Management Discussion and Analysis 2013-14
6. TM International Logistics Limited
| in Rs.crores | ||
| FY 14 | FY 13 | |
| Turnover | 1,088 | 1,047 |
| Profit/(loss) before tax (PBT) | 47 | 65 |
| Profit/(loss) after tax (PAT) | 36 | 53 |
TM International Logistics Limited (TMILL) and its subsidiaries offer logistic services spanning port-based services, shipping, freight forwarding and marine services.
During Financial Year 2013-14, TMILL added a new line of service to cater to the requirement for coastal liner services along the west coast of India. The shipping business arm of TMILL crossed a milestone by handling 8.7 million tonnes of cargo during Financial Year 2013-14, exceeding its previous best of 7.9 million tonnes in Financial Year 2012-13.
However even as the higher tonnage resulted in an increase of 4% in turnover over the previous Financial Year 2012-13, TMILL experienced a 28% reduction in profit before tax over previous year, mainly due to decline in the margins in the global shipping market. The reduction in steel cargo handling at Berth No. 12 at Haldia Port due to the change in trade flows coupled with a reduction in the scope of port management services at the Dhamra Port also affected its performance.
7. Tata Steel Processing and Distribution Limited
| in Rs.crores | ||
| FY 14 | FY 13 | |
| Turnover | 1,723 | 1,643 |
| Profit/(loss) before tax (PBT) | 60 | 60 |
| Profit/(loss) after tax (PAT) | 43 | 41 |
Tata Steel Processing and Distribution Limited (TSPDL) is the largest steel service centre in India. In Financial Year 2013-14, it has enhanced its steel processing capacity to ~ 2.6 million tonnes and added a new service centre raising the number of these facilities to nine. TSPDL commissioned the largest Slitting line at Jamshedpur with an annual capacity of around 3 lakh tonnes. This Slitting line is the largest line in India and now TSPDL is now India's largest Service Centre Complex. To augment its steel processing capacity in Southern region, TSPDL also commissioned its first Hot Rolled Pickled and Oiled (HRPO) Steel Service Centre at Chennai. The 2.85 lakh tonnes per annum facility is equipped with state-of-the-art capabilities.
The Company, a key player in Auto steel servicing sector, was impacted during the Financial Year 2013-14 due to the slowdown in the general economic conditions and in the Auto sector in particular. However, it has ended the year with an improved performance contributed by an increase share of business with key customers – both in its Distribution and Tolling businesses, bolstered with various cost reduction and improvement initiatives.
8. The Tinplate Company of India Limited
| in Rs.crores | ||
| FY 14 | FY 13 | |
| Turnover | 1,080 | 893 |
| Profit/(loss) before tax (PBT) | 91 | 50 |
| Profit/(loss) after tax (PAT) | 63 | 28 |
The Tinplate Company of India Limited, India's largest producer of tin-coated and tin free steel used for metal packaging, has two Cold Rolling Mills and two Electrolytic Tinning Lines. The overall production from the two cold rolling mills for Financial Year 2013-14 was 336k tonnes, 4% higher than the production of 323k in the previous year. The production by the tinning lines during Financial Year 2013-14 at 324k tonnes was also 5% higher than the previous year's production of 310k tonnes.
TCIL's turnover rose by 21% on the strength of higher conversion volumes and export realisation. The increased volumes, higher export realisations as well as weaker rupee contributed to a 122% increase in profit after tax.
9. Tata NYK Shipping Pte Ltd.
| in Rs.crores | ||
| FY 14 | FY 13 | |
| Turnover | 1,582 | 1,091 |
| Profit/(loss) before tax (PBT) | (307) | (125) |
| Profit/(loss) after tax (PAT) | (307) | (125) |
TATA NYK Shipping Pte Ltd., a 50:50 joint venture company of Tata Steel Ltd, India and NYK Line, Japan caters to the seaborne trade for the Tata Group and the Indian markets.
The Company carried 20.2 million tonnes of cargo in Financial Year 2013-14, a growth of 20% over the previous year.The Company has a current fleet size of 24 ships (6 owned and 18 chartered).
Due to onerous contract and pre-delivery of high cost vessel, the Company has taken a one-time charge of Rs.247 crores in the Financial Year 2013-14. The Company has reported losses in Financial Year 2013-14 due to weak underlying shipping industry fundamentals. However, the losses are lower as compared to previous year.
10. Tata Sponge Iron Limited
| in Rs.crores | ||
| FY 14 | FY 13 | |
| Turnover | 784 | 798 |
| Profit/(loss) before tax (PBT) | 150 | 126 |
| Profit/(loss) after tax (PAT) | 101 | 85 |
Tata Sponge Iron Limited, a manufacturer of sponge iron and producer of power, located at Joda, Odisha, increased its capacity utilisation during the Financial Year 2013-14 from 92% to 97% in comparison to the previous year.
The Power business of the Company saw a rise, generating 195.71 million kwh of power in Financial Year 2013-14 as compared to 178.92 million kwh in Financial Year 2012-13. The sale of surplus power during Financial Year 2013-14 was 140.91 million kwh as compared to 123.81 million kwh in Financial Year 2012-13. The increase in generation and sale of power is primarily on account of higher operating days as well as better capacity utilisation by its sponge iron kilns.
III. Strategy
Tata Steel's strategy development and deployment is aligned to its vision of becoming a global steel industry benchmark in Value Creation and Corporate citizenship.
One of the key pillars of Tata Steel's long-term strategy is to continue to build capacity in India through brownfield and greenfield expansions that is globally competitive and delivers world class products to its customers. In line with the above strategy, the Jamshedpur operations of the Company achieved almost a million tonnes of additional production and sales during the Financial Year 2013-14. In a year when most steel consuming segments in India were witnessing depressed demand conditions, the Company produced and sold higher volumes through meticulous planning and market development.
Tata Steel places a sustained emphasis on innovation. The process encompasses building of the capability to better understand the needs of consumers and finding the best possible products/solutions to cater to their needs. This can be done through innovation in process, product, service/solution or channel. Tata Steel has in the past demonstrated the ability to innovate by branding steel, shaping and developing the channel partners, entering new segments by developing new products and increasing penetration in value chains through services and solutions. There is a need to further strengthen the process of understanding consumer needs and generating actionable insights. While focussing on creating a funnel of innovative offerings for its chosen segments, the Company has, as a step forward, adopted a customer-based approach for its marketing and sales function in the Financial Year 2013-14 creating new business verticals.
During the year Tata Steel also continued with focussed improvements in the quality of products and services, building on the progress made by it in its Total Quality Management journey. It is further strengthening its quality assurance system by emphasising on internal system through standardised initiatives, cross functional activities and Q reviews across different levels, which enable it to deliver value to customers. Customer claims and critical claims from existing facilities have reduced significantly in the Financial Year 2013-14. As Tata Steel grows its volumes in India, it will continue to focus on customer centricity across all segments and branding of its products which is a significant part of the total turnover of the Company.
In the steel industry, capacity gets added in sizeable chunks at points in time while demand growth is more linear. Therefore, demand growth in the short-term is unlikely to grow in tandem with supply of steel as additional capacities come on stream and this will put pressure on steel prices. The price discovery will be based on the cost positions of marginal players in the industry. India is expected to remain as a net exporter of steel and this will imply a higher level of integration of domestic and global steel prices. Tata Steel has hitherto benefitted from access to raw material. Softening of raw material prices due to surplus global raw material (iron ore and met coal) capacity will add pressure on steel prices going forward.
Therefore, Tata Steel continues to focus on continuous operational improvements. Kar Vijay Har Shikhar (KVHS) is the programme introduced in India for continuous innovation in process and operational excellence. Through its cost improvement initiatives, Tata Steel achieved a savings of Rs.1,614 crores against a plan of Rs.1,412 crores in Financial Year 2013-14. KVHS contributed Rs.1,170 crores towards cost improvements in the Financial Year 2013-14.
Similarly, the Company's European operations continued to deploy improvement programme under the umbrella of "Objective Goal Strategy Measure" (OGSM) programme designed towards achieving the mission of the Company i.e., 'To be the long-term preferred partner in our chosen markets by unlocking the potential of steel'. The European strategy combines the use of market differentiation, which aims to raise the proportion of premium, value-added products and services in the Company's portfolio, with rigorous cost control.
The focus on costs by Tata Steel Europe resulted in approaching GBP 200 million in operating cost savings during the year. Financial performance consequently improved over the previous year, despite the margin between raw materials costs and steel sales prices deteriorating.
During the year, Tata Steel Europe launched a number of improvement initiatives, some of which are listed below:
- Following the success of Project Ark in 2011 at Long Products Europe (LPE), LPE launched 'Path to Profit' during the year with a reduction of GBP 40 million in controllable costs and 500 FTE (full time employees) reductions.
- Launched in 2011, the Journey to Commercial Excellence (J2CE) is a key Sales and Marketing improvement programme. It plays a significant role in accelerating delivery of a number of its OGSM objectives. The programme covers five areas with initiatives focussed either on creating value for the company or on developing the internal capability of the Sales & Marketing function. They are: Customer, Pricing, People, Product and Working Capital, with multiple initiatives now either in the deployment phase or having already reached steady-state.
- In September 2013, a Journey to Procurement Excellence (J2PE) was announced with a view to speed up the pace of change and deliver savings in external spend. The review identified potential benefits of GBP 100 million per year that could be achieved by taking a pan-European approach to external spend and by deploying best practices commercially and operationally.
- A standardised 'idea' capture and management process across European operations – Ideas Make a Difference (I-MAD) – was launched during the year. The process is designed to centralise capture of ideas and propel further sharing and learning across Europe. The financial impact for the year amounted to GBP 7 million.
- Recognising that technical expertise is a key area of differentiation for European operations, development of a 'Technical Excellence Programme' commenced in quarter 3. It focusses on improved sharing and learning, the implementation of technical and operational best practice, an effective and efficient organisation, common approaches, enhanced skills and competencies, and faster innovation.
IV. Finance
The Financial Year 2013-14 was marked by growth in emerging economies slowing due to the tapering by US Fed and Forex volatility. There was a consensual shift of investors from the emerging market to developed markets during the period. Despite looking stronger, the developed world too had its share of problems in the form of rising debt and gradual recovery.
Investor service and credit rating companies are keeping a close eye on the steel, metal and mining sectors. There are some challenges going forward in the form of weaker consumption and capacity expansion, which may weigh on the margin of steelmakers' and their utilisation rates. Mining bans and a softer outlook for global commodity prices have also affected the mining sector. Government's push towards unlocking pending investment has aided sentiments.
In the context of the above uncertain macroeconomic environment, Tata Steel has adopted a financing strategy for this year, which is similar to last year, focussed on the following key components (a) Financial Closure for Odisha project: Tata Steel is implementing a fully integrated 6 mtpa steel plant (3 mtpa in first phase) in Odisha. The capital expenditure is to be funded by mix of debt and equity. Financing for the project has been successfully closed with debt approval of Rs.22,800 crores by a consortium led by State Bank of India. This has been the largest-ever syndicated project finance deal and the debt facility was oversubscribed 1.7 times. This is truly a testament to the continuous confidence that the investors and bankers have in the Company (b) Disposing off of non-core assets to reduce lazy capital. Tata Steel has launched the sale process for some of its non-core assets. One such proposed sale is Tata Steel's land in Borivili for Rs.1,155 crores (c) Liquidity buffer for continued global operations: the total liquidity headroom of the Company was Rs.2,243 crores as of 31st March, 2014, comprising cash & cash equivalents and undrawn lines).
Fitch maintained Tata Steel Limited's rating at BB+ and outlook as "Negative". The Domestic rating of Tata Steel Limited and the loans availed from banks was reaffirmed at AA. Further, Moody's Investors Service reaffirmed Tata Steel Limited's Corporate Family Rating at Ba3 while maintaining its outlook as "Negative". S&P also maintained its outlook of Tata Steel as "Negative" and re-affirmed 'BB' Rating. The concerns in the near term outlook across the agencies are principally because of lower growth and a challenging external environment for the global steel industry. However, due to the depreciation of the rupee during the past year, steel export has become more profitable. Also, domestic steel margins improved as the domestic prices are correlated with global steel prices in terms of US$.
The Company remains equipped to meet these challenges through an increased emphasis on deleveraging the balance sheet through a better financing strategy to meet capital expenditure requirements and disposing non-core assets. Tata Steel's plant in Kalinganagar is also expected to start its production towards the end of Financial Year 2014-15. Once the plant starts commercial production, Tata Steel will be able to leverage its expertise and distribution network to meet the rising steel demand in India as well as consolidate its earnings. Benefits from the 3 mtpa expansion in Jamshedpur has begun to accrue resulting in higher earnings and profits. This will help the Company to diversify its customer base across sectors and strengthen its performance.
V. Financial Performance
1. Tata Steel standalone
Tata Steel recorded a profit after tax of Rs.6,412 crores during Financial Year 2013-14 as compared to Rs.5,063 crores in Financial Year 2012-13 primarily due to higher deliveries at 8.52 million tonnes (Financial Year 2012-13: 7.48 million tonnes). The basic and diluted earnings per share were at Rs.64.22 for Financial Year 2013-14 (Financial Year 2012-13: Rs.50.28).
The analysis of major items of the financial statements is shown below:
a) Net sales and other operating income
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Sale of products | 44,884 | 41,014 | 9 |
| Sale of power and water | 898 | 875 | 3 |
| Income from town, medical and other services | 87 | 76 | 14 |
| Other operating income | 440 | 352 | 25 |
| Sales and other operating income | 46,309 | 42,317 | 9 |
| Less: Excise Duty | 4,598 | 4,118 | 12 |
| Net sales and other operating income | 41,711 | 38,199 | 9 |
Sales increased in the Financial Year 2013-14 by 9% over Financial Year 2012-13 primarily due to increase in volumes of Flat products (post commissioning of TSCR). The increase was partly offset by lower volumes of Long products and lower realisations of both Flat and Long products due to adverse market conditions and mix impact. Higher volumes partly offset by lower realisations at Tubes Division and at Wires Division also contributed to the increases.
Division wise net sales are shown below:
| in Rs.crores | |||
| Net Sales | FY 14 | FY 13 | Change % |
| Steel | 37,012 | 33,705 | 10 |
| Tubes | 1,937 | 1,790 | 8 |
| Ferro Alloys and Minerals | 2,594 | 2,544 | 2 |
| Bearings | 168 | 160 | 5 |
| Total | 41,711 | 38,199 | 9 |
b) Purchase of finished, semi-finished steel and other products
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Purchase of finished, semi-finished steel and other products | 353 | 453 | (22) |
Purchase of finished and semi-finished materials decreased over Financial Year 2012-13 due to lower purchases at Growth Shop (on account of Odisha projects and external orders) at Wires and CRC West Division. The decreases were partly offset by purchase of imported rebars – at Steel Division – and higher purchases at Tubes Division.
c) Raw materials consumed
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Raw Materials consumed | 9,678 | 9,877 | (2) |
Raw Materials consumed decreased primarily due to lower cost and consumption of purchased coke. The decreases were partly offset by higher consumption of imported coal, higher cost and consumption of imported limestone, Ferro Alloys and other raw materials along with higher freight and handling costs of own material.
d) Employee benefits expense
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Employee benefits expense | 3,673 | 3,602 | 2 |
The employee benefits expense in the current period increased over Financial Year 2012-13 primarily on account of normal salary revision. The increase was partly offset by reduction in retiring provisions on account of change in actuarial estimates due to change in discounting rates.
e) Stores and spares consumed
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Stores and spares consumed | 2,611 | 2,091 | 25 |
Stores and spares consumed (including industrial gases and spares) increased during the Financial Year 2013-14 primarily on account of higher consumption of operational spares, industrial gases and other stores and spares to support higher production.
f ) Repairs to machinery
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Repairs to machinery | 1,734 | 1,381 | 26 |
Repairs to machinery increased compared to Financial Year 2012-13 mainly on account of increase in mechanical contract jobs at the Finishing Mills, increase in civil contract jobs at the mines and collieries along with overhauling and other maintenance activities at various steel making facilities in the Jamshedpur Steel Works.
g) Conversion charges
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Conversion charges | 2,004 | 1,955 | 2 |
Increase in the Conversion charges was a consequence of higher volumes and higher conversion charges at Flat products, Tubes Division and Wire Division. This increase was partly offset by lower conversion rates at FAMD and Long products and lower volumes at FAMD.