Management Discussion and Analysis

3. Analysis of the Financial Performance of the Company

a) Net sales/Income from operations

Sale of products and services increased by 15% to Rs. 19,762.57 crores, mainly due to increase in volumes and prices of almost all products of the Company. Steel sales increased by 19% to Rs. 14,511 crores as compared to Rs. 12,220 crores in the previous year. Tubes sales increased by 48% to Rs. 1,276.30 crores. The Ferro Alloys and Minerals division sales increased by 16% to Rs. 1,522.71 crores. The Bearings division sales increased by 25% to Rs. 165.41 crores.

b) Purchase of finished and semi finished steel and other products

The purchase of finished and semi finished steel and other products were lower by 31% at Rs. 450.60 crores as compared to Rs. 656.08 crores in the previous year. The decrease is mainly on account of lower purchases of metallics during the year in view of increased production of hot metal.

c) Raw materials consumed

The raw materials consumed increased by 32% to Rs. 3,121.46 crores as compared to Rs. 2,368.30 crores in the previous year, mainly due to higher consumption of raw materials on account of increased production of saleable steel, and price of imported coal, zinc and imported coke.

d) Payments and Provisions to Employees

The staffcost increased by 8% to Rs. 1,454.83 crores as compared to Rs. 1,351.51 crores in the previous year. The increase is mainly due to annual increments, dearness allowance and consequential increase in provisions for gratuity and leave salaries. However, these increases were partly offset by reduction in the manpower by 977 from 38,182 as on 31st March, 2006 to 37,205 as on 31st March, 2007.

e) Stores Consumed and Repairs to Machinery

The stores consumed increased by 45% to Rs. 1,072.91 crores as compared to Rs. 737.74 crores in the previous year, mainly due to the increase in production and also due to higher purchases of bought out components. The repairs to machinery decreased by 6% to Rs. 587.18 crores as compared to Rs. 624.27 crores in the previous year, mainly due to reduction in the areas of Flat products and iron making stages of the Jamshedpur operations.

f) Conversion Charges

The Conversion charges increased by 16% to Rs. 745.16 crores as compared to Rs. 640.52 crores in the previous year, mainly due to the increase in the conversion charges in the Company’s Ferro Alloys and Minerals Division operations from chrome ore and manganese ore to ferro chrome, and silico manganese and ferro manganese, and also due to higher quantities of conversions of hot rolled coils to tinplate products.

g) Other Expenses

The other expenses increased by 12% to Rs. 838.22 crores as compared to Rs. 751.08 crores in the previous year, mainly due to increase in operations as well as due to higher bank charges incurred in connection with raising new loans during the year.

h) Freight and Handling Charges

The freight and handling charges increased by 11% to Rs. 1,117.45 crores as compared to Rs. 1,004.32 crores in the previous year, mainly due to increase in volume of sales of various products.

i) Interest

The net interest charges increased by 40% to Rs. 173.90 crores as compared to Rs. 124.51 crores in the previous year, mainly due to increase in interest on Forex loans, swap charges for hedging currency and interest rate risks and higher working capital loans.

j) Employee Separation Compensation

During the year, 440 employees were separated under the Employee Separation Scheme (ESS) of the Company, which resulted in increase in ESS charges by Rs. 11.92 crores. There has been a decrease in the ESS charge to the extent of Rs. 4.02 crores due to reduction in the number of old ESS cases. Further, due to the change in the interest rate considered for discounting the provision for employee separation compensation, there was a net charge of Rs. 91 crores as compared to the previous year.

k) Fixed Assets

Gross Block increased by Rs. 1,962.03 crores during the year, mainly due to capital expenditure incurred on the 1.8 million tonnes steel expansion project in Jamshedpur (Rs. 1,346 crores), completion of the 1 million tonne steel expansion project (Rs. 141 crores), commissioning of 4” Precision Tube Mill and 3” Commercial Tube Mill and other sustenance and minor capital schemes.

l) Investments

During the year, the Company invested in Tata BlueScope Steel Limited, Tata Steel (Thailand) Public Company Ltd., Natsteel Asia Holdings Pte. Ltd., The Dhamra Port Company Ltd., Rawmet Ferrous Industries Pvt. Ltd. The Company has liquid funds of Rs. 3,566.58 crores as on 31st March, 2007 as compared to Rs. 1,291.98 crores as on 31st March, 2006. The Company has ring-fenced Rs. 3,262.59 crores out of liquid funds as on 31st March, 2007 to provide cash confirmation in connection with the acquisition of Corus Group plc.

m) Stores and Spare Parts and Stock-in-Trade

The stores and spare parts and the stock-in-trade increased by Rs. 158.23 crores as on 31st March, 2007 as compared to 31st March, 2006. Stores and spare parts increased due to increased operations during the year as well as ongoing steel expansion project in Jamshedpur. Stock-in-trade increased by Rs. 95 crores as on 31st March, 2007 due to increase in finished and semi-finished stock by Rs. 82 crores and raw material inventory by Rs. 13 crores as compared to 31st March, 2006. Average inventory in terms of number of day sales marginally came to 42 days as compared to 43 days in the previous year.

n) Sundry Debtors

The increase is mainly on account of increase in turnover. Sundry debtors in terms of number of day sales came down to 11 days as compared to 12 days in the previous year.

o) Loans and Advances

Loans and advances increased by Rs. 1,820.87 crores from Rs. 1,234.86 crores as on 31st March, 2006 to Rs.3,055.73 crores as on 31st March, 2007, mainly due to advance of Rs. 1,516 crores for share application money to Tata Steel Asia Holdings Pte. Limited, an SPV for acquisition of shares of Corus Group plc and Rs. 162 crores to Hooghly Met Coke & Power Company Limited.

p) Current Liabilities

The current liabilities increased by Rs. 687.21 crores from Rs. 2,835.99 crores as on 31st March, 2006 to Rs. 3,523.20 crores as on 31st March, 2007 mainly due to increase of Rs. 278.23 crores towards capital supplies for the 1 million tonne and ongoing 1.8 million tonnes steel expansion projects in Jamshedpur and Rs. 255.00 crores towards wages and salaries.

q) Secured and Unsecured Loans

Secured and unsecured loans increased by Rs. 7,129.18 crores from Rs. 2,516.15 crores as on 31st March, 2006 to Rs. 9,645.33 crores as on 31st March, 2007 due to new syndicate foreign currency loans drawn for funding the acquisition of Corus Group plc. The Company has drawn foreign currency syndicate loans of Rs. 7,225 crores (USD 1.65 billion) during the year as per details given below:

1. JPY Syndicated External Commercial Borrowings of USD 495 million equivalent: Rs. 2,162.66 crores (unsecured loan)

2. External Commercial Borrowings of USD 5 million equivalent: Rs.21.77 crores (unsecured loan)

3. JPY Syndicated External Commercial Borrowings of USD 750 million equivalent: Rs. 3,298.88 crores (unsecured loan)

4. International Finance Corporation, Washington - A Loan USD 100 million equivalent: Rs. 435.35 crores (secured loan)

5. International Finance Corporation, Washington - B Loan USD 300 million equivalent: Rs. 1,306.05 crores (secured loan).


r) Appropriation

The Company has transferred Rs. 1,500 crores to the General Reserve during FY 2006-07 (FY 2005-06 : Rs. 1,500 crores).

s) Dividend

The Board of Directors of the Company have recommended a dividend @ 130% (Rs. 13 per share) for the year ended 31st March, 2007, and a special dividend @ 25% (Rs. 2.50 per share), subject to the approval of the shareholders at the Annual General Meeting. The dividend cash-outgo (including tax on dividend) would be Rs. 1,104.33 crores. The dividend payout as % of Net Profit works out to 26% as compared to 23% in the previous year. The dividend payout during the last 10 years is as illustrated below :

t) EVA

The Company in pursuance of its Vision to create value for its shareholders, has adopted the EVA based methodology for performance management and also for capital expenditure evaluation based on the recommendations of Stern Stewart & Co.

Economic Value Added (EVA) is defined as the excess of Return on Invested Capital (ROIC) over weighted average cost of Capital (WACC); viz

Return on Invested Capital (ROIC) = Net Operating Profit after Taxes but before interest costs (NOPAT)

Average Invested Capital

Weighted average cost of Capital (post tax) = Average Adjusted Equity * Cost of Equity (%) + Average debts
(including Prov. for ESS Compensation and deferred tax liability) *Cost of Debts (%)

Average Adjusted Equity + Average debts

The Cost of Equity is determined under the CAPM method while the cost of debt is based on the actual cost of borrowings.

The EVA spread was 22.23% as compared to 23.54% in the previous year. The calculation of EVA spread is as follows:

The Company generated EVA of Rs. 2,707 crores as compared to Rs. 2,324 crores in the previous year. The Return on Invested Capital was 32.64%. The Net Operating Profit after Tax (NOPAT) to Sales was 20.11% as compared to 20.15% in the previous year. Net operating profit after tax increased by 15% but the average capital employed increased by 23% in FY 2006-07.

The weighted average cost of capital decreased to 10.41% as compared to 11.45% for the previous year due to increase in proportion of debt in the total capital employed and reduction in the average cost of debt.

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