ASIAN CASE RESEARCH JOURNAL, VOL.

19, ISSUE 2, 259–289 (2015)

ACRJ
Financing Strategy at Tata Steel
This case was prepared by
Rajesh Haldipur, Mumbai, In January 2011, Anuj Gupta, an analyst at a major bro- kerage was
India, Assistant Professor
Kulbir Singh of Institute of
reviewing the red herring prospectus of Tata Steel Ltd. (TSL) to
Management Technology, issue shares to the investing publica. On January 17, 2011 Tata Steel
Nagpur, India, and Professor Ltd, a world size steel company in India announced the issue of
S. R. Vishwanath of Shiv 57m equity shares with a face value of Rs. 10 amounting to Rs.
Nadar University, Uttar
Pradesh, India, as a basis for 34.77b. The company gave a formal notice to Securities Exchange
class discussion rather than Board of India, the stock market regulator, that it would launch a
to illustrate either an effec- follow- on public offer (FPO) on January 19. The issue
tive or ineffective handling of
an administrative or business comprised a net issue to the public of 55m shares and a reservation of
situation. 15m equity shares for subscription by eligible employees. It would
constitute 5.94% of the post-issue paid-up equity share capital of the
Please send all corre- company. The proceeds of the issue would be used a) to part finance
spondence to Professor
Vishwanath S. R., School the company’s share of capital expen- diture for expansion of existing
of Management and Entre- works at Jamshedpurb; b) to redeem certain redeemable non-
preneurship, Shiv Nadar convertible debentures issued by the company on a private placement
University, NH-91, Tehsil
Dadri, Gautam Buddha basisc; and c) for general corporate purposes. The issue would open
Nagar, Uttar Pradesh, on January 19, 2011 and close on January 21, 2011. The issue would
India 201314. E-mail: be 100% book-built. The issue price would be set in the band of Rs.
srvishy@gmail.com
594–Rs. 610 per share at a price discovered through book building.
Upon subscription, the shares would be listed on the Bombay Stock
Exchange and the National Stock Exchange

a
http: //www.moneycontrol.com/news/ipo-tip/tata-steel-fpo-opens-should-you-
subscribe_514217.htm.
b
The expansion work at the Jamshedpur plant scheduled for completion by March 2011 would
augment the steel production capacity of the plant to 10 million tonnes per annum.
c
Tata Steel had a net debt of $10.7 billion. It was expected to use Rs. 10,900m from the FPO
proceeds to pay the redemption amount of some of the maturing redeem- able non-convertible
debentures.

© 2015 by World Scientific Publishing Co. DOI: 10.1142/S0218927515500108

260 ACRJ

of India. The company appointed Kotak Mahindra, Citigroup,

Deutsche Equities, HSBC Securities, RBS Equities, SBI Capital, and
Standard Chartered Securities as book running lead managers.
Anuj had noticed that TSL had issued at least half a dozen
securities during 2007–2011. He wondered what led to TSL’s ever
growing financing needs. In light of the company’s analysis he had to
give an investment recommendation to subscribe or avoid the issue.
On the Bombay Stock Exchange Tata Steel shares were trading
at Rs. 621 per share on 17 January, down 2.47% from the previous
close.

COMPANY BACKGROUND

Incorporated in 1907, Tata Steel Ltd. was India’s largest steel

company with a steel production capacity of approxi- mately 25.2
mtpa (see Table 1 for the break-up of capacity). The Company had a
presence across the entire value chain of steel manufacturing,
including production and distribution of finished products as well as
mining and processing iron ore and coal for its steel production.
According to WSA (World Steel Association), the company was
the seventh largest steel company in the world in terms of crude steel
produc- tion volume in 2009. Tata Steel’s operations were primarily
focused in India, Europe and other countries in the Asia Pacific. In
2010, the Company’s operations in Europe and India represented
62.9% and 28.8% of its total steel produc- tion respectively.
Tata Steel Ltd offered a broad range of steel products including
a portfolio of high value-added downstream prod- ucts such as hot
rolled coils, sections, plates and wires. Tata Steel was also a large
producer of ferrochrome in India. The company’s customers primarily
comprised of companies from construction, automotive, aerospace,
consumer goods, material handling and general engineering
industries. Its main facilities were located at Jamshedpur, India,
where it operated a 6.8 mtpa crude steel production plant and a
variety of finishing plants close to iron ore and coal reserves.
 Table 1. Steel Production Capacity

Steel Production Capacity

(in mtpa)
Europe
IJmuiden steelworks, Netherlands 7.7
Port Talbot steelworks, West 4.9
Glamorgan, Wales
Scunthorpe steelworks, South 4.5
Humberside, England
Rotherham steelworks, South 1.3
Yorkshire, England
India
Jamshedpur Steelworks, Jharkhand 6.8
Total 25.2
Source: Tata Steel RHP.

Exhibits 1 through 6 present TSL’s financial statements, key

ratios, Steel Industry peer group ratio comparison, and TSL’s stock
price history.

COMPETITIVE STRENGTHS AND STRATEGY

Tata Steel had a number of competitive strengths:

Global Scale. With operations in India, Europe and the Asia Pacific it
could attract multinational customers who increas- ingly relied on
maintaining relationships with a few global suppliers.
Cost Competitiveness. In India TSL had captive iron ore and coal
mines because of which it was insulated from the vola- tility of raw
material prices. Further, its labor cost was much lower when
compared to other multinational steel companies. Because of these
reasons TSL had a strong cost advantage. Consequently, it had the
highest EBITDA/ton when com- pared to domestic peer companies.
Strong Market Position. TSL had a strong position in flat and long
products in India and served customers in a variety of industries.
While the customer industries were growing rapidly, competition
from other Indian companies was limited because of high entry
barriers.
Through the acquisition of the Corus group of UK, TSL had
established a strong position in Europe. Europe accounted for 46% of
TSL’s sales in 2010.
Economies of Scale. The Corus acquisition helped TSL achieve
greater economies of scale and cost efficiencies. The acquisition
allowed TSL to manage its supply chain better by reducing logistics
and procurement costs and providing bar- gaining power with
suppliers.
Tata Steel’s strategy had four key elements:
• It had grown significantly in recent years with its steel pro- duction
capacity increasing from approximately 5.0 mtpa in 2006 to 27.2
mtpa in 2011. The company intended to increase its size further as
demand for steel grew. The increase in size was expected to
provide scale economies and cost advantage.
• Tata Steel sought proprietary access to raw materials in order to
avoid cyclical fluctuations and reduce volatility in production
costd.
• It planned to increase its access to ports and shipping lines in
order to gain control over its distribution channels, improve supply
chain processing and reduce freight and logistics costs.
• The company planned to expand its operations through strategic
alliances with joint venture partners throughout

d
The top three mining companies, BHP Billiton, CVRD and Rio Tinto, control the supply of
processed iron ore to steel mills and therefore have significant bargaining power. Substantial
increases in iron ore prices by these mining companies had forced steel producers to raise prices
to maintain margins in recent years. Many leading steel companies were also looking to
pursue investments in mines as a safeguarding measure against rising raw material costs. In
addition, steelmakers were adjusting to a recent shift in the pricing of iron ore and coking coal
after Vale, BHP billiton and other raw material suppliers abandoned the 40-year tradition of
annual prices in favor of the quarterly, index-linked, contracts system. This change to
quarterly pricing exposed steel producers to additional volatility and price risk.
 its chain of operations, including for raw material procure- ment
(primarily for mining), steel production and port and shipping. Its
strategic partners included New Millennium Capital, JFE Steel,
Nippon Steel, and POSCO for mining, Vietnam Steel Corp,
Vietnam Cement Industries Corp, BlueScope Steel for steel
production and Larsen & Toubro and NYK Line for ports and
shipping.

INDUSTRY BACKGROUNDe

The global steel industry is cyclical with its growth linked to the
economic cycles of countries. In particular, industrial production,
infrastructure development, trade policies of countries, regional
demand-supply imbalances all affected the industry. Manufacturers
of steel attempted to reduce the impact of cyclicality by diversifying
manufacturing opera- tions, customer base, product mix and focusing
on value added products.
According to the WSA, global crude steel production in 2009
was approximately 1224 mt, while global steel consump- tion was
1127 mt.
Global Steel Production. Growth in steel production had been
volatile. According to the WSA, global steel production grew on
average by negative 0.5% per year from 1990 to 1995, 2.4% per year
from 1995 to 2000 and 6.1% per year from 2000
to 2005.
During 2005–2009, global steel production increased by
approximately 1.7% per year. Individual rates for these years ranged
from 9.0% in 2006 to 7.9% in 2009. The overall global crude steel
production in 2009 was 1224 mt, a 7.9% decrease in production
over the previous year.
For the ten months ended October 31, 2010, the WSA
estimated that total crude steel production in 66 countries (which
accounted for more than 98% of total global crude steel production
in 2009) was 1,165.1 mt — a growth of approximately 17.5% over
the same period in 2009. China

e
This section is reproduced from Tata Steel’s Red Herring Prospectus.
recorded a 10.7% increase in production for the ten months ended
October 31, 2010 as compared to the same period in 2009 and
production in the United States and EU27 grew by approximately
44.7% and 29.1%, respectively, over the same period. This was
preceded by declines in the United States and Europe of 43.6% and
36%, respectively, for the ten months ended October 31, 2009 as
compared to the same period in 2008. Over the past decade, steel
production had continued to shift, from its traditional base in heavily
indus- trialized countries to fast-growing developing markets such as
China and India.
Global Steel Consumption. Historically, the United States and
Europe have been the major consumers of steel. In 2000, the United
States and EU27 accounted for 37.8% of consumption of steel
globally, while Japan accounted for 10% and India and China
accounted for 3.6% and 16.3% respectively. By 2005, the United
States and EU27 accounted for 26.4%, Japan accounted for 7.3% and
China and India accounted for 33.2% and 3.8% of global steel
consumption.
In 2009, the contribution of the United States and EU27 in
aggregate was just 15.8% and that of Japan was 4.7%. However,
China accounted for 48.1% and India accounted for 4.9% of the
global steel consumption in 2009.
Overall steel consumption in 2009 was 1,127.3 mt, a 6.7%
decrease over the previous year. Over this period steel consumption
decreased in all regions except China and India. The EU 27
consumption was 118.7 mt, a 34.9% decrease over the previous
year. The EU 27 decrease represented 78.2% of the total global
decrease in consumption. The pro- gression of the U.S. financial crisis
into a global economic crisis brought about a massive and regionally
synchronized global decline in demand for steel in late 2008. For
most of the world, this trend continued into the first quarter of
2009. According to the WSA, in 2009, China was the largest single
steel consumer of finished steel products in the world, con- suming
approximately 542.4 mt of finished steel products, which represented
a 24.8% increase over 2008. In 2009, India was the fourth largest
steel consumer consuming approxi- mately 55.3 mt of crude steel.
Global Steel Prices. Steel prices are volatile and fluctuate in response
to changes in global supply and demand, raw mate- rial costs and
general economic conditions. After a downturn in demand beginning
in 1998, global steel prices reached a historic low in the third quarter
of 2001. Since then, global steel prices increased, reflecting stronger
global demand, notably led by China. In the third quarter of 2008,
global steel prices declined sharply due to weak global economic
condi- tions which led to a fall in global demand. The steel industry
also fluctuates in response to a combination of factors, including the
availability and cost of raw materials, global production capacity, the
existence of, and changes in, steel imports, exchange rates,
transportation and labor costs, and protective trade measures. In
recent years, global steel prices have also been increasingly volatile
due to increased commu- nications across global markets and levels
of steel trading as a percentage of total steel production.
Global Steel Outlook. According to the WSA, in 2009, steel
consumption in the United States declined by 39.8% com- pared to
2008 but was expected to increase by 32.9% in 2010 and 9.4% in
2011, bringing it back to 80% of its 2007 level. Europe had been the
most affected outside the NAFTA region. The EU27, other Europe,
and Commonwealth of Independent States had shown declines of
35.7%, 17.3% and 28.3%, respectively, in their steel consumption in
2009. Japan had also been affected by a sharp decline in the
exports of its steel-using industries, especially the automotive and
machinery industries. Steel consumption in Japan declined by 32.3%
in 2009 but was expected to increase by 19% in 2010. Steel
consumption in EU27 was expected to increase by 18.9% in 2010 and
5.7% in 2011. Other Europe was also expected to witness growth in
steel consumption by 20.1% in 2010 and 9.5% in 2011. Steel
consumption in the NAFTA region was likely to grow by 31.3% in
2010 and 8.7% in 2011. Steel con- sumption in EU is expected to
increase by 18.9% in 2010 due to inventory rebuilding and strength
in the export sector. In 2011, an increase in real usage was expected
to drive the steel demand to 147.4 mt bringing it to 75% of the 2007
peak.
 Emerging economies were affected by the economic crisis as
well, but to a lesser degree. India was projected to have a positive
growth of 13.9% in steel consumption in 2010 and 13.7% in 2011
after growing 7.7% in 2009. The economies of the BRIC f countries as
a whole were forecasted to grow by 8.6% in 2010 and 4.9% in 2011
after growing 17.5% in 2009. The BRIC economies were expected
to contribute 37.4% and 50.5% of the incremental demand in 2010
and 2011.
China was expected to witness a growth of 6.7% in steel
consumption in 2010 and 3.5% in 2011 after growing 24.8% in 2009.
Steel consumption for the world excluding China was expected to
increase by 19.0% in 2010 and 6.8% in 2011.

The Corus Acquisition

Tata Steel had recently included in its fold NatSteel, Singapore, and
Millennium Steel, Thailand, creating a manu- facturing network in
eight markets in South East Asia and Pacific Rim countries.
Commenting on the acquisitions, Koushik Chatterjee, Group
CFO of Tata Steel saidg:
“…meeting our growth goals through organic means in India,
unfortunately, is not the fastest approach, espe- cially for large
capital projects, due to significant delays on various fronts. Nor
are there many opportunities for growth through acquisitions in
India, particularly in sectors like steel, where the value to be
captured is limited — for example, in terms of technology,
product profiles, the product mix, and good management. India
actually needs a faster pace of increased organic capacity in steel
in the near future to meet its growing demand.
So to pursue our overall growth strategy, we needed to go
beyond India. And as the first step, we looked at the ASEAN rim
for our initial acquisitions, due to the nearness

f
Brazil, Russia, India and China.
g
“An Indian approach to global M&A: An interview with the CFO of Tata Steel”,
McKinsey Quarterly, October 2009.
 of the markets. When we acquired NatSteel Asia, head- quartered
out of Singapore, in 2004, it gave us immediate access to six
markets in the region, including Vietnam, the Philippines, and
Malaysia. They may not be very big now, but these countries have
meaningful populations and are on a trajectory for growth over
the longer term, making them very attractive for the future. And by
the way, these first regional acquisitions also let us test the waters
of M&A and taught us how to run a transnational business, to
understand the cultural issues, and to integrate larger
organizations.”
On October 20, 2006 the board of directors of Anglo-Dutch
steelmaker Corus accepted a $7.6 billion takeover bid from Tata
Steel, the Indian steel company. The following months saw a lot of
negotiations from both sides of the deal. Tata Steel’s bid to acquire
Corus Group was challenged by CSN, the Brazilian steel maker.
Finally, on January 30, 2007, Tata Steel purchased a 100% stake in
the Corus Group at 608 pence per share in an all cash deal,
cumulatively valued at
$12.04 billion. The deal was the largest Indian takeover of a foreign
company and made Tata Steel the world’s fifth-largest steel group.
To finance the acquisition, Tata Steel put together a package
consisting of many securities, including a new secu- rity entitled
Convertible Alternative Reference Security. After examining several
alternatives of coming together, Corus and Tata Steel finally decided
that an LBO would be the best way to go. For that, they needed a
scheme of arrangement wherein they could acquire 100% of the
shareholding of Corus. The management felt that anything less
would mean leakage of funds, because the cash flows generated by
the acquired entity was expected to flow to the acquirer or its bankers
through dividends declared at short intervals. If the holding (in the
acquired company) was less than 100%, the minority shareholders
whose shares were not acquired would also be entitled to the
dividends declared. The dividends paid to these minority shareholders
would then represent a leakage of funds.
The Board of Corus recommended Tata Steel’s bid to its
shareholders. However, there was another bidder–CSN,
a Brazilian company, which also had a business relationship with
Corus. Like TSL, CSN too could assure raw material security for
Corus as it had substantial iron ore and coal mining interests. Lack of
raw material security was a major reason why Corus had a post-tax
profit of 5% whereas Tata Steel was four times as profitable, although
TSL was one- fourth the size of Corus. Therefore, an auction was
conducted by the UK government to ensure the best deal for Corus
shareholders. This turned out to be a bruising auction that went into 8
rounds, with at least of $750 m being added to the bid with every
bid.
The eventual price paid was 608 pence per share — when the
price of a Corus share was less than 50 pence just four years earlier.
This was funded in a large measure by non-recourse borrowing by
Tata Steel through three Special Purpose Vehicles (SPVs)
incorporated in Netherlands. The Dutch law did not permit a lender to
go beyond the imme- diate borrower and “pierce the corporate veil”
to recover money from the parent company. This was a costlier
form of borrowing but suited the Tata Group very much because it
would insulate Tata Steel from a possible failure of Corus and the
consequent debt default. Thus, Tata Steel was able to structure the
deal such that the predominant portion of funding came from debt that
would be repaid from the cash flows of Corus after the acquisition,
while at the same time ensuring that the parent company’s leverage
ratio remained low enough for it to continue to raise money.
The compelling reasons for acquiring Corus (from the
perspective of the Tatas) were two-fold:
• In a single stroke it would catapult TSL from the 60th posi- tion to
the 6th position among steel producers of the world.
• It would be possible for Tata Steel to make Corus more
competitive over a period by:
a) Aggressively addressing the vulnerability of Corus to vagaries
of raw material prices through acquisition of strategic stakes
and ownership of key raw material sources from all over the
world.
b) Shifting the business model gradually over 5–10 years so that
the expensive, inefficient primary steel manu- facturing
(billets/ingots) could be shifted to India or
 other countries rich in iron ore and coal/gas, while the creation
of value-added saleable steel products (flats and longs) could
take place in UK/Europe (i.e. near the markets). This made
sense because primary steel could be cheaply transported by
sea and raw material (as well as labor) was much cheaper in
India. This had enabled Tata Steel to become the lowest cost
producer of steel in the world, despite not enjoying the
benefits of scale.
The acquisition was financed as follows:
• Tata Steel’s subsidiary in Singapore became the vehicle for raising
the equity portion of the money. This way, India’s case-by-case
approval and Foreign Direct Investment (FDI) limits could be
circumvented, because the acquisition and investment was by a
wholly owned subsidiary outside India, thanks to a “loophole” in
the FDI provisions.
• Tata Sons and Tata Steel together contributed around Rs. 40b to
the equity of this wholly owned subsidiary. Tata Sons raised its
stake largely by selling about 0.8% of shares in Tata Consultancy
Services, another Tata group company, at about Rs. 9b, which
hardly made any difference because it held nearly 80% of the
shares in this software and IT services giant. Tata Steel, till the
Corus acquisition, was a cash-rich company, with about Rs. 30b
in liquid invest- ments, adding about Rs. 50m every day to this
kitty. The acquisition transformed Tata Steel from a cash-rich, low
debt company to a cash-hungry giant that would be in constant
fund-raising mode over the next several years. Almost all its liquid
investments disappeared to fund the Corus acquisition.
• The equity contribution from Tata Sons and Tata Steel were not
enough, so a significant amount of “bridge loans” were taken to
finance the “equity” portion of the funding requirement (about
Rs120b). The bridge loans for equity used in the acquisition were
repaid by June, 2008, after which the complete loan acquisition
funding pattern became clear. The compositions of acquisition
funding structures before and after paying off the bridge financing
are shown in Graphs 1a and 1b.
Graph 1a. Composition of Corus Acquisition Funding Structure before the
repayment of bridge loans.

Graph 1b. Composition of Corus Acquisition Funding Structure after the

repayment of bridge loans.

Source: Company.

• Together with the contributions of Tata Steel and Tata Sons, the
entire “equity” portion was transferred to the three SPVs in the
Netherlands (as equity contribution)h. These SPVs then raised debt
in the ratio of (approximately) 3:1 leading to total fund collection
of around Rs. 650b, the acquisition price of 100% of Corus.

h
The SPVs were created to ring-fence and collect repayments of three bankers who funded the
acquisition.
• Between the time that Tata Steel won the right to buy out Corus in
the auction and the time the company’s share- holder and creditor
approvals were put in place, the Tata Group managed to
renegotiate the lending terms for financing the leveraged non-
recourse debt. Two of the orig- inal three bankers were changed
and it is believed that TSL saved about $1b in interest costs over
the lifetime of the loans due to the renegotiation. In addition, key
concessions were negotiated with regard to prepayment penalties,
and so on. These would have an uncertain, beneficial, impact on
the company.

LIFE AFTER THE CORUS ACQUISITION

In November 2007, Tata Steel purchased a 35% stake in a coal

venture owned by Riversdale Mining Limited in the Tete province of
Mozambique (Benga Project) for AU$100m. The company had 40%
off-take rights of the total output. In addi- tion, Tata Steel also
increased its stake in the parent, Rivers- dale Mining, to 24%, thereby
increasing its economic interest in the Benga project to 50.6%.
Later on, Rio Tinto, another mining giant, made an all-cash
offer for Riversdale at AU$16/share, valuing the company at
AU$3.9bn. The bid was recommended by all directors of Riversdale
except Tata Steel’s representative. Rio Tinto’s bid for Riversdale
implied a value of US$920m (Rs. 46 per share) for Tata Steel’s
stake in Riversdale. Industry observers believed that Tata Steel would
maintain its status quo stand because counter bidding would stretch its
balance sheet and selling its stake would lead to lower integrationi.
All of the above happened in spite of a worldwide recession
leading to price and demand crashes in 2008.
In September 2010, Tata Steel acquired a 80% interest in a
Canadian iron ore project — New Millennium Capital Corporation
(NML), along with 100% off-take rights for the project. In addition,
the company acquired approximately 27% of the common shares
of NML.

i
Analysts expected the net market value (i.e. market value-cost of investment) to be about
$540m.
 Also, in 2010, raw material suppliers got together and switched
from annual to quarterly rate contracts, thus making raw material
prices, and hence steel prices, more volatile.
In January 2011, TSL and Nippon Steel, entered into a
joint venture (JV) agreement to construct a continuous annealing and
processing line, which would produce automo- tive cold-rolled flat
products. TSL would have a 51% stake in the JV. The expected
capacity of the plant was 0.6 mtpa and would be situated in
Jamshedpur, India. It was scheduled to be completed by 2013.
The company was constructing a multi-purpose indus- trial
park at Gopalpur in the Ganjam district of Orissa State. The park
would primarily consist of office and industrial space and cater to
companies in the ores and minerals, gems and jewelry, engineering,
auto ancillary, chemicals and drugs, textiles and marine processing
sectors as tenants.
The company, in an effort to secure more coking coal for
Indian operations, purchased a 5% interest in the Carbor- ough
Downs Coal Project located in Queensland, Australia. It also
entered into an agreement that entitled it to purchase up to 20% of
the project’s annual coal production (with a minimum off-take of
5%), with 12 months notice and at market prices, over the life of the
project. This JV had Vale, JFE Steel, Nippon Steel and Posco as
partners.
It entered into:
a) a 50–50 JV with Steel Authority of India Limited (SAIL), to
acquire and develop coal mines in India. It had been working
towards acquiring several coal blocks in India.
b) JV with Vicem and VN Steel to construct an integrated steel
plant in Vietnam. TSL, VN Steel and Vicem, would have equity
stakes of 65%, 30% and 5%, respectively, in the JV. The initial
capacity of the plant was expected to be
4.5 mtpa.
c) 50–50 JV with L&T Ltd to develop a deep sea port at Dhamra,
Orissa, in order to enhance the company’s import and export
logistics capabilities from India. The port was expected to be
capable of handling 13 mtpa of coal and 6 mtpa of iron ore. It
could accommodate vessels with a capacity of 180,000 dead
weight tonnes. The port commenced its trial operations in
September 2010.
 FINANCING STRATEGY AT TATA STEEL 273

TSL was also trying to sell its non-core assets and improve its
liquidity situation. In August 2010, Tata Steel signed a Memorandum
of Understanding with Sahaviriya Steel Indus- tries Public Company
Limited (SSI), Thailand’s largest steel producer, whereby SSI would
acquire from Corus the Tees- side Cast Products (TCP) business in
a transaction valued at
$500m. Along with this, Tata Steel Ltd also sold of 27.03% in
Southern Steel Berhad, Malaysia under its subsidiary NatSteel
Holdings Pte Ltd for a total consideration of $72m.
Apart from the above rationalization of assets, the company
also raised Rs. 10.7bn in FY11 through the issue of stock and
warrants to promoters and would further receive Rs. 5.3bn on
conversion of warrants by the promoters in FY12. Tata Steel
planned to further reduce its leverage by the issue of equity shares
through its Follow-on Public Offer (FPO). The issue would lead to a
dilution of 6.3% and reduce promoter’s stake by 2.4%. It planned to
a) utilize Rs18bn of the issue proceeds for the expansion of
Jamshedpur plant,
b) repay debt to the tune of Rs. 10bn and c) invest in interna- tional
raw material projects in Mozambique and Canada.
Analysts expected the 3 mtpa capacity expansion in India to
generate $700mn of incremental EBITDA.

RECENT HISTORICAL FINANCING

Although, over the years, the net debt position of Tata Steel reduced
considerably, it was still quite high.
After the Corus acquisition, Tata Steel had been pro- actively
seizing opportunities to either re-negotiate terms or exchange
securities or raise money at lower costs and/or longer tenors well
before the commitments fell due. It had also raised equity whenever
it could. It explored several novel fund-raising options, including a
trademarked security with the acronym of CARS (see below).
Commenting on TSL’s challenges after the Corus acquisition
(due to the financial crisis in Europe), Koushik Chatterjee, the
company’s CFO, saidj:

j
An Indian approach to global M&A: An interview with the CFO of Tata Steel”, McKinsey
Quarterly, October 2009.
 “Since the Corus acquisition, we have become a large, diverse
organization in a very short time, adding signifi- cant complexity
to the business, which means I spend a lot of time focusing on
performance management, capital allo- cation, and liquidity
management. But we’d been building a liquidity cushion and
buffers long before the crisis. I think the best time to raise capital
is when you don’t need it immediately but have a long-term
deployment strategy in place. That gives you the leeway to get
the best out of negotiations with the providers of capital, because
you’re not under duress. These last six months have reaffirmed
my view on that point, and our buffers are in long-term capital —
three, five, or seven years — that won’t need refinancing in the
short term. We have also raised equity recently, which will be
deployed in some very attractive capital projects, especially the
growth projects in India. Given the volatility and uncertainty of the
global environ- ment, it is important to keep an adequate liquidity
buffer.”
As of September 30, 2010, the company had a net debt of about
$10.7 billion (Rs. 487,900m), out of which $5.32 billion was in lieu
of loans taken by the company for expansion of its Indian
operations. The outstanding debt also included a part of the $4.58
billion loan taken by the company to acquire Corus in 2007.
In November, the Tata Steel board had approved a proposal to
raise up to Rs. 70b ($1.5 billion) through various instruments.
Subsequently, on December 24, the company secured shareholders’
approval to raise a maximum of Rs. 50b. The company’s
financing history for the period 2006– 2011 is described below:
2010–2011: In July 2010, the Company issued GDRs (Global
Depository Receipts) worth $500 million at $7.644/share (each
GDR equals one share). This was one of the largest GDR offerings
by an Indian Company on the London Stock Exchange.
In addition, in July 2010, it issued warrants amounting to
$158.23m and ordinary shares amounting to $198m to Tata Sons, the
parent holding company.
In December 2010 and January 2011, it raised Rs. 30b via
issuance of 20 year Non-Convertible Debentures, where
the Company will have no cash outgo on account of interest for the
first 3 years.
2009–2010: In November 2009, the company made an offer to
exchange Cumulative Alternative Reference Securities (CARS) it had
issued in 2007k into Foreign Currency Convert- ible Bonds with the
objective of lengthening its debt maturity profile, reducing cost and
potentially reducing future repay- ment obligations l. CARS worth
$493 million were tendered for exchange into FCCBs worth
$546.935 million.
The Company also prepaid Rs. 20b of its term debt in
December ’09 and January ’10. It prepaid $300 million of foreign
currency term loans in February and March 2010. In addition, Tata
Steel Europe prepaid £100 million of its term debt in June 2009.
The Company achieved financial closure for its expan- sion of
2.9 mtpa in Jamshedpur for which it contracted long- term rupee
borrowing aggregating to Rs. 93.39b in Tata Steel Limited and its
subsidiary to be drawn over the next three years and to be repaid
over a period of seven years.
The Company also tied up ECA (Export Credit Agency)
backed long term buyer’s credit (import financing) of €264 m to be
drawn over the next two and half years and repaid over the next ten
years. The Company was also in the process of obtaining an
additional €70 m by way of further ECA backed long term buyer’s
credit.
In the second half of FY 09 and the first quarter of FY 10,
the Company had focused on raising additional debt in order to
maintain a liquidity buffer given the uncertain nature of the steel
markets. As a result, in April 2009, the Company raised Rs. 20b from
a term loan and in May 2009, it privately placed Rs. 21.5b of Non-
Convertible Debentures repayable after 10 years. It also contracted a
term loan of Rs. 6.5b for 10 years and one of Rs. 1.99b for 7 years.

k
The CARS amounting to $875m issued in September 2007 had a coupon of 5.15% and a
tenor of 5 years. They would get converted into ordinary shares at Rs. 733.13 per share.
l
The FCCBs carried a coupon of 4.5% and a tenor of 5 years. They would get converted into
shares at Rs. 605.53 per share.
2007–2008 and 2008–2009: The Company issued a series of three,
seven, eight and ten year non-convertible debentures of various
amounts during 2007–2009.
In May 2008 it raised Rs. 20 billion through a private
placement of redeemable non-convertible rupee debentures in three
series:
• Rs. 6.2b worth of non-convertible debentures series 1 (NCDs —
Series 1). They mature in May 2015 and carry a coupon rate
of 10.2% payable annually. They are listed on the wholesale debt
segment of the National Stock Exchange.
• Rs. 10.9b worth of non-convertible debentures series 2 (NCDs —
Series 2) with a 3-year maturity and floating rates.
• Rs. 2.9b worth of non-convertible debentures series 3 (NCDs —
Series 3) with a 3-year maturity and fixed rate.
In November 2008 Rs. 12.5b worth of 12.5% non-convertible
debentures were issued by the company. They mature in November
2016 and carry a coupon rate of 12.5% payable annually.
2006–2007: The company made a preferential issue of 27,000,000
ordinary shares with face value of Rs. 10 each, at a premium of Rs.
506 and 28,500,000 warrants to Tata Sons Ltd. Each warrant entitled
Tata Sons to subscribe to one ordinary share of the company against
payment in cash. The option to convert the warrants into ordinary
shares was exercisable on or after 1st April, 2007.
In addition, shares aggregating to Rs. 13.932b were issued.
On 16 April, 2007, Tata Sons exercised its option to convert
28.5m warrants into ordinary shares at a price of Rs.
484.27 per share. Accordingly ordinary shares were allotted to TSL
on 17th April, 2007, at a premium of Rs. 474.27 per share aggregating
to Rs. 13,801.7m
The company raised $100 million A-loan (equivalent of Rs.
4353.5m) and $300 million B-loan from International Finance
Corporation, Washington (equivalent Rs. 13,060.5m) by way of
secured loans.
 The company also incurred several unsecured loans the details
of which are given below:
• Japanese Yen syndicated loan of $495 million (equivalent Rs.
21,626.6m)
• External Commercial Borrowing loan of $5 million (equiva- lent
Rs. 217.7m) from Canara Bank, London
• Euro Hermes Loan equivalent Rs. 104.7m from Deutsche Bank,
Frankfurt
• Japanese Yen syndicated loan of $750 million (equivalent Rs.
32,988.8m) from Standard Chartered Bank
In addition, the company also took a short term loan of Rs. 2.5b
from IDBI Bank. Exhibits 7a, 7b and 7c provide a snapshot of Tata
Steel’s financing during 2007–2011.
TSL was able to embark on this policy of opportunis- tically
raising moneys and reducing leverage and financial costs mainly
because of the advantage it gained in the re- negotiation of its LBO
funding package. The result was a package unlike most other LBOs in
that the terms, as finally negotiated, allowed pre-payments. A
standard LBO funding package consists of no more than 20%
amortizable (ie, debt that can be reduced by repayments, like term
loans) loans and the remainder is repayable at the end of years 7 –
10. These bullet-repayment loans are the most expensive com-
ponent, and usually prepayment of these loans is prohib- ited. The
banks agreed to relaxation of these terms probably because a group as
large as the Tatas had enough clout and credibility to hold out the
prospect of participation in possible large future deals.

CONCLUSION

In pricing the follow on public offer, investment bankers com- monly

used the peer comparison approach to justify the issue price. Under
the peer comparison approach, the company’s implied Price-
Earningsm and other multiples were compared

m
P/E implied by the issue price assuming lower or higher of the prices within the price band
used for book building.
with peer companies. Exhibits 8a and 8b present TSL’s stand alone
and consolidated Earnings per Share and Return on Net worth.
Exhibits 9a and 9b present the data on peer company financials and
multiples.
Anuj reviewed all the documents and sat down to write his
investment thesis. He also noticed that at least five bro- kerages Viz.
Anand Rathi, Emkay Global Financial Services, ICICI Securities,
India Infoline, Networth Direct had issued a “buy” recommendation n.

REFERENCES

1. Goutam Chakraborty, Tata Steel, Emkay Global, January 19,

2011.
2. Pankaj Pandey et al., Tata Steel, ICICI Securities, January 19,
2011.
3. Pawan Burde, Tata Steel, Anand Rathi, January 11, 2011.
4. Tarang Bhanushali, Tata Steel, India Infoline, January 18, 2011.
5. Tata Steel, Networth Direct, January 18, 2011.
6. Tata Steel Analyst Meet Presentation, May 25, 2011.
7. Tata Steel Annual Reports 2007–08, 2008–09, 2009–2010, 2010–
2011.
8. Tata Steel Investor presentation, December 2010.
9. Tata Steel Investor presentation, January 2011.
10. Tata Steel Red Herring Prospectus.
11. Capital Market, Vol. XXV/21 and 22.

n
Pawan Burde, Tata Steel, Anand Rathi, January 11, 2011; Goutam Chakraborty, Tata Steel,
Emkay Global, January 19, 2011; Pankaj Pandey et al., Tata Steel, ICICI Securi- ties, January
19, 2011; Tarang Bhanushali, Tata Steel, India Infoline, January 18, 2011; Tata Steel, Networth
Direct, January 18, 2011.
 FINANCING STRATEGY AT TATA STEEL 279

Exhibit 1
Consolidated Income Statements (Rs. ’0 m)
2007 2008 2009 2010 2011E 2012E
Net Sales 25,212.4 131,535.9 145,686.3 101,757.8 109,286.1 122,442.4
Other Income 438.10 574.20 265.70 1185.90 500.00 500.00
Raw Materials 3489.0 33,324.6 41,531.7 31,004.5 33,227.7 36,685.4
Power 1315.0 44,929.3 5957.40 4051.7 4462.00 4940.10
Employee Expenses 1885.0 16,673.2 17,975.1 16,463.0 15,256.7 16,857.3
Freight 1508.4 6005.20 6024.90 5549.1 5941.90 6481.6
Total Expenses 17,762.2 113,542.8 129,201.6 94,350.5 95,814.0 105,400.2
EBITDA 7888.20 18,567.3 18,127.7 8042.7 13,972.1 17,542.2
Depreciation 1011.00 4137.00 4265.4 4491.7 4673.2 5173.1
Interest 411.20 4183.80 3290.2 3022.1 3148.3 2992.3
PBT 6313.00 16371.1 6743.2 31.00 6650.5 9876.8
Tax 2147.40 4049.30 1894.0 2151.8 2535.9 3487.6
Net Profit 4177.30 12,350.0 4950.9 -2009.2 4204.6 6479.2

Dividend % 22.6 9.70 26.3 33.4 21.9 14.1

EPS-Basic Rs. 64.6 177.0 67.80 22.7 47.4 73.1
EPS-Diluted Rs. 64.60 163.10 60.40 22.6 44.6 68.7
Source: CAPITALINE DATABASE, ICICI Securities.
 Exhibit 2
Consolidated Balance Sheet (Rs. ‘0 m)

2007 2008 2009 2010 2011E 2012E

Share Capital 580.00 6202.60 6202.80 886.70 958.70 958.70
Reserves & Surplus 14,235.8 28,198.2 22,324.1 27,344.0 30,492.8 35,916.2
Secured Loans 4961.2 35,415.0 34,329.3 31,979.3 31,129.3 29,279.3
Unsecured Loans 19,964.3 18,209.8 25,571.2 21,417.2 20,417.2 18,917.2
Net Deferred Tax 785.90 2464.70 1785.60 1769.00 1769.00 1769.00

Total Liabilities 42408.5 92420.4 92167.7 85261.3 86810.3 88883.7

Net Block 14,220.5 41,966.3 40,959.4 45,467.6 47,794.4 45,621.2

Capital WIP 3326.40 8899.4 8930.1 9930.1 11,930.1 9930.1
Investments 16497.5 3367.4 6411.1 5417.8 5417.8 5417.8
Inventories 3888.10 23,064.3 21,668.7 16,987.1 17,279.1 19,087.5
Sundry Debtors 1686.50 18,696.3 13,031.6 10,728.7 10,913.1 12,055.3
Cash & Bank 11,228.6 4470.4 11,383.3 6901.0 2650.5 4344.0
Loans & Advances 1980.30 15,459.8 13,015.7 6761.5 10,928.6 1 2244.2
Current Assets 16,804.4 46,240.1 46,090.5 34,623.7 30,849.4 35,493.6
CL & Provisions 7523.80 32,818.8 30,251.0 21,656.6 22,827.2 24,541.5
Net Current Assets 11,261.00 28,881.1 28,855.2 19,728.5 18,950.8 23,196.4
Total Assets 42408.5 92420.4 92167.7 85261.3 86810.3 88883.7
Source: CAPITALINE DATABASE, ICICI Securities.
 Exhibit 3
Cash Flow Statement (Rs. m)
2009 2010 2011E 2012E 2013E
Operating Cash Flow 95,011 71,290 120,092 111,978 126,789
 Capex 83,611 69,472 91,450 78,500 58,000
Free Cash Flow 11,400 1,819 28,642 33,478 68,789
 Dividend 12,266 13,209 14,686 16,396 17,936
+ Equity Raised 4 24,215 2,059 13,999 –
+ Debt Raised 20,514 (26,866) 15,184 20,000 (20,000)
 Investments 28,712 (17,530) – – –
 Misc Items (30,253) (2,908) 0 0 0
Net Cash Flow 21,192 6,396 31,198 51,081 30,852
+ Opening Cash 40,291 61,482 67,878 99,077 150,158
Closing Cash 61,484 67,878 99,076 150,158 181,010
Source: Anand Rathi Research.

Exhibit 4

Key Ratios

2007 2008 2009 2010 2011E 2012E

EPS (Rs.) 64.6 177.0 67.8 22.7 47.4 73.1
Cash EPS (Rs.) 80.2 236.3 126.2 28.0 100.1 144.6
Book Value (Rs.) 229.1 493.1 390.7 318.4 354.7 457.5
Adj. Book Value (Rs.) 229.9 234.4 180.3 154.4 192.7 279.3
EBITDA Margin (%) 31.3 14.1 12.4 7.9 12.8 14.3
Net Profit Margin (%) 16.6 9.4 3.4 2.0 3.8 5.3
RONW (%) 28.2 35.9 17.4 7.1 13.4 17.6
ROCE (%) 16.2 15.6 15.0 4.2 10.7 13.9
EV/EBITDA 4.7 4.8 4.8 11.9 7.0 5.4
Price to Book Value 2.7 1.2 1.6 1.9 1.7 1.4
P/BV Adj. 2.7 2.6 3.4 4.0 3.2 2.3
Source: CAPITALINE DATABASE and ICICI Securities.
 Exhibit 5
Peer Group Ratio Comparison
Interest Coverage Ratio

03/31/10 03/31/09 03/31/08 03/31/07 03/31/06 03/31/05 03/31/04 03/31/03

Company/Year

Tata Steel Ltd.* 4.42 5.91 8.61 25.92 31.03 24.15 12.74 5.28
JSW Steel Ltd. 4.13 2.76 6.02 5.71 3.53 4.1 1.73 0.66
Essar Steel Ltd. 0.99 1.59 2 1.92 2.06 2.65 1.13 0.99
Ispat Industries Ltd. 0.75 0.71 1.1 1.02 0.19 1.77 1.17 0.74
SAIL 26.2 37.23 46.7 29.37 13.2 15.36 3.75 0.67
JSL Stainless Ltd. 1.76 0.19 2.61 4.54 3.86 7.24 4.5 2.49

Debt/Equity Ratio

03/31/10 03/31/09 03/31/08 03/31/07 03/31/06 03/31/05 03/31/04 03/31/03

Company/Year

Tata Steel Ltd. 0.78 0.78 0.67 0.51 0.31 0.53 0.99 1.35
JSW Steel Ltd. 1.29 1.2 0.88 0.83 1.06 1.85 4.9 7.74
Essar Steel Ltd. 1.85 1.46 1.47 1.69 2.1 4.41 10.8 49.56
Ispat Industries Ltd. 9.19 5.37 4.5 4.84 3.91 4.35 6.62 6.84
SAIL 0.39 0.21 0.18 0.28 0.44 0.94 2.86 5.02
JSL Stainless Ltd. 4.12 3.18 2.14 2.01 1.98 1.59 1.62 1.9

Net Assets/Net Worth

03/31/10 03/31/09 03/31/08 03/31/07 03/31/06 03/31/05 03/31/04 03/31/03

Company/Year

Tata Steel Ltd. 1.68 2.31 2.07 1.67 1.23 1.36 1.71 2.33
JSW Steel Ltd. 2.26 2.51 2.06 1.8 2 2.31 4.82 8.91
Essar Steel Ltd. 3.41 2.59 2.37 2.74 6.17 5.43 9.9 14.23
Ispat Industries Ltd. 22.55 111.13 14.95 17.83 15.84 5.64 11.2 11.36
SAIL 1.5 1.27 1.13 1.23 1.32 1.53 2.65 5.91
JSL Stainless Ltd. 4.93 5.36 3.33 2.88 3.19 2.72 2.4 3.14
*
The ratios of TSL reflect consolidated results.
Source: CAPITALINE DATABASE.
 Exhibit 6
Tata Steel Stock Price Chart (Rs.)

1000
900
800
700
600
500
400
300
200
100
0
Jan−92 Jan−93 Jan−94 Jan−95 Jan−96 Jan−97 Jan−98 Jan−99 Jan−00 Jan−01 Jan−02 Jan−03 Jan−04 Jan−05 Jan−06 Jan−07 Jan−08 Jan−09 Jan−10 Jan−11Jan−91

Source: Bombay Stock Exchange.

Exhibit 7a
Historical Financing 2009–2011

Year Instrument Amount

2010–2011 NCD Rs. 30b No cash interest outgo for 3 years; 20 year
2010–2011 GDR $500m

2009–2010 FCCB CARS worth $493m were exchanged into FCCBs, 5 year

Tenor

2009–2010 Rupee Term Loan Rs. 93390m; 7 year tenor

2009–2010 Buyer’s Credit €264 m

2009–2010 Term Loan Rs. 20b

2009–2010 NCD Rs. 21.50b (privately placed)

2009–2010 Term Loan Rs. 6.50b (10 years)

2009–2010 Term Loan Rs. 1.99b (7 years)

Source: Company Website, Analyst Reports.

 28
Exhibit 7b 4
A
Historical Security Issuance 2007–2009 C

Year 2009–2010 2009–2010 2008–2009 2008–2009 2008–2009 2008–2009

Security NCD* NCD NCD NCD Series 1 NCD Series 2 NCD Series 3
Amount Rs. m 15,000 6510 12,500 6200 10,900 2900
Issue Date May-09 May-09 Nov-08 May-08 May-08 May-08
Maturity Date May-19 May-19 Nov-16 May-15 May-11 May-11
Coupon % 11 10.4 12.5 10.2 Mibor + 250 bp 9.8
Coupon
Payment Annual
Listing NSE India NSE India NSE India NSE India NSE India NSE India
AA (Fitch) AA+ AA (Fitch) AA+
Rating AAA (Fitch) AAA (Fitch) AAA (Fitch) AAA (Fitch)
(CARE) (CARE)

Year 2007–2008
†
Security CARS

Amount $ m 382
Issue Date Sep-07
Maturity Date Sep-12
Coupon % 1
Coupon
Semi annual
Payment
Listing SGX, Singapore
*
Non Convertible Debenture.
†
Cumulative Alternative Reference Securities.
Source: CAPITALINE DATABASE and Company Website.
 FINANCING STRATEGY AT TATA STEEL 285

Exhibit 7c
Summary of Capital Raised/Repaid

Rs ’0 m Raised/(Repaid)
3938 CARS Sep 07 Used to retire bridge financing
2000 NCDs May 08 Used to retire bridge financing
1250 12.5% NCDs Nov 08 Used to retire bridge financing
5473 Cum. Conv. Preference Shares issued Dec 08
1500 11.5% NCDs May 09
651 10.4% NCDs May 09
900 Prepayment Jun 09
1800 Injection as per re-negotiation Jun 09
2250 GDRs Issued Jul 09
1800 Injection as per re-negotiation Sep 09
2465 CARS Exchanged Nov 09
2730 FCCBs issued Nov 09
500 10.25% NCDs Dec 10
2000 Prepaid Rupee debt Dec 10 Q4
1350 Prepaid Foreign Currency debt Dec 10
2500 10.25% NCDs Jan 11
3477 FPO Jan 11
Source: Casewriter Estimates.
 Exhibit 8a
Stand Alone and Consolidated EPS of TSL
Standalone Earning Per Share (Face Value Rs. 10 per Equity Share)
Basic (Rs.) Diluted (Rs.) Weight
FY 2008 66.8 62.1 1
FY 2009 69.4 62.9 2
FY2010 60.3 57.3 3

Weighted Average 64.4 60.0

Six months ended September

40.8 38.7
30, 2010

Consolidated Earning Per Share (Face Value Rs. 10 per Equity Share)

Basic (Rs.) Diluted (Rs.) Weight (Rs.)

FY 2008 107.4 106.4 1
FY 2009 48.0 44.9 2
FY 2010 (24.3) (24.3) 3

Weighted Average 21.8 20.6

Six months ended

September 30, 2010 42.6 40.4

Source: Tata Steel RHP.

 FINANCING STRATEGY AT TATA STEEL 287

Exhibit 8b
Stand Alone and Consolidated Return on Net Worth of TSL
Stand Alone RONW
RONW % Weight
FY 2008 17.2 1
FY 2009 17.1 2
FY 2010 13.4 3

Weighted Average 15.3

Six months ended September

8.7
30, 2010

Consolidated RONW

RONW % Weight
FY 2008 22.0 1
FY 2009 12.9 2
FY 2010 (8.7) 3

Weighted Average 3.6

Six months ended September

13.7
30, 2010

Net Asset Value per Equity Share

Net Asset Value per Equity Share as of September 30, 2010 is Rs.
463.6 on a standalone basis and Rs. 307.7 on a consolidated basis
Source: Tata Steel RHP.
 Exhibit 9a
Domestic Peer Comparison FY 2009–2010
Name of the Consolidated/ EPS P/E NAV RoNW
Company Unconsolidated Rs. Rs. %
Tata Steel Unconsolidated 57.3 – 418.9 13.4
Tata Steel Consolidated (24.3) – 259.7 (8.7)
JSW Steel Unconsolidated 10 13.5 662.3 23.3
SAIL Unconsolidated 10 12.2 80.7 22.0
Bhushan Steel Unconsolidated 2 11.4 186.2 28.2
Source: Capital Market Vol. XXV/21; December 13–26, 2010 (Industry- Steel Large).

Industry P/E
Highest 16.3
Lowest 1.8
Industry Composite 10.9
Source: Capital Market Vol. XXV/22;
December 27, 2010–January 9, 2011
(Industry — Steel Large) P/E Ratios based
on TTM EPS and price as of December 20,
2010.
 FINANCING STRATEGY AT TATA STEEL 289

Exhibit 9b
Forecasted Multiples for Domestic and Global Steel Companies

P/E EV/EBITDA ROE ROA

2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E
Domestic

Tata Steel 13.0 8.6 7.0 5.4 10.7 13.9 6.8 7.4
SAIL 11.2 9.5 6.7 5.3 16.0 17.0 9.6 9.8
JSPL 15.1 12.0 10.4 8.3 33.4 30.9 14.2 14.1
JSW Steel 12.9 8.4 9.0 6.3 12.8 15.6 5.3 7.4

Global

Arcelor Mittal 15.3 13.1 9.3 7.5 5.9 6.5 3.4 3.2
POSCO 8.9 8.3 5.9 5.4 12.5 12.1 9.3 9.1
Nippon Steel 13.2 10.7 7.1 6.5 7.4 9.4 4.4 5.1
KOBE Steel 12.9 12.0 5.7 5.4 9.2 9.9 3.7 6.1
Source: ICICI Securities.
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