Emerging Challenges of the Finance Function

The key imperative of a world class finance function is to achieve a meaningful balance of its trusteeship role in implementing effective controls and to act as a steward of the company’s capital toward efficient allocation for execution of long term strategies.

The primary responsibility of a world class finance function is to achieve a meaningful balance of its trusteeship role in the oversight and implementation of effective controls as also to act as a steward of the company’s capital towards efficient asset allocation for the long term growth of the organisation. As the centres of economic activity become more distributed around the globe for an emerging market multinational like the Tata Steel Group, the organisation re-orients its priorities taking into account the diversity across borders, cultures, regulatory environments and time zones. To meet these challenges, the finance function in the Tata Steel Group focuses on a value centered strategy to align its capabilities and resources most effectively with the needs of the business. This alignment is critical to enable the Company to pursue the path set by the Tata Steel Group Vision 2012 which aims to deliver significantly higher Return on Invested Capital (ROIC) to its shareholders over the next 5 years. The incremental ROIC would be generated from better margins from the existing assets through the performance improvement programmes that are currently underway, sweating of the existing capital employed in the business and efficient asset deployment in the new growth projects across the Group.

The year 2007-08 has been a historic year for Tata Steel in many ways. It was the centenary year of the company which marks a very important milestone in the company’s history and we are very proud to be part of this great institution. The year also marked the completion of the Corus acquisition process on April 2, 2007 which till date is the largest transaction by an Indian company.

During the year, the Company completed the long term financing programme for the Corus acquisition. Of the total Enterprise Value of USD 14.2 billion, at the close of the Corus acquisition process on April 2, 2007, the financing included around USD 10.5 billion as bridge funding, the balance being applied out of Tata Steel’s own cash and borrowings. Despite very volatile credit markets globally, the company raised around USD 6.2 billion of term debt with an average life of around 5 years at very competitive terms. This debt being non - recourse in nature was determined based on the cash flow servicing capability of our European operations and will be serviced by the Tata Steel UK (Corus) cash flows. The syndication of the above debt was completed during the year with more than 25 banks and institutions participating in the process. On the equity side, Tata Steel raised around USD 2.27 billion (Rs. 9,120 crores) of equity and convertible preference shares on a rights basis. The Company further raised around USD 875 million in Convertible Alternate Reference Securities (CARS) which is a 5 years convertible instrument with a coupon of 1% and a conversion premium of 35% to the prevailing market price in August 2007. As a result of the above, your Company raised around USD 10 billion during the year and completed the long term financing for the Corus acquisition.

As recognition of the above, your Company won several international awards during the year for the Corus acquisition financing including the International Financing Review (IFR) Awards for the Asia Pacific Loan of the year and the Asia Pacific Leverage Loan of the year, Finance Asia award for the Best Deal of the year, AAA Asset Magazine’s award for the Best Corporate Issuer amongst others.

For the finance function of the Tata Steel Group, effective Performance Management and efficient Capital Stewardship are the key enablers towards building a sustainable value centric culture. Several initiatives are currently on towards enhancing the technology effectiveness of the function of which the SAP implementation in Corus UK and South East Asia and the Hyperion financial systems across the Group are prominent. These projects will improve the performance management process of the Company very significantly in the future.

The international financial markets have been very volatile for the last 12 months after the emergence of the sub prime crisis in the US in mid 2007. Considering the inflationary trends and general cautiousness on the economic outlook globally, the financial markets are expected to remain weak and tentative in the near term. With general re-appraisal of risk along with increased currency volatility and firming up of the interest rates, it is very likely that the liquidity constraints will continue in the near future.

In order to finance our planned capital expenditure, the Tata Steel Group continues to follow prudent financial practices of focusing on higher generation and conservation of internal capital, improvement in the working capital management and allocation of capital to value creating projects. Our brownfield expansions in India and the ongoing capital expenditure programmes globally are on track and the financing of the same are fundamentally premised on internal generations of the Group. The Company will consider raising external capital for the other growth projects as and when required based on the Company’s long term financing strategy which focuses on ensuring that the capital structure remains robust in the long term, the financing plan provides flexibility to the balance sheet for future needs and is earnings accretive in the long term.

Finally, I would like to take this opportunity to thank all the stakeholders of the Tata Steel Group for their association with the Company and look forward to their continued support and encouragement in the future.