FCFE Analysis Tata Steel Limited

A Report on FCFE analysis of

Tata Steel Limited

By Jobin Jose (1021357) 2nd year MBA M

Submitted on 17/08/11

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FCFE Analysis Tata Steel Limited

An overview of the company

Tata Steel is Asias first integrated private sector steel producer with consolidated turnover of Rs.102,393 crores during the year ended March 31st, 2010. TATA Steel has been ranked at the top of the Nielsens corporate image monitor study followed by TATA Motors. The worlds most admirable companies 2011, published by Fortune Magazine, ranks TATA steel on 6 position in metal industry category.
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Tata Steel, formerly known as TISCO (Tata Iron and Steel Company limited), is the worlds seventh largest steel company, with an annual crude steel capacity of 30 Million Tones Per Annum (MTPA). It is the second largest private sector steel company in India in terms of domestic production. Ranked 315th on Fortune Global 500, it is based in Jamshedpur, Jharkhand, India. Tata Steels main plant is located at Jamshedpur in Jharkhand. With its acquisition of the Corus, Nat Steel and Millennium Steel it has become a multinational company with operations in various countries. Tata Steel has a balanced global presence in over 50 developed European and fast growing Asian markets, with manufacturing units in 26 countries. It is the worlds second most geographically diversified steel producer. Also it is the worlds lowest cost producer of steel with shareholder base of 800,000 people and employee strength over 81,000 across 5 continents. The registered office of Tata Steel is in Mumbai. The company is listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Tata Steel is backed by 100 glorious years of experience in steel making with its establishment in 1907.

Consolidated Financial Highlights 2009-10

Turnover
160,000.00 140,000.00 120,000.00 100,000.00 80,000.00 60,000.00 40,000.00 20,000.00 FY 08 FY 09 FY 10 FY 11 131,534.00 118,753.00 102,393.00 147,329.00

(Rs in crores, Source Annual report of the company) Page 2

FCFE Analysis Tata Steel Limited

EBITDA
25,000.00 19,495.00 20,000.00 18,273.00 15,000.00 10,000.00 5,000.00 FY 08 FY 09 FY 10 FY 11 9,340.00 17,103.00 14,000 12,000 10,000 8,000 6,000 4,000 2,000 (2,000) (4,000) FY 08 12,350

Profit After Tax

8,983 4,951

(2,009) FY 09 FY 10 FY 11

EBITDA Margin
16% 14% 12% 10% 8% 6% 4% 2% 0% FY 08 FY 09 FY 10 FY 11 5% 0% 10% 9% 14% 13% 14% 25% 20% 15%

Return on Invested Capital

FY 08

FY 09

FY 10

FY 11

(Source Annual report of the company)

Performance of Tata Steel in NSE during 2010-11

800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 0.00

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FCFE Analysis Tata Steel Limited

FCFE Analysis of Tata Steel Cash flows for FY 2007-2011

Cash flow from Operating activities

TATA STEEL
RS. Cr 1 A. CASH FLOW FROM OPERATIONS Net Profit Before Tax Depreciation Profit/Loss on sale of assets Profit/Loss on sale of other investments 6261.65 819.29 -11.19 -15.63 2007 2

CASH FLOWS 2008 3 2009 4 2010 5 2011

7066.36 834.61 -28.26 -0.03 -124.30 -142.53 -88.42 929.03 226.18 -743.60 209.00 1071.68 8138.04 176.36 8314.40 -2060.20 0.00 6254.20

7315.61 973.40 6.43 -186.46 -26.62 -336.91 -101.62 1489.50 222.34 67.91 33.71 2141.68 9457.29 737.29 10194.58 -2797.56 0.00 7397.02

7214.30 1083.18 -7.75 -628.39 31.03 -339.79 -248.68 1848.19 0.00 11.13 86.12 1835.04 9049.34 1399.37 10448.71 -2079.49 0.00 8369.22

9776.85 1146.19 0.62 -648.09 -50.54 -385.78 -92.66 1686.27 0.00 -275.05 70.94 1451.90 11228.75 184.25 11413.00 -2870.28 0.00 8542.72

Gain/Loss on cancellation of forwards/Swaps/Options -82.69 Interest and Income form current investments Income from other investments Interest charged to P&L A/c -401.41 0.00 251.25

Amortisation of employee separation compensation 152.10 Exchange Gain/Loss on revaluation of foreign currency loans -222.10 Others Total 72.29 561.91

Operating Profi t before Working Capital Changes 6823.56 Change in Working Capital Cash Generated from Operations Direct Taxes paid Employee Separation Compensation paid Net Cash from Operating Activities 331.88 7155.44 -2034.59 -224.85 4896.00

(Source Annual report of the company)

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FCFE Analysis Tata Steel Limited Cash flow from investing activities
TATA STEEL
RS. Cr 2007 1 2 CASH FLOWS 2008 2009 3 4 2010 2011 5

B. CASH FLOW FROM INVESTING ACTIVITIES Purchase of fi xed assets Sale of fi xed assets Purchase of investments -2,009.58 17.85 -2,458.97 63.88 -2,786.29 15.18 -2,102.04 78.34 -4,321.85 387.42

-18,306.13 -31,605.12 -59,903.25 -189,929.81 -97,469.30 -4,439.80 -5,811.84 -5,312.05

Purchase of investments in Subsidiaries -118.17 -29,587.40 Sale of investments

14,623.48 34,110.46 57,181.61 192,326.96 96,878.80 -85.80 90.73 312.12 101.62 -9,428.08 -121.68 56.55 248.68 -3,707.39 163.58 92.66

Inter-corporate deposits/Shareholder Loan (net) -20.00

Interest and income from current investments received 58.89 155.95 Dividend received Net Cash used in Investing Activities 324.16 88.42

-5,429.50 -29,318.58

-5,254.84 -13,288.13

(Source Annual report of the company)

Cash flow from financing activities

TATA STEEL
RS. Cr 2007 1 2 CASH FLOWS 2008 2009 3 4 2010 2011 5

C. CASH FLOW FROM FINANCING ACTIVITIES Issue of Equity Capital 1393.20 4881.45 0.25 0.14 0.00 0.00 0.00 6494.43 -894.39 2421.50 0.00 0.00 1.76 0.00 6457.36 -7047.78 -30.82 -278.79 -1678.44 -1317.92 4368.01 0.00 178.20 0.33 1500.00 6412.04 -4257.64 34.61 -264.84 -1609.95 -707.95

Issue of Cumulative Convertible Preference Shares 0.00 5472.52 Issue of Share Warrants Capital contribution received 147.06 5.59 0.00 0.00 0.00 17632.70

Proceeds from Hybrid Perpetual Securities 0.00 Proceeds from borrowings Repayment of borrowings 8043.69

-692.31 -10386.61

Amount received/(paid) on cancellation 93.65 of forwards/swaps/options 134.41 -10.17 Long term loan expenses Interest paid Dividend paid Net Cash from Financing Activities -118.88 -227.85 -717.69 -202.38 -746.07 -937.95 -32.51 -1213.96 -1187.37

7926.46

15848.07

3156.42

-1473.13

5652.81

(Source Annual report of the company) Page 5

FCFE Analysis Tata Steel Limited Net Cash flow

TATA STEEL
RS. Cr Net increase/(decrease) in Cash or Cash equivalents (A+B+C) 2007 1 2

CASH FLOWS 2008 2009 3 4 2010 2011 5

3282.03 -22697.95

-2430.55

-1380.34

1066.96

(Source Annual report of the company)

Projected Cash flows

TATA STEEL
RS. Cr CAGR A. CASH FLOW FROM OPERATIONS B. CASH FLOW FROM INVESTING ACTIVITIES C. CASH FLOW FROM FINANCING ACTIVITIES Net increase/(decrease) in Cash or Cash equivalents (A+B+C) Terminal Value Discounted Cash Flows PV of Terminal value 1 2012 2 PROJECTED CASH FLOWS 2013 3 2014 4 2015 5 2016

11.78% -6.54% -34.27%

9548.76 5283.25 596.48 563.86

10673.28 4937.86 392.09 350.39

11930.24 4615.04 257.74 217.73

13335.21 4313.33 169.43 135.30

14905.65 4031.34 111.37 14908.39 84.08 11254.40

19.60% -15892.96 -19008.40

-22734.55 -27191.12 -32521.30

Calculation of WACC

Cost of Equity Rf

10.37% 8.00% 0.79 11.00%

Repo Rate Equity Capital Cost of Equity Debt Post Tax Cost of Debt Total Capital WACC Terminal Growth Rate

8.00% 1137.61 10.37% 28301.14 5.60% 29438.75 5.78% 5.00%

Beta Mkt.Ret

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FCFE Analysis Tata Steel Limited Value of the company

The Valuation

PV of FCFE during growth phase PV of Terminal Value Value of Operating Assets of the firm Value of Non-operating assets Value of Equity Number of shares issued Value of Equity per share

1351.36 11254.40 12605.76 7689.52 20295.28 95.92 211.59

Interpretation
Price per share of the company Value of the equity per share as per FCFE analysis Price per share as on 31/03/2011 Price per share as on 16/03/2011 - Rs. 211.59 - Rs. 622.25 - Rs. 469.00

It has been observed from the analysis that the share price of the company is highly over valued compared to the intrinsic value of the company. It can be because of brand value of the company and another factors like investor sentiments and over all performance of capital markets and economy. But, from 01/04/2011, share price is coming down and it stands at Rs 469 per share as on 16/08/2011. It supports FCFE analysis has been done. Cash flows 1. Operating Activities Cash inflow from operating activities has a Compound Annual Growth Rate (CAGR) of 11.78% which is a good growth rate. Also during FY 2011, Net Profit Before Tax (PBT) has been increased to Rs. 9,776.85 Cr which was Rs. 7,214.30 Cr during previous year. Returns from current and other investments showing negative values of outflows for last five financial years. It shows that the company is not utilizing or managing its investments. Foreign currency transactions of the company are showing losses for FYs 2007, 2008 and 2011. It shows that company is susceptible to fluctuations in currency prices. 2. Investing Activities
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FCFE Analysis Tata Steel Limited It has been observed that cash out flow from investment activity is very high and it is increasing each year. The out flow has increased form Rs. 5,429.50 Cr during FY 2007 to Rs. 13,288 Cr during FY 2011. Amount spent for Purchase of investments is very high which explains that the company is in an expansion mode. During FY 2010, Tata steel spent Rs. 189,929 Cr for purchase of investments. Another abnormal change observed is in purchase of investments in subsidiaries in FY 2008. The company has spent Rs. 29,587 Cr during this period. This amount was spent for the acquisition of Corus. Connecting inflow from operating activities and out flow from investing activities shows that the investments are high and the company is not producing profits from these investments. These are long term investments and it is expected that the company will make returns on these investments. 3. Financing Activities The company raised new equity funds during past five years. The new equity has been raised to fund its expansion activities in plants and to meet acquisition expenses. Preference share of Rs. 5,472 Cr was issued in FY 2008 to meet its fund requirements for acquisition of Corus. Because of its obligation to pay back its borrowings, inflow from financing activities is less and in showing a CAGR of -6%.

Major Findings
FCFE value of the company is Rs. 211.59 Price per share as of 31/03/2011 was Rs. 622.25 which shows the confidence investors had on the company Price per share is coming down after 31/03/2011 Beta of the company is 0.79 The company is on expansion mode and its outflow in investment activities is very high. The companys investments have not created an inflow for last five years.

Bibliography
http://www.tatasteel.com http://economictimes.indiatimes.com http://www.nseindia.com/ Prowess

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