An Analysis on Asia's first private steel company: Tata Steel

Business Overview

Founded way back in 1907, Tata Steel is Asia’s first private steel company. The company is one of the first ventures of the Tata Group and continues to remain a significant contributor to its revenues. The possession of captive mines has helped the company to maintain low cost of raw materials thereby leaving a greater headroom to set margins. They were among the first to start branding steel products in order to organise the pricing and distribution channels. Various innovations in Human Resource practices in India which have become standard across industries were first introduced at Tata Steel. Mahatma Gandhi said “Tata Steel is a great Indian firm, a miniature Swaraj” on his visit to the steel city of Jamshedpur to solve a labour issue. In fact, not many of you would have known, Netaji Subhash Chandra Bose was one of the presidents of the Tata Steel Workers’ Union in its early days. Despite all the turbulent times that it has witnessed over its 115 years of existence, Tata Steel has remained intact akin to the strength of the steel that it produces. Various landmarks of modern architecture from Burj Khalifa. The Howrah Bridge and the recent Narendra Modi Cricket Stadium owe their roots to the quality of steel from Tata Steel’s factories. 

Business Segments

The business is broadly divided into:

• Construction
• Automotive
• General Engineering
• Industrial
• Agricultural

Steel industry’s growth is synonymous with the economic growth of a country. As a matter of fact, Tata Steel’s products would have in some way or the other touched your life. As of September 2021, India was the second largest producer of crude steel in the world. India’s aspirations to become a $5 Trillion economy won’t be distant as long as some of the major industries including steel keep moving towards growth.

As shown in the above chart, the construction sector is the biggest consumer of steel in India. This could well reflect even Tata Steel’s revenue share of its business segments. One in every two major infrastructure projects use Tata Structura and two-thirds of metro rail, flyovers and bridges are built using the strength of Tata Steel Global Wires.

Global Markets

The steel manufacturing and related facilities are in India, the UK, Netherlands and Thailand while the raw material mines are in India and Canada. 

Competitive Advantage

Former CMD J.J. Irani had emphasised on the need for customer-oriented product mix and had started lean manufacturing to combine low cost with quality. This was imperative in the wake of competition augmenting from local players promising superior products. At a certain point, the company was sailing in unknown waters and a change was indispensable. To ensure that the company stayed afloat, an alteration in the personnel management was engineered. New personnel were added and the results of the process were sensational. We must remember that for quality steel, we equally need quality personnel. Apart from this, the company had adopted backward integration which gave a fillip to ensure low cost of raw materials. Well, they have believed in owning raw materials for their profitability for over 100 years!

Sustainability

Sustainability can be best measured by the six capitals: Human capital, social and relationship capital, natural capital, financial capital, intellectual capital and manufactured capital. The company had joined the ResponsibleSteel organisation, the industry’s first global multi-stakeholder standard and certification initiative. This initiative helps in aligning with the global ISEAL codes of good practice. The firm has been committed to improve its sustainability and has created autonomous organisations like the Tata Main Hospital and JUSCO to benefit the community at large. Apart from that, the company has been actively working with its distributors by providing training and ensuring that their needs have been met. 

Revenues

The company earns revenues from various baskets of iron and steel products which include hot rolled, cold rolled, coated oil, tubes, rebar and wire rods. In fact, even the leftover iron products including crushed steel products and iron dust generate revenues for the company. Let’s look at the total revenues earned over the years. 

Total revenues from operations have been on an increasing trend, just for a decrease in FY 2020 owing to less demand due to pandemic restrictions. Over these 5 years, revenues have grown at CAGR of 15.75% 

Quality Management

Tata Steel has benefitted from robust quality management models that make a mark in the steel industry. Company’s flagship “SHIKHAR25” operational efficiency model has helped it reduce waste at different levels of production. This has shown fruition in the achievement of the prestigious Deming Grand Prize in 2012. 

What factors affect the steel sector

Before we move on to discuss the share price trend, let’s make ourselves aware of the various determinants that affect the steel sector. Over the past years, iron ore prices have acted as a better economic indicator than its rivals’ copper and gold. In fact, if the iron ore prices increase, it indicates that there is growing demand and further economic activity. It has been observed, (S&P Report) that China is the main driver for change in iron ore prices. It has around 90% correlation to China’s A50 stock market index. This shows that the biggest consumer is China and also the largest producer is China. This dominance in the steel sector contributes to the overall economic prosperity in the country. India has Tata Steel as its sole entrant in the top 15 largest crude steel producers’ list according to a report by Statista. Now, let’s look at this thumb rule given by the industry: “We need around 3 tons of raw materials in the form of iron ore and coke to produce 1 ton of steel”. Due to this ratio, the challenge further increases in terms of robust inbound logistics as well. In India, unlike several other countries, most of the steel plants are located in inland remote areas to get closer to the raw material source. This affects the outbound logistics in order to reach the customer timely. So hence, this capital-intensive sector pins down its hopes on a steady demand in order to continue financing its huge debt. Steel sector sales are cyclical, meaning, they shall go up when there is a boom and decline when there is a slump. Major factors for huge sales could be growth in infrastructure and related activities, automobile sector, telecommunication sector, and other household related sectors. Each of these sectors have their own determinants like for the automobile sector, crude oil prices could be a determinant. Hence, the demand can keep fluctuating and this increases the risk of financial leverage. Thanks to rise in global steel prices, Tata Steel had reduced its debt to Rs 51,049 crore. There is a detailed report on Tata Steel’s Q4 Earnings here.

Share Price Trend (1 Yr)

The shares have been on a downward trend and have lost as much as 61% from its 1-year high. This fall isn’t attributed to Tata Steel alone, other companies in the sector have also corrected significantly. Last month, the government had imposed 15% export duty on iron ore and some other steel intermediaries in a bid to curb inflation in construction costs. The metal-related companies have been falling since then. This has negatively impacted the sector’s capacity utilisation. Last year, global steel prices reached record highs surpassing even the 2008 financial crisis levels. Pandemic induced restrictions began to ease and China was one of the early countries to open the economy as a result demand skyrocketed. But after the onset of the omicron variant, China demand slowed down due to lockdown curbs. The rise in coking coal prices, an input for producing steel further affected share price as operating margins lowered. 

Analysts Review

Centrum Broking: “Buy”

• The analyst reduced FY23 EBITDA by 11% due to the export duty addition and rising coking coal prices.
• With that mind, target price has been reduced to ₹1492 from ₹1586

IIFL Securities: “Buy”

• Analyst recommends to buy on dips as the stock fell to its 52-week low.
• The market has discounted the downside triggers and buying interest in the stock can be seen.