Professional Documents
Culture Documents
TATA STEEL
SUBMITED BY:Angad Singh Kalra Nidhi Sharma Reema Kharbanda Sahil Kukreja Shubham Jain Sumit Gugnani
ACKNOWLEDGEMENT
It is indeed a matter of great pleasure and proud privilege to be able to present this project report on TATA STEEL
The completion of the project work is a milestone in student life and its execution is inevitable in the hands of guide. We are highly indebted to Prof. Nand Dhameja for his invaluable guidance and appreciation for giving form and substance to this report. It is due to his enduring efforts, patience and enthusiasm which has given a sense of direction and purposefulness to this project and ultimately made it a success.
We would wish to thank the non teaching staff and our friends who have helped us all the time in one way or other. Really it is highly impossible to repay the debt of all the people who have directly or indirectly helped us for performing the project.
PREFACE
We take an opportunity to present this project report on TATA STEEL and put before readers some useful information regarding our project.
We have made sincere efforts and have taken care to present this matter in precise and compact form, the language being as simple as possible.
We are sure that the information contained in this volume would certainly prove useful for better insight in the scope and dimension of this project in its true perspective.
The task of completion of the project though been difficult was made quite simple, interesting and successful due to deep involvement and complete dedication of our group members.
TABLE OF CONTENTS
A.Objective B. Introduction
C.Definitions
D.Cost of equity
OBJECTIVE
Collect the following data for the past 10 yrs for a listed company (TATA STEEL) including sensex: a) EPS b) DPS c) Book value per share d) Avg. market value per share (avg. of high and low during a year)
From this data, a) Calculate growth rate and payout ratio. b) Using the dividend growth model, determine the firms cost of equity. c) Ascertain the companys latest beta and cost of equity using CAPM.
Further collect the information about the companys debt and interest rate and calculate the weighted average cost of capital.
History
Tata Steel was established by Indian Parsi businessman Jamshetji Nusserwanji Tata in 1907 (he died in 1904, before the project was completed). Tata Steel introduced an 8-hour work day as early as in 1912 when only a 12-hour work day was the legal requirement in Britain. It introduced leave-with-pay in 1920, a practice that became legally binding upon employers in India only in 1945. Similarly, Tata Steel started a Provident Fund for its employees as early as in 1920, which became a law for all employers under the Provident Fund Act only in 1952. Tata Steel's furnaces have never been disrupted on account of a labour strike and this is an enviable record.
Capacity Expansion
Tata Steel has set an ambitious target to achieve a capacity of 100 million tonne by 2015. Managing Director B. Muthuraman stated that of the 100 million tonne, Tata Steel is planning a 50-50 balance between Greenfield facilities and acquisitions. Overseas acquisitions have already added up to 21.4 million tonne, which includes Corus production at 18.2 million tonne, Natsteel production at two million tonne and Millennium Steel production at 1.2 million tonne. Tata is looking to add another 29 million tonnes through the acquisition route. Tata Steel has lined up a series of greenfield projects in India and outside which includes 6 million tonne plant in Orissa (India) 6.8 million tonne in Jharkhand (India)(2.9 million tonne will be added by dec, 2011) 5 million tonne in Chhattisgarh (India) 3-million tonne plant in Iran 2.4-million tonne plant in Bangladesh 5 million tonne capacity expansion at Jamshedpur (India) 4.5 million tonne plant in Vietnam (feasibility studies underway)
Acquisitions
On 20 October 2006, TISCO signed a deal with Anglo-Dutch company, Corus On 19 November 2006, the Brazilian steel company Companhia Siderrgica Nacional (CSN) launched a counter offer for Corus at 475 pence per share, valuing it at 4.5billion. On 11 December 2006, Tata preemptively upped the offer to 500 pence, which was within hours trumped by CSN's offer of 515 pence per share, valuing the deal at 4.9 billion. The Corus board promptly recommended both the revised offers to its shareholders. On 31 January 2007 Tata Steel won their bid for Corus after offering 608 pence per share, valuing Corus at 6.7 billion.
In August 2004, Tata Steel entered into definitive agreements with Singapore based NatSteel Ltd to acquire its steel business for Singapore $486.4 million (approximately Rs 1,313 crore) in an all cash transaction. In 2005, Tata Steel acquired 40% Stake in Millennium Steel in Thailand for $130 million (approx. Rs 600 crore). In 2007 Tata Steel through its wholly owned Singapore subsidiary, NatSteel Asia Pte Ltd acquired controlling stake in two rolling mills: SSE Steel Ltd, Vinausteel Ltd located in Vietnam.
Controversies
The company is facing increasing criticism that the drive for growth and profits is completely overshadowing its once famed philanthropy, and causing lasting social and environmental damage at various locations. In response, Tata cites its programs for environment and resource conservation, including reduction in greenhouse emission, raw materials and water consumption. The company has increased waste re-use and re-cycling, and reclaims land at its captive mines and collieries through forestation. Tata Steel's chief, environment and occupational health, says, "Our capital investment in pollution-abatement solutions was in the vicinity of Rs 400 crore in 2003-04.
Dhamra Port
The Dhamra Port, a Joint Venture between Larsen & Toubro and Tata Steel, has come in for criticism from groups such as Greenpeace, Wildlife Protection Society of India and the Orissa Traditional Fishworkers' Union. The port is being built within five kilometres of the Bhitarkanika National Park, a Ramsar wetland of international importance, home to an impressive diversity of mangrove species, saltwater crocodiles and an array of avian species. The port will also be approximately 15 km. from the turtle nesting of Gahirmatha Beach, and turtles are also found immediately adjoining the port site. Aside from potential impacts on nesting and feeding grounds of the turtles, the mudflats of the port site itself are breeding grounds for horseshoe crabs as well as rare species of reptiles and amphibians. One such species, the amphibian Fejervarya cancrivora, is the first record for the Indian mainland.
Definitions
Earnings per share (EPS)
The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Calculated as: E S S A T
When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
Market value
Market value of an asset or security is the current price at which the asset or the security is being sold or bought in the market. Market value per share is expected to be higher than the book value per share for profitable, growing firms.
Growth rate
The amount of increase that a specific variable has gained within a specific period and context. For investors, this typically represents the compounded annualized rate of growth of a company's revenues, earnings, dividends and even macro concepts - such as the economy as a whole. For example, the auto industry has higher rates of revenue growth during good economic times. However, in times of recession, consumers would be more inclined to be frugal and not spend disposable income on a new car.
Payout ratio
The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings. Calculated as: E D S E S
Cost of equity
In financial theory, the return that stockholders require for a company. The traditional formula for cost of equity (COE) is the dividend capitalization model: C E D C V S D
A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership. The capital asset pricing model (CAPM) is another method used to determine cost of equity.
Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V=E+D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using the formula: NPV = Present Value (PV) of the Cash Flows discounted at WACC.
Beta
Beta is a measure of the systematic, non-diversifiable risk of an investment. The beta coefficient of a security, fund, or portfolio represents its market sensitivity, relative to a given market index and time period.
Where: ra = rate of return of the asset rp = rate of return of the portfolio Cov (ra,rp) = the covariance between the rates of return.
The portfolio of interest in the CAPM formulation is the market portfolio that contains all risky assets, and so the rp terms in the formula are replaced by rm, the rate of return of the market.
COST OF CAPITAL
The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds (both debt and equity), or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities". It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. Significance of cost of capital The acceptance criterion in capital budgeting (in NPV, as a discounting factor and in IRR it is used as a cut off rate to compare with) The determinant of optimum capital mix in capital structure decision (ie., the mix that minimizes the overall cost of capital) A basis for evaluating the financial performance (ie., Economic value added = capital employed (ROI cost of capital) ) A basis for taking other financial decisions (dividend policy, making rights issue , working capital decisions)
COST OF CAPITAL
A. OVERVIEW Definition: Cost of capital refers to the rate of return a firm must earn on its investment projects to increase the market value of its common shares required by market suppliers of capital to attract funds to the firm
Notes: If project rate of return > cost of capital value of firm increases If project rate of return < cost of capital value of firm decreases Goal: minimize cost of capital
Assumptions: 1. Business risk (not able to cover operating costs) is unchanged 2. Financial risk (not able to cover financial obligations) is unchanged 3. Cost of capital is measured on an after-tax basis
kl rl b p f p
Basic equation:
Ways to evaluate the basic equation: 1. Time-series: historic cost of capital 2. Compare with other firms (cross-section)
Example 1 (Time-series) Firm A had a cost of long-term debt 2 years ago of 8%. Risk-free cost of longterm debt is 4%. Business risk premium is 2%, and financial risk premium is 2%. What is the cost of long-term capital of the firm when the current riskfree cost of long-term debt is 6%?
Example 2 (Cross-section comparison) Firm B is in the same business and with a financial premium of 4%. The cost of capital of firm B is higher than that of firm A by 2 %.
For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. If a project is of similar risk to a company's average business activities it is reasonable to use the company's average cost of capital as a basis for the evaluation. A company's securities typically include both debt and equity, one must therefore calculate both the cost of debt and the cost of equity to determine a company's cost of capital.
The cost
of interest paid. In practice, the interest-rate paid by the company can be modeled as the risk-free rate plus a risk component (risk premium), which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous (not linked to the company's activities).
The cost
return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments (comparable) with similar risk profiles to determine the "market" cost of equity. It is commonly equated using the CAPM formula (below), although articles such as Stulz 1995 question the validity of using a local CAPM versus an international CAPM- also considering whether markets are fully integrated or segmented (if fully integrated, there would be no need for a local CAPM).
The cost
shareholders to compensate for waiting for their returns, and for bearing some risk. The return consists both of dividend and capital gains, e.g. increases in the share price. The returns are expected future returns, not historical returns, and so the returns on equity can be expressed as the anticipated dividends on the shares every year in perpetuity.
Ke = Rf + (Rm - Rf j
Year
Beta Risk free rate (Rf) Market Premium rate (Rm) Cost of equity (ke)
2010
1.51 7.81 14.32
24.28
198.4
-136
91.8
90.3
The preference share may be treated as a perpetual security if it is irredeemable Thus, its cost is given by following equation:-
K p = D p / P0 ( 1 - f )
Where kp = Cost of Preference Capital d = Constant Annual Dividend Payment P0 = Expected Sales Price of Preference Shares F = Flotation Costs as a percentage of Sales
Cost of Debt
The cost of debt is the rate of interest actually paid by the company to the parties which provide the capital to the company in lieu of a fixed return to them. So it is the effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen most often. This is one part of the company's capital structure, which also includes the cost of equity. A company will use various bonds, loans and other forms of debt, so this measure is useful for giving an idea as to the overall rate being paid by the company to use debt financing. The measure can also give investors an idea as to the riskiness of the company compared to others, because riskier companies generally have a higher cost of debt. The following tables show the calculation for cost of debt .
YEAR
total debt total equity d/v e/v Interest Rate of Interest(Rd)
2010
25,239.20 37168.75 0.404423 0.595577 1,848.19 0.07
2009
2008
2007
2006
26,946.18 18,021.69 9,645.33 2,516.15 29704.6 27300.73 14096.15 9755.3 0.475654 0.397633004 0.406265 0.205041 0.524346 0.602366996 0.593735 0.794959 1,489.50 929.03 251.25 168.44 0.06 0.05 0.03 0.07
WACC
In the last three subsections, the cost of each contributing part is calculated. In this section, the proportion of each part to the total, i.e., the weight of each part will be calculated and each will be multiplied with the respective costs to get the final WACC. The discount rate to be used for the cash flows must be chosen in a manner that reflects the aspirations of all categories of capital suppliers.The two broad kinds of suppliers of capital to a firm are (i) those who lend funds and expect a fixed return irrespective of success or failure of project and
(ii) those who are willing to merge their fortunes with the performance of the project ,expecting high returns ,if profits permit and sacrifice returns if the project does not succeed.
Weighted average cost of capital ,WACC will be one single number that will take into account ,the expectations of all suppliers of capital .This may be used as a hurdle rate that must be overcome if the project is to be accepted. Crossing of this hurdle rate will imply that all capital suppliers are satisfied with by the benefits of the project . In order to develop a single number ,we need to consider the cost of suppliers of all kinds of capital ,individually .Depending upon the proportions of each kind of
capital ,individually .Depending upon the proportions of each kind of capital,a weighted average may be found .Mathematically ,this can be represented as
2009
2008
2007
2006
The bar graphs show the value of WACC for three different firm for a period of five years. All the three graphs follow the same trend with a negative value for the year 2008. This is mainly due to recession. For the TATA steel, there is an increase in the interest rate for the year 2010. This is due to the increase of equity for TATA steel and thus debtors depends higher interest rate for debt confirming the corporate theory. The cost of equity is negative during the recession period but assuming that WACC cannot be negative, the value taken will be zero. Also we can see that the value of WACC increases to a large extent after recession period. Generally the WACC needs to come down as interest rates have reduced the WACC of companies. On the other hand, the spates of corporate disasters like those at Enron and WorldCom have increased the perceived risk of equity investments
cash and cash equivalents in excess of 10,890 crores (US $2.4 billion) at the end of the financial year 2010-11.
Year 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002
EPS 71.58 56.37 69.7 63.85 72.74 63.35 62.77 47.33 27.53 5.52
DPS 12 8 16 16 15.5 13 13 10 8 4
Book Value per share 487.55 416.6 336.69 296.65 236.81 171.68 123.67 118.16 85.58 66.8
Avg Market Value per share 552.8 592.82 388.12 549.17 723.9 510.17 387.77 348.82 285.5 118.75
TATA
1% 0%
37%
Equity share capital 58% Preference share capital Reserves & surplus Secured loans
4%
Unsecured loans
COMPARISON OF BETA:
COMPANY
TATA STEEL SAIL JSPL
2010
2.53 1.84 1.72
2009
2.58 1.91 2.07
2008
2.38 1.87 2.38
2007
2.14 1.62 1.51
2006
2.12 1.61 1.29
The above table shows the beta was higher during the recession period and is quite lesser for the government owned entity i.e. SAIL.
COMPARISON AMONG THE PEER COMPANIES OF THE LONG TERM DEBT/ EQUITY:
Long term debt/Equity
4 3.5 3 2.5 2 1.5 1 0.5 0 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 TATA STEEL SAIL JINDAL STEEL BHUSHAN STEEL
REFERENCES
1 2
http://www.bseindia.com/about/abindices/betavalues.a sp http://www.tatasteel.com/investors/annual-report2010-11/html/financial-highlights.html
http://www.tatasteel.com/investors/annual-report2010-11/html/awards-recognition.html