Tata Steel - Where growth comes first

Tata Steel - Where growth comes first

June, 2001

The steel giant seems to be slowly getting into the growth mould, if its current annual results are anything to go by. The company's profit before extraordinary items and tax grew by about 78% to Rs 888.28 crore in FY 2000-01 as against Rs 499.10 crore in the previous financial year. Its net profit after tax has increased by 31% YoY to Rs 553.44 crore, while operating profit margin improves by 400 basis points. Cost reduction seems to be at the core of this growth, which has helped the company to become the lowest cost producer of steel globally. However, the story does not end here. To accelerate its growth engine, the steel juggernaut is now on a restructuring binge, which involves charting certain new business paths too.

The steel major's strategy to benchmarking itself with and adopting the best practices of companies like Nippon Steel of Japan and Posco of Korea, is now paying rich dividends, as it has been able to reduce its cost of production from $225 per tonne in 1998 to $145-$150 per tonne currently. The company has emerged as one of the lowest cost producers of steel in the world among the five major international players at a cost of around $177 per tonne for hot roll coils (HRC), as per the report published by CRU internationally. The present cost of production of Tisco at $150-$155 has further come down in comparison to the other four lowest cost producer in the world viz. Posco (South Korea), CSN (Brazil), CSL (Brazil) and Magnatogorst (Russia). This has been achieved on the back of a constant focus on various areas affecting the cost of steel i.e. cost of conversion, cost of raw material, fuel rate in blast furnace and the mining of coal. Besides, the company has been using the most modern technologies which have helped cut costs. The yield on every tonne of input used in producing a tonne of steel has also gone up considerably. The company has also made an effort to cut down costs by negotiating with customers in the supply chain at various stages to take advantage of economies of scale. At present, the company incurs a cost of only $5 per tonne of iron ore as raw material. This is highly competitive as compared with international standards of iron ore procurement costs of around $20 per tonne. Manpower reduction is also one of the key areas to reduce cost. The company has reduced its manpower from 75,000 to 48,000 over the last four years. These steps have sustained the low cost of steel even when the hiked freight rates affected the cost structure of other steel companies.

The cost reduction has been further achieved through innovative strategies and aggressive cost cutting exercises. To begin with, The company no longer uses manganese to increase strength and flexibility of steel, as the metal is too expensive. The company’s delivery time has shrunk from three to four weeks in 1998 to two weeks now. It aims to reduce it further to one week. Tisco has identified few market segments, and intends to dominate them by delivering quality steel at competitive price. The company is also focusing on e-business and branding, which will aid it further in curtailing costs.

Based on the recommendations of Mckinsey, the steel major has initiated a major restructuring drive. This involves forming up of three fully autonomous strategic business units (SBUs) to be headed by three deputy managing directors. With the formation of SBUs, the functional responsibilities will primarily lie with the three deputy managing directors who will have independent charge. While the steel division will concentrate on the steel making process as well as the raw material supply chain including the collieries, the new & allied businesses will focus on the production and sales of tubes, bearings and secondary steel as well as exports. The corporate services arm, which has been formed as a separate entity, will take charge of corporate communications, town and medical services, social services and information technology. The restructuring initiatives is expected to result in a leaner organisational setup which could foster healthy competition among the various wings. The focus on the respective units will also be much greater.

The company's future growth is expected to be driven by value-added products, in the areas of automobiles and consumer durables. This is because all the company's plants are already operating at full capacity and hence do not leave any room for increased production. The company is striving hard to improve its revenue mix in favour of high margin cold roll sheets. In a technical collaboration with Nippon Steel, the company has commissioned 1.2 million tones cold rolling mill in August 2000 at a cost of Rs 16 billion. Its Rs 3 bn second cold galvanizing line of 0.3 million tonne capacity is also expected to start commercial production by mid 2001. While the first mill would service the construction sector, products from the second mill would be largely for the automobile industry. The segment is expected to account for 34% of the company revenues two years from now. The major positive is that there are no large capacity additions foreseen in the near future. The production of premium automotive grade steel would not only help the company in improving realizations but would also add to the growth of the company's topline.

Organic growth apart, Tisco is also planning to invest $50 million in setting up a 0.1 million tonne ferro chrome export oriented project in Australia. The reason for putting a plant in Australia is comparatively the lower power cost. It would get power at a tariff of 1.8 cents for over 15 years, which is one fifth of tariffs in India. Power accounts for 60 percent of the cost of ferro chrome manufacturing and India's power cost at 9 cents per unit is far higher than the 2-3 cents per unit elsewhere in the world. As part of a strategic decision to enter the mining business, Tisco is also foraying into titanium mining. The company is looking at alliances with global majors for manufacturing titanium dioxide. Further on the anvil is the plan to get into the call centre business in Jamshedpur on a large scale to provide employment to those opting for the voluntary retirement scheme in the over manned steel company. In order to develop the business, the company has forged a marketing alliance with Tata International, the trading arm of the group. Though Tata Steel is exiting from areas that are not part of its core activities, the foray into the manpower intensive call centre business will enable it to exploit manpower in Jamshedpur.

To what extent all these plans materialize, only time will tell. However, the near future does not paint a very rosy picture, especially in the backdrop of a weak outlook on global steel demand scenario. Stiff competition from the cheap imports and the anti-dumping duties imposed on the domestic steel manufacturers by the US do not augur all too well. Nonetheless, the long-term prospect looks bright, especially in the backdrop of the company's strategy to broadbase its export markets, which include Jordan, Iraq and South-East Asia, in order to reduce its dependence on US markets. This apart, the company's foray into value-added products would make it less susceptible to international steel prices and help it chart the growth trajectory.