Management Discussion and Analysis 2013-14
h) Finance costs and Net finance charges
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Tata Steel | 1,821 | 1,877 | (3) |
| Tata Steel Europe | 3,606 | 3,090 | 17 |
| NatSteel Holding | 61 | 56 | 9 |
| Tata Steel Thailand | 76 | 77 | (1) |
| Others | 1,428 | 1,167 | 22 |
| Eliminations & adjustments | (2,655) | (2,299) | 15 |
| Group Total | 4,337 | 3,968 | 9 |
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Tata Steel | 1,472 | 1,546 | (5) |
| Tata Steel Europe | 3,508 | 2,996 | 17 |
| NatSteel Holding | 57 | 51 | 12 |
| Tata Steel Thailand | 72 | 74 | (3) |
| Others | 402 | 250 | 61 |
| Eliminations & adjustments | (1,656) | (1,400) | 18 |
| Group Total | 3,855 | 3,517 | 10 |
In Tata Steel India, finance cost was lower primarily due to increase in interest capitalisation. Increase at TSE is primarily due to exchange impact on translations. Increase in 'Others' is primarily on account of Foreign Currency Bonds issued by one of the affiliates in Q1 of Financial Year 2013-14.
i) Exceptional items
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Tata Steel | (142) | (675) | (79) |
| Tata Steel Europe | – | (7,340) | (100) |
| NatSteel Holding | – | (24) | (100) |
| Tata Steel Thailand | – | (518) | (100) |
| Others | – | 673 | (100) |
| Eliminations & adjustments | 114 | 494 | (77) |
| Group Total | (28) | (7,390) | (100) |
The exceptional items in Financial Year 2013-14 primarily represents the diminution in the value of investments in TAYO Rolls Limited and in Gopalpur SEZ Limited net of adjustment of accumulated losses in consolidated financial statement. Exceptional items in Financial Year 2012-13 includes the non-cash write down in TSE (Rs.7,354 crores), TSTH (Rs.518 crores), Kalimati Coal Company (Rs.132 crores) and TSKZN (Rs.307 crores), Tata Metaliks (Rs.45 crores) and the loss on sale of JVs and Subsidiaries by TSE (Rs.20 crores) partly offset by profit on sale of investment by Kalimati Investment Company Limited (Rs.962 crores).
j) Stores and spares stock
| in Rs.crores | ||||
| FY 14 | FY 13 | Inc./ (Dec.) | Change % | |
| Tata Steel | 1,718 | 1,473 | 245 | 17 |
| Tata Steel Europe | 1,053 | 887 | 166 | 19 |
| NatSteel Holding | 117 | 89 | 28 | 32 |
| Tata Steel Thailand | 259 | 280 | (21) | (8) |
| Others | 254 | 236 | 18 | 8 |
| Eliminations & adjustments | – | – | – | – |
| Group Total | 3,401 | 2,965 | 436 | 15 |
In Tata Steel India, increase in stores and spares were primarily due to increase in mechanical and electrical spares stock to support the operations post 3 million tonnes expansion at Jamshedpur.
k) Stock-in-trade
| in Rs.crores | ||||
| FY 14 | FY 13 | Inc./(Dec.) | Change % | |
| Finished Goods | 10,016 | 8,291 | 1,724 | 21 |
| WIP | 5,768 | 4,946 | 823 | 17 |
| Raw Materials | 7,695 | 7,890 | (195) | (2) |
| Total Inventory | 23,479 | 21,127 | 2,352 | 11 |
| in Rs.crores | ||||
| FY 14 | FY 13 | Inc./ (Dec.) | Change % | |
| Tata Steel | 4,290 | 3,785 | 505 | 13 |
| Tata Steel Europe | 16,652 | 14,858 | 1,794 | 12 |
| NatSteel Holding | 1,311 | 1,118 | 193 | 17 |
| Tata Steel Thailand | 585 | 639 | (54) | – |
| Others | 962 | 995 | (33) | (3) |
| Eliminations & adjustments | (321) | (268) | (53) | 20 |
| Group Total | 23,479 | 21,127 | 2,353 | 11 |
The overall finished and semi-finished inventory increased over March 2013, primarily at TSE due to the impact of the foreign exchange fluctuation on translation and marginal increase in GBP terms. Tata Steel India reported higher levels of finished and semi-finished inventory due to an increase in tonnages. The raw material inventory has decreased primarily at TSE due to lower cost of raw materials, which was partly offset by the increase in the raw material inventory at Tata Steel India. The primary reason for increase in raw material inventory at Tata Steel India is increase in the imported coal quantity.
l) Sundry debtors
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Tata Steel | 771 | 797 | (3) |
| Tata Steel Europe | 7,510 | 5,824 | 29 |
| NatSteel Holding | 751 | 726 | 3 |
| Tata Steel Thailand | 128 | 166 | (23) |
| Others | 19,283 | 15,891 | 21 |
| Eliminations & adjustments | (12,437) | (9,410) | 32 |
| Group Total | 16,006 | 13,994 | 14 |
Decrease in debtors at Tata Steel India is mainly on account of decrease in export debtors as Financial Year 2012-13 included higher month end sales in March 2013. TSE debtors increased primarily due to exchange impact on translation.
m) Cash flow and Net debt
Cash flow
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Net Cash from operating activities | 13,146 | 14,035 | (6) |
| Net Cash flow from investing activities | (16,451) | (13,297) | 24 |
| Net Cash flow from financing activities | 1,014 | (1,780) | (157) |
| Net increase/(decrease) in cash & cash equivalents | (2,291) | (1,042) | 120 |
Net cash flow from operating activities: The Group generated Rs.13,146 crores from operations during Financial Year 2013-14 as compared to Rs.14,035 crores in Financial Year 2012-13. The cash generated from operations prior to the changes in working capital and tax payments in the current period was Rs.17,428 crores against Rs.12,764 crores in Financial Year 2012-13 reflecting higher profits. Cash from operations was lower than previous year due to increase in the working capital during the current period by Rs.1,270 crores as against a decrease of Rs.3,841 crores in the previous year. The payments of income taxes during Financial Year 2013-14 was Rs.3,013 crores as compared to Rs.2,569 crores in Financial Year 2012-13.
Net cash from investing activities: A sum of Rs.16,451 crores was applied in the current year towards investing activities including capex of Rs.16,420 crores partly offset by sales of current and non-current investments.
Net cash from financing activities: Cash inflow from financing activities in the current period (loans availed net of loan repayments and interest payments) amounted to Rs.1,015 crores as against an outflow of Rs.1,780 crores in Financial Year 2012-13.
The net decrease in cash and cash equivalents was Rs.2,291 crores excluding the effect of exchange fluctuation Rs.1,073 crores in the current period with a balance of Rs.8,451 crores as on 31st March, 2014 against a balance of Rs.9,669 crores as on 31st March, 2013.
Net debt
| in Rs.crores | |||
| FY 14 | FY 13 | Change % | |
| Gross Debt | 81,609 | 68,507 | 19 |
| Less: Cash and Bank balances (including non-current balances) | 8,704 | 9,892 | (12) |
| Less: Current investments | 2,668 | 760 | 251 |
| Net Debt | 70,237 | 57,855 | 21 |
Net debt at Rs.70,237 crores at 31st March, 2014 was higher than March 2013 by Rs.12,382 crores due to increase in the gross debt level which was partly offset by the increase in cash and bank balances. Gross debt was higher mainly due to increase in the fresh drawals during the period an exchange rate impact on revaluation.
VI. Risks, Opportunities and Threats
The Tata Steel Group aims to address risks, opportunities and threats posed by its business environment strategically by maintaining sustainable and robust business models and further improving on them. Tata Steel's response to these elements is discussed in the sections below.
1. Macro Environment
The Group's financial performance is influenced by the economic climate in India, UK, the European mainland, South–East Asia and by changes in the global steel market.
While the steel consumption growth in India has been relatively resilient, slowing economic growth has meant a moderation in steel consumption growth rates. Despite the challenging economic conditions, Tata Steel has consistently and profitably grown its volumes across customer segments by enhancing its participation across value chains through innovation-led changes in service and solution, new brands, shaping channels, diversifying and deepening the customer base, entering new segments and aggressively implementing several cost reduction initiatives.
European prospects show very marginal improvement; with the Euro zone showing signs of economic recovery, driven by increased factory output. However, the European steel demand continues to be weak even as steel imports rise from countries with low cost of production e.g. China, Russia etc. The Group's response in Europe included an acceleration of commercial and operational improvement initiatives delivery of significant fixed cost savings and further rationalisation of its operations.
South–East Asia continues to face strong competition from China. Thailand was affected by political turmoil. The challenges and opportunities posed by macro factors are being predicted, identified and aligned to the Group's objectives.
In South–East Asia, the Company has improved the product mix and increased exports to growth markets besides focussing on cost reduction initiatives as mitigation measures.
2. Industry Cyclicality
The steel industry is subject to cyclical swings arising from factors such as excess capacity, regional demand & supply imbalances and volatile swings in market demand and prices, more recently exacerbated by swings in input prices as well as changes in the regulatory environment. Whilst the Group seeks to differentiate its products and to manage down the level of its fixed costs, it still retains the focus on improving its operations through a variety of measures such as continuous improvement programmes, enhancing technical knowledge and skill, improving process safety, targeted capital expenditure and focussed risk management.
3. Regulatory Environment
The mining sector in India has been under regulatory scrutiny including states like Odisha and Jharkhand where the Group has significant mining operations. The Group has complied with the prevailing laws and regulations and has fully cooperated with the regulators.
The Group's European businesses are subject to numerous laws, regulations and contractual commitments in various countries in which it operates. The Group has policies, systems and procedures in place aimed at ensuring substantial compliance and there is a strong commitment from the Board and the Executive Committees to enforce compliance.
4. Growth Projects
The Group continues to pursue its growth strategy, particularly in the Indian market where it sees significant market opportunities. The execution of the growth projects involves uncertainty in terms of required approvals, land acquisition, commissioning and local community relationships. Work on the Group's greenfield steel plant in the state of Odisha, India, to be developed in two phases of 3.0 mtpa each, continues. Phase 1 is to be commissioned at the end of Financial Year 2014-15.
5. Raw Materials Security and Price Volatility
The access to and cost of raw materials supplies depend, to a large extent, on the worldwide supply and demand relationships, notably iron ore, metallurgical coal and scrap.
The volatility in prices of raw materials and energy, including the mismatches between the trends in prices for raw materials and steel, as well as limitations on or disruptions in the supply of raw materials, could adversely affect the Company's profitability.
Achieving greater raw material security to insulate the Group from swings in prices of key raw materials and resultant impact on profitability continues to be a key strategic objective. Indian operations are 100% self-sufficient in iron ore and about 45% in metallurgical coal.
The Group maintains strong supplier relationships and flexible sourcing through centralised procurement of raw materials. The Group continues to closely monitor market conditions and seeks to put in place contractual arrangements to ensure security of critical supplies.
To achieve greater raw material security, the Group is pursuing various mining projects in Africa, Canada and India.
6. Health, Safety & Environmental Risks
The Group operates in multiple geographies and thus has compliance obligations with diverse and complex laws regulations and contractual commitments relating to health, safety, environment and regulatory compliance. The risk of substantial costs, liabilities and damage to reputation related to non-compliance with these laws and regulations are an inherent part of the Group's business.
The Group has policies, systems and procedures in place aimed at continuously improving safety performance and minimising the impact of the Group's operations on the environment.
To meet environmental standards, dust and other emission levels are monitored to ensure that they stay within permissible limits. The Group continues to invest to improve energy efficiency and to reduce CO2 emissions. Extra efforts are being taken to ensure workplace safety in mines and collieries in India and on construction sites.
The EU Emissions Trading Scheme, currently in Phase 3, is the key item of environmental legislation for the Company's European operations. The Company is very active in the European Steel Association's efforts to mitigate the risks associated with the deployment of this regulation under Phase 3 and beyond.
7. Financing
Tata Steel Group's expansion projects require significant investment which in turn is funded from internal cash generation and capital raised externally (including debt). Also, the Company in 2007, funded its acquisition of Corus in significant part by debt, raised both in India and overseas, as a result of which the Company has sizeable repayment and debt servicing obligations on an ongoing basis. Recent depressed market conditions (especially in Europe) have meant that the cash generation across the Tata Steel Group has been constrained, thereby increasing the risk inherent in the capital structure of the business. At the same time, it is important to note that the financing for the Company's growth projects in India is finalised and hence does not pose a limiting factor for growth. Additionally, Tata Steel Group continues to opportunistically raise capital and rebalance its capital structure, taking into account market conditions and available liquidity.
8. Pensions
TSE provides retirement benefits for substantially all of its employees; including defined benefit. The market value of pension assets and liabilities is significantly greater than the net assets of the Group and, therefore, any change can have a material impact on the Group's financial statements.
The Group has put in place a framework to manage pension risks and works with Schemes' Trustees to ensure that obligations remain affordable and sustainable.
A range of measures has already been adopted by the principal Schemes in the Group to manage liabilities and to protect against investment market risk exposure, whilst maintaining asset performance. Further actions will be considered as and when appropriate.
9. Foreign Exchange Rate Volatility
Through its global operations, the Group operates in several currency areas. Volatility in the currency markets can adversely affect the outcome of commercial transactions and cause trading uncertainties.
The Group has foreign exchange hedging policies in place to protect its trading and manufacturing margins against rapid and significant foreign exchange movements.
10. Long-term competitiveness of European Operation
A large proportion of the Group's manufacturing facilities are in Europe, which is a relatively high cost area and where demand growth for steel products is much lower than in developing parts of the world.
In order to maintain its ability to successfully compete in the long-term the Group is, therefore, undertaking a number of initiatives including a strategic review of its asset portfolio, business specific improvement plans and securing access to cost-effective raw materials.
VII. Internal Control Systems
In Tata Steel India, the Corporate Audit Division continuously monitors the efficacy of internal controls with the objective of providing to the Audit Committee and the Board of Directors, an independent, objective and reasonable assurance on the adequacy and effectiveness of the organisation's risk management, control and governance processes. The Division also assesses opportunities for improvement in business processes, systems and controls; provides recommendations, designed to add value to the organisation and follows up on the implementation of corrective actions and improvements in business processes after review by the Audit Committee and Senior Management.
The scope and authority of the Corporate Audit Division is derived from the Audit Charter approved by the Audit Committee. The Charter is designed in a manner that the Audit Plan is focussed on the following objectives:
- All operational and related activities are performed efficiently and effectively.
- Significant financial, managerial and operating information that is relevant, accurate and reliable is provided on time.
- Review the process of identification and management of Business Risks.
- Resources are acquired economically, used efficiently and safeguarded adequately.
- Employees' actions are in accordance with the Company's policies and procedures, Tata Code of Conduct and applicable laws and regulations.
- Significant legislative and regulatory provisions impacting the organisation are recognised and addressed appropriately.
- Opportunities identified during audits, for improving management control, business targets and profitability, process efficiency and the organisation's image, are communicated to the appropriate level of management.
- Shareholders' and other Stakeholders' wealth and welfare are preserved, protected and enhanced.
Corporate Audit Division develops an annual audit plan based on the risk profile of business activities of the organisation and the business activities are prioritised for audit accordingly. The audit plan is approved by the Audit Committee, which regularly reviews compliance to the plan.
During the year, the Audit Committee met regularly to review reports submitted by the Corporate Audit Division. All significant audit observations and follow-up actions thereon were reported to the Audit Committee.
The Audit Committee also met the Company's Statutory Auditors to ascertain their views on the financial statements, including the financial reporting system, compliance to accounting policies and procedures, the adequacy and effectiveness of the internal controls and systems followed by the Company. The Management acted upon the observations and suggestions of the Audit Committee.
In Tata Steel South East Asia the respective Boards of NSH and TSTH are responsible for the internal control systems of the companies.
The Internal Audit functions of NSH and TSTH serve to provide independent and objective assurance on the adequacy and effectiveness of the organisation's risk management, control and governance processes. The Internal Audit functions also assesses opportunities for improvement to business processes, systems and controls; provides recommendations designed to add value to the organisation and follows up on the implementation of agreed audit recommendations.
The scope and authority of the Internal Audit functions are derived from the Internal Audit Charter approved by the respective Audit Committees. The duties and authority of the Audit Committees' in turn vested by the Audit Committee Terms of Reference approved by the respective Boards.
The activities of the Internal Audit function are guided by the Internal Audit Plan, which is approved by the respective Audit Committees, who also review the findings/agreed actions set out in Internal Audit reports and the adequacy of IA resources during quarterly Audit Committee meetings. The Audit Committees also meet the respective Company's Statutory Auditors regarding their review of the financial statements, including the financial reporting system, compliance with accounting policies and procedures, the adequacy and effectiveness of the internal controls and systems followed.
In Tata Steel Europe (TSE), the Board of Directors is responsible for TSE's system of internal control and reviewing its effectiveness. The company has a well-established internal audit function that has direct access to the Chairman of the Audit Committee, who meets with the Director Audit several times each year and reports functionally to the Tata Steel
Group Director Assurance & Audit. The Audit Committee receives reports from the internal audit function four times a year and also considers the terms of reference, plans and effectiveness of the function. The internal audit function works closely with the external auditors. It provides independent and objective assurance to the Board, the Audit Committee and the Executive Committee on the systems of internal control employed in the TSE Group, and provides a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control and governance procedures.
There were no changes in internal control over financial reporting during the period under review that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
TSE's system of internal control has been designed in order to provide the directors with reasonable assurance that its assets are safeguarded, that transactions are authorised and properly recorded and that material errors and irregularities are either prevented or would be detected within a timely period.
viii. Human Resources and Industrial Relations
At the core of Tata Steel's Human Resource Management (HRM) policy is the underlying belief that employees are our primary source of competitiveness. Hence the focus is on enriching the quality of life of its employees, developing their potential and maximising their productivity. With Tata Values as the bedrock, the unique attributes of our policy are climate of openness, equity, fairness and respect for the individual, freedom to experiment, mutual trust, and teamwork. Tata Steel is an equal opportunity employer and strives to attract the best available talent and ensure diversity in its workforce.
Tata Steel would not have been where it is today without its people and their commitment, innovation, engagement, strive for excellence and a strong sense of belongingness to the organisation. A strong industrial harmony of over eight decades bears testimony to strong people practices of the Company.
HR & IR Function was reorganised as HRM for better partnership with business and addressing all people-related issues more comprehensively across all geographies.
For sustainable future, Leadership Development has continued to be a focus area for Tata Steel Group. As a next step to Talent Appreciation Process (TAP), a Senior leadership Team building Exercise was conducted with the objective of arriving at a Team Vision, understanding each other's strengths, besides arriving at an 'agreed to' action plan to leverage team strengths better. Window on the World, a platform that provides an opportunity to share leading edge thoughts and insights, strengthens the Company's culture of continuous learning and drives the pursuit of its goal of being a hallmark in the area of learning and development initiatives. Eminent personalities were invited for this programme.
Tata Steel has continued to play a pioneering role in employee welfare with the introduction of a "Family Support Scheme" to institutionalise financial security for the bereaved family by maintaining their standard of living in the event of death of an employee arising out of accident while on duty.
Employee Productivity continues to a critical focus area in the Company's journey towards global benchmark in value creation and excellence. Therefore, Productivity Week celebration – new initiative in the Financial Year 2013-14 – was organised across the Company from 12th – 14th February, 2014. Employee productivity for Works and Services manpower rose to 590/tcs/man/year in Financial Year 2013-14 from 513 tcs/man/year in Financial Year 2012-13. The total strength of permanent employees in the Indian operations increased to 36,199 as on 31st March, 2014 as compared to 35,905 as on 31st March, 2013, primarily due to increase in the number of employees at the KPO site during Financial Year 2013-14. Industrial Relations remained normal at all locations during the reporting period.
During the year the Company received various rewards and recognition in HRM area as enumerated below:
Tata Steel once again won the World Championship (8th Virtual Steel Making Challenge) organised by World Steel Association at Brussels. Mr. Kausik Tamuli and Mr. Animesh Kumar Singh, Management Trainee 2011 represented Tata Steel and were declared World Champions. This feat was achieved for the 2nd time in succession. In the regional rounds, the top 10 teams in the Middle East-India-Africa region were all from Tata Steel, a feat achieved by the Company for the third year in succession. The regional rounds witnessed participation across a geographical area spanning Middle East, India and Africa, with 2,000 participants from 41 different countries competed fiercely for the honours.
- Tata Steel won 23 medals out of a total of 28 medals on offer, including 16 gold medals in the CII National Works Skill Competition in various trades held in February 2014.
- Tata Steel bagged the first prize in the Operations & Production category as well as the first and second prizes in the Repairs & Maintenance category during the 13th National Supervisory Skills Competition organised by CII at Kolkata during 12th – 14th August, 2013.
The European operations have employee strength of 31,184 as at the end of March 2014 as compared to 32,100 on 31st March, 2013. The reduction mainly resulted from restructuring measures due to the continued economic downturn.
During the Financial Year 2013-14, the Company's European operations announced restructuring plans at its Long Products business and its UK electrical steels site based in Newport, South Wales to improve its competitive position and to cope up with difficult trading conditions in the global electrical steels market.
iX. Statutory Compliance
The Managing Director makes a declaration at each Board Meeting regarding compliance with provisions of various statutes after obtaining confirmation from all the units of the Company. The Company Secretary ensures compliance with the SEBI regulations and provisions of the Listing Agreement. The Group Executive Director (Finance & Corporate), as the Compliance Officer, ensures compliance with guidelines on insider trading for prevention of insider trading.
X. Cautionary Statement
Statements made in this report describing the Company's objectives, projections, estimates, expectations may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors.