined with strong growth in North America resulted in revival of the steel industry.
The world reached 1 billion tonnes of steel production in 2004 and is expected to scale new heights in the coming
future .
On the consumption front, the increase of 26% during 1998-2003 is commendable when seen with the increase in
World GDP of 19%. The key player in this arena has been China which accounts for 70% followed by Eastern
Europe.
Growth in production is also comparable with increased demand. Asia accounted for a significant increase in
production. During the same period, there was a significant shift of trade in the Asia-Oceanic area. All these trends
contributed to the increase in steel prices worldwide.
During the last fifteen years, steel industry has undergone significant restructuring. In the light of declining demand
in Central and Eastern Europe capacity has reduced, however, to meet the global competitiveness the facilities have
been modernized. The restructuring in 1990s among the producers in European Union has led to marked regional
consolidation. Similar consolidation has been experienced in United States due to reconfiguration of bankrupt firms.
The fall in capacity from closure of several individual firms has been accompanied by increased capacity from new
investments in new markets. Despite significant restructuring, the steel industry remains highly fragmented globally.
The two to four percent share in global production each pertaining to large ten producers in 2003 continues from
1970s. In contrast to the top 5 iron ore producers who account for about 90% of the global iron ore market, in
automobile sector the top five biggest players account for 65% of market share. The top 5 producers of steel account
for less than 20% of the global steel production. This reveals the extent of fragmentation still prevailing in the steel
industry.
Current Industry scenario
2004 witnessed tremendous growth in steel markets. The global steel consumption increased by 8.8% over the 2003
level with figures reaching 935 million tonnes of finished products. The increased growth can be partly attributed to
increased consumption in China due to its high GDP growth and increased capital investment. Increased
consumption was also recorded in North America and newly industrialized states of former Soviet Union . The other
factor attributed to increased consumption was the recovery of markets in United States, Europe, Japan and Asia.
The buoyant market conditions of 2004 continued their trend in 2005 and are expected to extend to 2006.
World crude steel production increased to 1,066 million tonnes in 2004 indicating a 9% higher level from 2003. The
production of steel is prevalent in every country however, six countries or regions dominate 80% of the world
production. Asia is by far the largest producer of steel in the world, followed by Western Europe/Africa.
Accompanying by increased consumption was the increased production of crude steel in China of 272 million
tonnes contributing to 26% of global steel output. The growth of production in China is expected to grow in 2005
and 2006.
Mittal steel is the larges steel product and has its steel operations in many countries. With aggressive acquisition
strategy, the company today dominates steel making operations in four continents. Mittal Steel had initiated the
process of combining three of the worlds largest steelmakers.Mittal Steel is recognized for high degree in both
product diversification and geographical diversification.
The operating results of the Company for the year 2004 showed an increase in sales from
$9.6 billion for the year 2003 to $22.2 billion. This trend can be attributed to the increased global demand and prices
of steel. Excluding the affects of acquisitions, the sales of the company increased from $8.4 billion in 2003 to $12.5
billion in 2004 .The average prices of steel experienced an increase by 54% for the year ended December 2004. The
increased demand and production also pushed up the cost of key input resulting in an increase by 31% of average
cost per tonne for the year ended December 2004. The net result of increased sales and cost of sales was the increase
in overall gross profit by 142% or 34% increase in gross margin.

In 2004, the companys selling, general and administrative expenses increased by 118% due to higher level of sales
activity and higher cost of logistics resulting in increase of operating income to $6.1 billion for the year 2004
compared to $1.3 billion in 2003. The increase in net interest expense from $175 million in 2003 to $186 million in
2004 was the result of refinancing of debt at Inlands. The net result was the increase in the Companys net income
from $1,182 million in year 2003 to $4,701 million in 2004 (.A quick look into the profitability of the company with
industry standards reveals that the company had a gross margin of 27.1% as against the industry average of 21.01%,
and the net profit margin was 17.98% as against the average industry with 10.02%
Profitability Ratios (%)
Gross Margin (TTM)
Gross Margin 5 Yr. Avg.
EBITD Margin (TTM)
EBITD 5 Yr. Avg.
Operating Margin (TTM)
Operating Margin 5 Yr. Avg.
Pre-Tax Margin (TTM)
Pre-Tax Margin 5 Yr. Avg.
Net Profit Margin (TTM)
Net Profit Margin 5 Yr. Avg.
Effective Tax Rate (TTM)
Effective Tax Rate 5 Yr. Avg.
4.
Company
27.10
18.16
23.16
13.94
20.55
10.55
20.65
8.85
17.98
8.02
12.94
12.58
Industry
21.01
13.57
17.86
10.17
14.95
5.10
14.15
4.09
10.02
2.77
29.75
28.60
< TOP >

Strategic Determinants of Dividend Policy of Biocon
Some of the key factors which influence dividend payout of a firm are delineated below.
Liquidity: While earnings are an important determinant for the dividend decision, the role of liquidity cannot be
ignored. Dividend payout entails cash outflow for the firm. Hence, the quantum of dividends proposed to be
distributed critically depends on the liquidity position of the firm. In practice, firms often face cash crunch in spite of
having good earnings. Such firms may not be in a position to declare dividends despite their profitability.
Investment Opportunities: Another key determinant to the dividend decision is the requirement of capital by the
firm. Normally, firms tend to have low payout if profitable investment opportunities exist and conversely, firms tend
to resort to high payouts if profitable investment opportunities are lacking. Generally, firms operating in industries
which are in the nascent and growth phases of the product life cycle are characterized by high dependence on
retained earnings. On the other hand, firms operating in industries which are in the maturity and decline stages
normally distribute a larger proportion of their earnings as dividends.
Access to Finance: A company which has easy access to external sources of finance can afford to be more liberal in
its dividend payout. The dividend policy of such firms is relatively independent of its financing decisions. Firms
having little or no access to external financing have rather limited flexibility in their dividend decisions.
Flotation Costs: Issue of securities to raise capital in lieu of retained earnings involves flotation costs. These costs
include fees payable to the merchant bankers, underwriting commission, brokerage, listing fees, marketing expenses,
etc. Moreover smaller the size of the issue, higher will be the flotation costs as a percentage of amounts mobilized.
Further there are indirect flotation costs in the form of underpricing. Normally issue of shares is made at a discount
to the prevailing market price. The cost of external financing has an influence on the dividend policy.
Corporate Control: Further issue of shares (unless done through rights issue) results in dilution of the stake of the
existing shareholders. On the other hand, reliance on retained earnings has no impact on the controlling interest.
Hence, companies vulnerable to hostile takeovers prefer retained earnings rather than fresh issue of securities. In
practice, this strategy can be a double edged sword. The niggardly payout policy of the company may result in low
market valuation of the company vis--vis its intrinsic value. Consequently, the company becomes a more attractive
target and is in the danger of being acquired.
Investor Preferences: The preference of the shareholders has a strong influence on the dividend policy of the firm.
A firm tends to have a high payout ratio if the shareholders have a strong preference towards current dividends. On
the other hand, a firm resorts to retained earnings if the shareholders exhibit a clear tilt towards capital gains.
Restrictive Covenants: The protective covenants in bond indentures or loan agreements often include restrictions
pertaining to distribution of earnings. These conditions are incorporated to preserve the ability of the issuer/borrower
to service the debt. These covenants limit the flexibility of the company in determining its dividend policy.
Taxes: The incidence of taxation on the firm and the shareholders has a bearing on the dividend policy. India levies
a 10% tax on the amount of distributed profits. This tax is a strong fiscal disincentive on dividend distribution. These
dividends are totally tax-free in the hands of the shareholders. The capital gains (long-term) are taxed at 20%.
Dividend Stability: The earnings of a firm may fluctuate wildly between various time periods. Most firms do not
like to have an erratic dividend pay-out in line with their varying earnings. They try to maintain stability in their
dividend policy. Stability does not mean that the dividends do not vary over a period of time. It only indicates that
the previous dividends have a positive correlation with the current dividends. In the long run, the dividends have to
be invariably adjusted to synchronize with the earnings. However, the short-term volatility in earnings need not be
fully reflected in dividends.
Dividend Policy of Mittal Steel
The companys policy is to distribute dividends pro-rata from the unreserved profits insofar as its shareholders
equity exceeds the sum of its paid-up issued share capital and certain reserves that are required to be statutorily
maintained under the Law of Netherlands or the companys Articles of Association. The dividends remaining
unclaimed within five years plus two days after the date on which they became due and payable revert to Mittal
Steel.
LNM Holding the better half of Mittal Steel declared dividends to the tune of $164 million in 2003 and to the tune
of $2,386 million in 2004 to its sole shareholder before it was acquired by Ispat International. The companies
dividend yield stood at 1.50 versus the industry average of 1.10 and the payout ratio stood at 75.53 versus the
industry average of 11.22.
Dividends
5.
Company
Industry
Dividend Yield
1.50
1.10
Dividend Yield - 5 Year Avg.
4.50
2.16
Dividend 5 Year Growth Rate
99.75
11.25
Payout Ratio (TTM)
75.53
11.22
A rapid growth of Mittal Steel can be attributed to its successful acquisitions over a relatively short period of time, < TOP >
entailing significant investment. Its continuing acquisition strategy dates back to 1998 when Ispat International was
under the Mittal Family control. The success of business acquisitions not only entails large investment, but is also
accompanied by increased operating costs, greater allocation of management resources, better financial and
management control systems, sufficient and qualified managerial talent and above all the ability to manage risks and
liabilities associated with business acquisitions.
With aggressive acquisition strategy, its philosophy is to improve on the operating performance of acquired facilities
with focus on improved management practices, capital expenditure programs, resulting in improved productivity and
shipment of steel products. Its shipments grew from 1.5 million tonnes in 1992 to 42.1 million tonnes in 2004.
The most recent acquisitions to its credit are its acquisition of 44.5% interest in Mittal Steel Skopje (CRM) in May,
2004 and subsequent increase to 88.3% and a 77.3% interest in Mittal Steel Skopje (HRM) both located at
Macedonia. In April 2004, it entered into a JV with Government of Bosnia and acquired 51% interest in RZR
Ljubija Iron Ore mines which have been non-operational since 1990s. In April 2004, Mittal acquired 80.9% interest
in Mittal Steel Hunedoara which is a downstream steel products manufacturer. In December 2004, it increased its
share in Mittal Steel Poland to 72.4% which is the largest producer in Central and Eastern Europe.
January 2005, Mittal Steel entered into a share purchase agreement with Valin Group to purchase 37.17% of
outstanding shares of Hunan Valin Steel Tube & Wire Co. Ltd., a listed subsidiary of Valin Group. The purchase
consideration was for $314 million subjected to adjustment based on the net assets of Valin, which has been
approved by the regulatory authorities in the Peoples Republic of China.
Mittal Steel acquisitions strategy enable the company to acquire loss making companies in erstwhile USSR and
turning them into a profitable company. The restructuring of steel industry in Europe Union led to regional
consolidation. And the acquisition strategy of Mittal helped it to increase its revenue.
Today Mittal is a leading producer of steel with its operations in Algeria, Bosnia, Canada, Czech Republic, France,
Germany, Kazakhstan, Mexico, Poland, Romania, South Africa, Trinidad, Tobago and United States.
Today the Company operates in a number of developing countries most of which are undergoing substantial
transformation from centrally controlled economies to market oriented democracies. Approximately 71 percent of
Mittals sales for the year 2004 were directed towards developing countries and many of its operating subsidiaries
are primarily export oriented. The acquisition strategy helped Mittal to become a leading supplier to the automobile
industries in North America especially, to car manufacturers. With continued partnering with key customers and
with a reputation of high quality, the company has created long-term growth opportunities.
1989
Acquisition of Iron & Steel Company of Trinidad & Tobago
Caribbean Ispat (now Mittal Steel Point Lisas) was formed to lease, and then buy, the assets of
the Iron & Steel Company of Trinidad & Tobago, an integrated mini-mill steel complex.
1992
Acquisition of Sibalsa
Acquired from the Mexican Government. Today, the renamed Mittal Steel Lazaro Cardenas is
the worlds only dedicated producer and supplier of high quality steel slabs.
1994
Acquisition of Sidbec-Dosco
Canadas number four steelmaker (now Mittal Canada) was acquired from the Government of
Quebec. The company is the only integrated mini-mill in Canada and produces both long and flat
products.
1995
Acquisition of Hamburger Stahlwerke
The German wire rod producer (now Mittal Steel Hamburg) brought new mini-mill expertise
to the Group.
Ispat Shipping
(now Mittal Shipping) was formed to provide ocean transport solutions for the Group.
Acquisition of Karmet
One of the largest integrated single site steel plants in the world, the Kazakh company Karmet
(now Mittal Steel Temirtau) has its own coal mines, iron ore mines and power generation assets,
making it one of the lowest cost steel producers in the world.
1997
Flotation of Ispat International NV
Ispat International, the company controlling the Groups operations in Mexico, Trinidad &
Tobago, Canada and Germany, floated on the New York and Amsterdam stock exchanges. It was
one of the largest and most successful IPOs in the steel industry at that time.
There were acquisitions of two more German companies Ispat Stahlwerk Ruhrort (now Mittal
Steel Ruhrort) and Ispat Walzdraht Hochfeld (now Mittal Steel Hochfeld). The companies have a
long-term contract with Thyssen to buy hot metal and make some of the highest grades of steel.
1998
Acquisition of Inland Steel Company
Ispat International bought Americas fourth largest steelmaker, Inland Steel Company, renowned
for its innovation and product quality. It has two downstream joint ventures with Nippon Steel of
Japan.
1999
Acquisition of Unimtal
Ispat International acquired the French company, Unimtal Group (now Mittal Steel Gandrange),
including Trfileurope and SMR, becoming the largest producer of high-quality wire rods in
Europe.
2001
Acquisition of ALFASID
LNM Holdings acquired ALFASID (now Mittal Steel Annaba) from the Algerian government. It
is the largest producer of steel in North Africa and has its own iron ore mines.
Acquisition of Sidex
LNM Holdings acquired Sidex, an integrated steelworks in Galati, from the Romanian
Government. The company (now Mittal Steel Galati) is the largest steelmaker in Romania. In
2004, the Group bought three more steel facilities in Romania Tepro (Now Mittal Steel Iasi),
Petrotub Roman (now Mittal Steel Roman) and Siderurgica Hunedoara (now Mittal Steel
Hunedoara).
2002
LNM Holdings signed business assistance agreement with Iscor.
The company agreed to provide techno- commercial assistance to the South African steelmaker
over a three-year period in exchange for Iscor shares. LNM took control of Iscor, now Mittal
Steel South Africa, in June 2004.
2003
Acquisition of Nova Hut
LNM Holdings acquired Nova Hut (now Mittal Steel Ostrava) the largest steel producer in the
Czech Republic.
2004
Acquisition of Polskie Huty Stali
LNM Holdings acquired Polands leading steel producer, now renamed Mittal Steel Poland.
Acquisition of Macedonian facilities from Balkan Steel
LNM Holdings bought hot and cold rolling mills in Skopje (now Mittal Steel Skopje).
Acquisition of Tepro renamed Mittal Steel Lasi
Acquisition of Petrotub Roman renamed Mittal Steel Roman
Acquisition of Siderurgica Hunedoara renamed Mittal Steel Hunedoara
Acquisition of BH Steel
LNM Holdings bought Bosnias BH Steel (now Mittal Steel Zenica).
Acquisition of Atansore iron ore mines in Kazakhstan
Acquired controlling stake in Iscor (now Mittal Steel South Africa)
Merger of Ispat International and LNM Holdings to form Mittal Steel
2005
CREATION OF MITTAL STEEL AND MERGER WITH INTERNATIONAL STEEL
Ispat International acquires LNM Holdings to form Mittal Steel. At the same time, Mittal Steel
announced the agreed merger with International Steel Group of the US, in a cash and shares deal
worth $4.5 billion to create the worlds largest steelmaker.
6.
The company maintains its liquidity primarily from cash generated from its operations and from working capital < TOP >
credit lines at its subsidiaries level. For the year 2004, its cash from operations increased from $1,438 in 2003 to
$4,611 in 2004 resulting in increased cash and cash equivalent to the tune of $2.6 billion in 2004 from $900 million
in 2003.
In March 2004, Ispat Inland ULC issued $800 million principal amount of senior secured notes, the entire proceeds
from this were used to retire the $661.5 million loan taken under a credit agreement in 1998 from a syndicate of
financial institutions and also to repay $105 million inventory revolving credit facility and the balance to repay
receivables revolving credit facility.
In June 2004, a 3-year revolving credit facility, secured by assets of certain subsidiaries, was availed from a consortium
of financial institutions to the aggregate of $400 million. In the same month the company was approved of $100 million
term facility with the International Financial Corporation.
With a total working capital limit of $589 million in America, $698 million in Europe and $827 million in the rest
of the world, as on December 31, 2004, the company has availed a credit of $181 million in America, $496 million
in Europe and $121 million in rest of the world (Exhibit 20) which implies an availability of approximately 45%
working capital limit for the future. The company has also entered into receivables factoring arrangement in Europe
to the tune of $144 million as on December 31, 2004
(in $ million)
Americas
Europe
Rest of World
As of
December
31, 2004
589
698
827
As of
December
31, 2003
569
161
92
As of
December
31, 2004
181
496
121
As of
December
31, 2004
372
124
20
As of
December
31, 2004
408
201
705
As of
December
31, 2003
197
37
72
This global scale operation gives rise to interest rate fluctuations and exchange rate risk exposures. The company
manages this risk through specific hedges. The company uses both fixed and variable rate debts and enters into swap
and collar contracts to finance and hedge interest rate exposures. The company does not deal or issue derivative
financial instruments.
To mitigate its foreign exchange exposure the company has established a control environment for risk assessment
and monitoring of derivative financial instruments. The estimated fair value of forward exchange contracts amount
to $120 million at December 31, 2003 and increased to $177 million at December 31, 2004. The company also
utilizes derivative commodity instruments to hedge exposures to fluctuations in the costs of natural gas and certain
nonferrous commodities. Futures and swaps contracts are entered into by US operating subsidiaries to manage
exposure. With counterparties of international repute the company does not consider the contracts as credit risk. The
company entered into contract to the tune of $6 million at December 31, 2003 and increased the contracts to the tune
of $109 million at December 31, 2004.
In 2004, the major risk factor for the European economy that affected the Steel industry in general was the rise of the
Euro. This threatened the export-led economy and the domestic demand for steel became weak.
7.
< TOP >

Cost of Production
Mittal Steel is one of the few companies which is vertically well integrated. It has acquired and owns coal and iron
ore mines, and a number of coal making facilities, engineering workshops and infrastructure facilities. This helps it
to strengthen and protect its sources of supply and at the same time insulate against increased cost of inputs. Its
strategy is to procure the raw materials at the lowest prices available, lowest cost ownership through aggregated
purchasing and supply chain optimization, cost advantage by exploiting global purchasing reach and leveraging on a
global scale the cost advantages.
A large proportion of the companys requirements for iron ore are fulfilled through its own captive mines and
through the long-term contracts. Its mines are located at Kazakhstan, the United States , Algeria and Mexico. The
company has entered into long-term contracts with iron ore mines in South Africa and iron ore suppliers in United
States. A smaller proportion is from contracts with International and local suppliers. Its principal suppliers are
Companhia Vale do Rio Doce and MineraAoes Brasileiras Reunidas S.A. in Brazil, Shougang Hierro Peru S.A. in
Peru, Corporacion Venezolana de Guyana in Venezuela and Quebec Cartier Mining Co. in Canada.
Minorca Mine, has an annual production capacity of 2.7 million tonnes which is a 100% owned subsidiary of
Ispat Inland. Empire Mine, has an annual production capacity of 6.3 million tonnes, which is a 21% owned
subsidiary of Ispat Inland.Ispat Inland has entered into a 12-year agreement with Cleveland-Cliffs as a
customer to its pellets from Empire Mine.
Consorcio Minero Benito Jurez Pea Colorada, S.A. de C.V. (Pea Colorada), is an iron ore mining and
pelletizing company. A 50% equity interest is held in the company by Ispat Mexicana. An expansion program is
being implemented (Joint venture) which is expected to increase the capacity of the company.
The company has entered into a long-term contract to purchases approximately 65% of Ispat Inlands coke
requirements from a supplier who constructed a heat recovery coke battery on land leased from Ispat Inland at
the Companys Indiana Harbor Works.
PCI Associates, has constructed a pulverized coal injection facility on land located within the Indiana Harbor Works.
Ispat Inland owns 50% interest in the company whose facility is adequate to serve the needs of Ispat Inland.
The company has its own transport arrangement. Mittal Shipping Limited provides ocean transportation to the
companys manufacturing subsidiaries and affiliates with its location at London, a principal hub of global shipping
business. In 2004, Mittal Shipping Limited arranged transport for 27 million tonnes of cargo. Ispat Mexicana holds
50% interest in Corporacion del Balsas, S.A. de C.V., which manages captive port facilities and 50% interest in
Servicios Siderrgicos Integrados, S.A. de C.V., which provides various products such as industrial gas and services
to Imexsa and a 50% interest in Cal del Balsas, S.A. de C.V.

Further, most of the companys manufacturing plants have their own deep water port facilities, railway sidings, large
engineering workshops, oxygen, lime, water treatment plants and research and development laboratories. With a
total working capital limit of $589 million in America, $698 million in Europe and $827 million in the rest of the
world, as on December 31, 2004, the company has availed a credit of $181 million in America, $496 million in
Europe and $121 million in rest of the world, which implies an availability of approximately 45% working capital
limit for the future. The company has also entered into receivables factoring arrangement in Europe to the tune of
$144 million as on December 31, 2004
Operating in mini-mills, integrated mini-mills and blast furnace processes for steel making the company adopts the
DRI-EAF-CCM route (Direct Reduced Iron Electric Arc Furnace Continuous Casting Method). It is the worlds
largest producer and captive consumer of DRI.
On the inputs front, in spite of tightened markets for key raw materials the company has been able to procure
sufficient supply of raw material to meet its production needs. It procures raw material under contracts that are shortterm (subject to price negotiations). The company is one of the worlds largest producers of DRI an input which is
essential to ensure uniform high quality of the finished goods. DRI is a cost effective substitute to scrap.
Operating Strategy
with focus on improved management practices, capital expenditure programs, resulting in improved productivity and
shipment of steel products. Its shipments grew from 1.5 million tonnes in 1992 to 42.1 million tonnes in 2004.
Mittal Steel is recognized for high degree in both product diversification and geographical diversification. Its
products include hot-rolled sheets, cold-rolled sheets, electro-galvanized and coated steel, bars, wire-rods, wireproducts, pipes, billets, blooms and other technically specified products which are sold for high-ended applications.
Its operations are geographically diversified with 47% of its presence in North America, 32% in Europe and the
balance in the rest of the world.
8.
A review of Dow Jones Steel sector index has indicated that the steel sector has been under pressure lately. While < TOP >
steel companies generally trade at low PE multiples, Mittal steel has a current P/E of 4.13 when compared to
industry P/E ratio of 7.98. The examining of cash flow reveals that Mittal steel sells at 3.19 x cash flow whereas
industry shares sell at 6.02 x cash flow.
P/E Ratio (TTM)
4.13
7.98
Price to Sales (TTM)
0.66
0.75
Price to Book (MRQ)
1.74
2.15
The company stock has been among the best performers over the couple of years with Market capitalization of $18.5
billion when compared with Nippon and JFE with $15.4 billion and Posco with $12.8 billion. The earnings per share
of the company as on September 30, 2005 stood at $4.034 as against the approximately $ 4.808 for the three months
ended September 30, 2004.
9.
World steel making capacity is expected to continue to increase for the next few years from 2005 to 2008 as per < TOP >
OECD estimates principally due to the developments taking place in China. More than half of the world crude steel
making capacity is expected to arise in the Asia-Oceanic region. Also the industry expects more cross border tie-ups
in the coming years. However, the projected steel capacity increases are more than the projected steel demand
resulting in structural problems by 2008. The steel industry is projected to grow at a rate of 14.8 percent between
2005 and 2008. OECD paper estimates that the demand for steel would increase steadily over the next four years
however not spectacularly resulting in over capacity.
With the merger with International Steel Group Inc., Mittal Steel has become the largest and profitable company in
the World, with operations in 14 countries located in four continents. Under the agreement ISG shareholders receive
$21 per share in cash and shares to the value of $21 based on the average closing price of Mittal Steel up to a
maximum of 0.6087 shares. It is expected that the market conditions for Mittal Steels products will be favorable
and shipments would increase over the next two years primarily due to recent acquisitions and mergers. The
companys merger with ISG puts it in a strong position with respect to key input materials such as coke, coal and
iron ore and also in stronger position in key end sectors. ISG is one of the leading integrated steel producers in North
America.
But steel companies are susceptible to changes in governmental, political and economic developments. With Mittal
Steel operating in many countries it is subject to economic risks and uncertainties, which may have adverse impact
in case of deterioration or disruption of the economic environment of such countries.
The surging of steel markets has resulted in physical shortages for key raw materials like coke, coal, iron ore and
scrap. Any prolonged interruption in the raw material supply or increase in their costs could adversely affect its
business, financial condition and results of its operations. Also in 2004 the industry was caught up in logistical
problems due to the hike in freight rates and port congestions leading to a disruption in supply chains.
< TOP OF THE DOCUMENT >

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Integrated Case Studies IV (362) : October 2006

Read the case carefully and answer the following questions:

Perform SWOT analysis of Mittal Steel.

< Answer >

< Answer >

< Answer >

every aspect of our business.

WORLD CRUDE STEEL

1998 World Crude Steel Production 777 Miot

World AC 933 Miot in

Source: OECD, Unpublished Data.

10 Largest Producers of Crude Steel

Share of world production

Source: IISI Mittal Steel.

APARTMENT CONSUMPTION FINISHED STEEL CHINA

MILLION METRIC TON

74 78 82 86 90 94 98 102106110 114 118 120124128132136140144

Apartment Consumption 1980 = 33 Miot

Exhibit 10: Mittal Steel Network

(100% owned by LNM)

(82% owned by LNM Group)

Ispat Nova Hut (Czech Republic)

Ispat Unimetal (France)

Ispat Sidex (Romania)

Ispat International (Britain)

Ispat Karmet (Kazakhstan)

Ispat Sidbec (Canada)

Ispat Annaba (Algeria)

Caribbean Ispat (Trinidad)

PT Ispat Indo (Indonesia)

Ispat Inland (US)

Source: ICFAI Research Team.

Ispat Mittal Mittal

Former Name of Subsidiary

Ispat Annaba Spa (Ispat Annaba)

Current/Contemplated New Name of

S.C. Siderurgica S.A.

Mittal Steel Hunedoara S.A.

Scrap require row

In 2003, Ispat International produced DRI to the tune of 7.2 million.

Mittal Steel Class A

Mittal Steel Class B

Total Common Shares

Long-term debt obligations

Dividend Yield - 5 Year Avg.

Dividend 5 Year Growth Rate

Payout Ratio (TTM)

resulting in over capacity (Exhibit 30).

Source: www.oecd.org; Unpublished Data.

Com Incl. Extraordinary

DPS Common Stock Primary Issue

Capital Lease Obligations

1 Share(s) Per ADR

Net Income/Starting Line

Changes in Working Capital

Cash from Operating Activities

Other Investing Cash Flow Items, Total

Cash from Investing Activities

Financing Cash Flow Items

Total Cash Dividends Paid

Issuance (Retirement) of Stock, Net

Issuance (Retirement) of Debt, Net