A

Report on
Working Capital Management at
Tata Steel Ltd.

Submitted To : Submitted By :
Prof. C.V. Kumar Ankit Agrawal

IBS-Hyderabad Roll No. : 10ESPHH010007

 Executive MBA (2010-11)

IBS-Hyderabad

Table of Contents

1. Tata Steel Ltd. : Brief Profile …………………………………………………..1

2. Macroeconomic Changes affecting Indian Steel Industry …………..2

3. Working Capital Management of Tata Steel Ltd.….........................2

(i)Estimation of Working Capital....................................................3
(ii)Working Cycle & Turnover Ratios ………………………………….……..3

4. Analysis
(i)Effectiveness of Working Capital Management ………………………4
(ii)Inventory and Receivables Management ………………………………4
(iii)Impact of changes in Working Capital on Sales ........................ 5

5. References ……………………………………………………………………………..6
Tata Steel Ltd. : Brief Profile
The Tata Steel Group has always believed that mutual benefit of countries, corporations and
communities is the most effective route to growth. Tata Steel has not limited its operations and
businesses within India but has built an imposing presence around the globe as well. With the
acquisition of Corus in 2007 leading to commencement of Tata Steel's European operations, the
Company today, is among the top ten steel producers in the world with an existing annual crude
steel production capacity of around 30 million tonnes per annum and employee strength of above
80,000 across five continents. The Group recorded a turnover of Rs.147,329 crore (US$ 28,962
million) in 2008 - 2009. The Company has always had significant impact on the economic
development in India and now seeks to strengthen its position of pre-eminence in international
domain by continuing to lead by example of responsibility and trust.

Raw Material Sourcing : Tata Steel’s Indian operations are self-sufficient in iron ore through its
captive mines. The mines and collieries in India give the Company a distinct advantage in raw
material sourcing. It is 60% self sufficient for coking coal and the rest is procured mostly
through imports. However, for Corus operations, the Company needs to source raw materials
through contracts with mining companies in UK and the Netherlands. Tata Steel is also striving
towards raw materials security through joint ventures in Thailand, Australia, Mozambique, Ivory
Coast (West Africa) and Oman. Tata Steel has signed an agreement with Steel Authority of India
Limited to establish a 50:50 joint venture company for coal mining in India. Also, it has bought
19.9% stake in New Millennium Capital Corporation, Canada for iron ore mining. Exploration of
opportunities for titanium dioxide in Tamil Nadu, commissioning a Ferro-chrome plant in South
Africa and setting up of a deep-sea port in coastal Orissa are on for meeting the Company's
objectives of growth and globalization

Macroeconomic Changes affecting Indian Steel

Industry
Steel is a deregulated sector and the Government does not directly make investments in the steel
industry In order to promote the domestic steel industry, the Government has framed the
National Steel Policy, 2005 and constituted an Inter-Ministerial Group (IMG), under the
chairmanship of Secretary (Steel) in 2007, to monitor and coordinate the issues concerning major
steel investments in the country related to infrastructure, raw material supply, environmental
clearance and other resource constraints. In the National Steel Policy 2005, a target has been kept
for increasing the per capita steel consumption in rural areas from 2 Kg per capita per annum to 4
Kg per capita per annum by 2019-20 through active focus on opening of new rural sales outlets
along with promotional efforts to increase demand.
A Gross Budgetary Support (GBS) of Rs.118.00 crore has been provided for promotion of
Research and Development (R&D) in the Iron and Steel Sector during the Eleventh Five Year
Plan. Government implements various fiscal measures in the form of duties and taxes, from time
to time with an overall view to regulate economy and boost the industry.  However, on the
aftermath of global economic slowdown the following economic stimulus measures were
initiated by the Government during October 2008 to February 2009 :

 Export Duty on steel items (except melting scrap) withdrawn with effect from 31.10.2008
 Duty Entitled Pass Book (DEPB) on steel items restored with effect from 14.11.2008
 Import Duty on iron and non-alloy steel items re-imposed at 5% with effect from
18.11.2008
 Central Value Added Tax (CENVAT) on steel items reduced to 8% with effect from
24.02.2009 ; and
 Countervailing duty (CVD) on Thermo Mechanically Treated (TMT) bars and structural
were reintroduced with effect from 02.01.2009.

Working Capital Management at Tata Steel Ltd.

Firms need money to pay for their day to day activities. They have to pay salaries, bills, suppliers
& so on. The funds available to do this, is known as the firms working capital. Managing the
working capital needs of the organization is important, because shortage of funds could disrupt
the day to day operations where as by holding excess funds the interest burden of the firm starts
mounting & eating into its profits. There are two concepts of Working Capital, Gross Working
Capital & Net Working Capital. Gross working capital is the sum total of all Current Assets,
Inventories, Debtors, Loans & Advances & Cash & Bank balances. Net Working Capital is the
difference between Current Assets & Current Liabilities & Net working capital is a qualitative
concept. It indicates the liquidity position of the firm and suggests the extent to which working
capital needs may be financed by permanent sources of funds. Current assets should be
sufficiently in excess of current liabilities to constitute a margin or buffer for maturing
obligations within the ordinary operating cycle of a business. In order to protect their interests,
short-lived creditors always like a company to maintain its current assets to maintain at higher
level than current liabilities.A firm needs to invest in Current assets to ensure Smooth and
Uninterrupted Operations. How much the firm invests will depend on its operating cycle. Cash
flows in a cycle into, around and out of a business. It is the life blood of the business and it is the
primary responsibility of the management to keep it flowing to generate profits.
 (i)Estimation of Working Capital
Tata Steel Ltd. FY FY FY FY FY
 
(Rs. Crore) 2004-05 2005-06 2006-07 2007-08 2008-09
A CURRENT ASSETS 4083.58 4237.6 13701.89 36962.44 10285.09
  Store and Spare parts 349.06 442.66 505.44 557.67 612.19
  Stock in Trade 1523.34 1732.09 1827.54 2047.31 2868.28
  Sundry Debtors 581.82 539.4 631.63 543.48 635.98
  Interest accrued on Investments 0.2 0.2 0.2 0.2 -
  Cash & Bank balance 246.72 288.39 7681.35 465.04 1590.6
   Loans & Advances 1382.44 1234.86 3055.73 33348.74 4578.04
CURRENT LIABILITIES &
B PROVISIONS 3699.99 3808.72 5453.66 6768.78 8974.05
  Sundry Creditors 2689.83 2835.99 3523.2 3855.26 6039.86
  Provisions 1010.16 972.73 1930.46 2913.53 2934.19
   
WORKING CAPITAL
C
{C= A-B }
 383.59 428.88 8248.23  30193.66  1311.04
Table-1

(ii)Working Cycle & Turnover Ratios

Tata Steel Ltd. FY FY FY FY FY
 
(Rs. Crore) 2004-05 2005-06 2006-07 2007-08 2008-09
A Working Cycle (in days)
  Store and Spare parts Cycle 122.77 123.563 93.44 104.932 87.674
  Stock in Trade Cycle 1.855 2.045 1.41 2.6035 2.58
  Sundry Debtors 15.342 12.71 11.44 10.236 8.423
  Gross Working Capital Cycle 163 164.521 131.355 140.24 119.589
  Creditors 90.71 88.61 95.421 90.74 109.48
   Net Working Capital Cycle 72.29 75.91 35.934 49.504 10.111
B Turnover Ratios
Inventory Turnover Ratio 10.42 9.89 10.81 10.84 9.36
Debtors Turnover 23.79 28.72 31.91 35.659 43.33
  Creditors Turnover  2.735 2.512 2.583 2.385 3.094

Table-2

Analysis
(i)Effectiveness of Working Capital Management
The study of working capital management at Tata Steel Ltd. should be done in two phases, the
first phase begins with 2005 (when Indian Government published National Steel Policy and
signaled producers to increase production to meet national and international demand) and ending
in 2008.The period 2008-09 constitutes the second phase when recession hit the world demand
and steel production also decreased drastically.

From Table-1, we can see that company’s working capital has increased significantly(from Rs
383 crores in 2005 to 30193 crores in 2008) .This increase is mainly on account of increase in
national and international demand ,company decided to move aggressively in acquiring current
assets to increase their production capacity .Tata Steel management showed extremely
aggressive and effective working capital management as their strategy was to put Tata Steel on
global footprint in terms of total steel output .Specially in second half of 2007 company’s cash
and bank balance has gone down by 93%(approx) to back their current investments in increasing
capacity [Note : The Corus deal also played huge role in this erosion of cash and bank balance of
the company)

The company’s working capital decreased by approximately 95% in FY 2008-09 over previous
year due to slowdown in global economy, shrinking demand and increased liquidity concerns
forced company to be more cautious in acquiring current assets and management went for wait
and watch approach during this period.

From Table-2, we can see that Tata Steel’s management has been able to decrease the Net
operating cycle from 72 days(approx.) to 10 days(approx.) which speaks volume about the
effectiveness of working capital management at Tata Steel Ltd. Also, company’s creditor
turnover has also increased consistently over the years suggesting that creditors are ready to back
company’s expansionary plans on operations front.

(ii)Inventory and Receivables Management

From Table-2, inventory turnover of the company has increased consistently barring
2009(slowdown period) which suggests that company operations have increased demanding the
company to replenish their inventories more frequently.

Also , company’s Debtor turnover has almost doubled during this period which means that
despite global slowdown company’s has been able to collect cash from its trade receivable
partners .This is evident of Tata Steel’s excellent receivables management.
 (iii)Impact of changes in Working Capital on Sales
Tata Steel Ltd. FY FY FY FY FY
 
(Rs. Crore) 2004-05 2005-06 2006-07 2007-08 2008-09
A Sales 14498.95 15139.39 17552.02 19691.03 24315.77

Table-3

From above table we can see that Tata Steel’s sales has consistently increased.This growth can
be attributed to increased international consumption of steel and Indian Government’s National
Steel Policy,2005 to increase consumption and production of Steel in India.To cater to this
increase in demand company has to increase its production and that required accumulation of
Working Capital ,which is exhibited in Table-1.Thus, Tata Steel’s management’s strategy to
accumulate the working capital in order to increase its output to cater growing consumption of
Steel worldwide is reflected in its enthusiastic Sales figures.

References
1. www.money.rediff.com
2. www.tatasteel.com/investors
3. CMIE’s Prowess database
4. Financial Management by I.M. Pandey