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Restructure, core competency is the latest mantra at Tisco - Views on News from Equitymaster
 
 
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  • Jan 8, 1999

    Restructure, core competency is the latest mantra at Tisco

      Background

    • Tata Iron and Steel Company Limited (Tisco) is the second largest integrated steel company in India having a saleable steel capacity of 2.7 m tonnes.

    • The company has embarked on a major consolidation drive under which it has sold its cement unit to Lafarge, its captive power plant to Tata Electric Companies, and its stake in Tata Timken to Timken, USA. The company is now planning to sell its infotech division. Tisco is currently setting up a 1.2 m tonnes per annum cold rolling mill as a measure of forward integration.

    • Tisco reported sales of Rs 14.3 bn (up 5.5% YoY) and a net profit of Rs 248 m (down 8.5% YoY) for the first quarter ended 30th June 1999. Though fall in net profits has been attributed to the higher interest and depreciation costs, the operating margins too have fallen from 16.8% to 16.6% over the same period.

      FY99 results

    • During FY99, Tisco recorded an all time high production of saleable steel at 3.11 mn tons, with semi finished goods accounting for 27% (37% in the previous year) of the total output. The shift in the product mix, in favour of finished or value-added goods, is expected to lead to higher margins.

    • The company's tubes and bearings divisions recorded a strong growth in volumes, while the ferro chrome division and the cement divisions recorded a decline in volumes over the previous year. Tisco has since sold the cement division to Lafarge and its stake in Tata Timken to Timken, USA, for considerations of Rs 5.5 bn and Rs 1.18 bn respectively.

    • The domestic steel markets witnessed an excess of supply during the year, resulting in lower realisations per ton of steel sold. The excess supply was the result of fresh capacities going on stream and dumping by international companies. Furthermore, the decline in demand due to the general economic slowdown contributed to the glut in the market. Although Tisco was successful in cutting operating costs, the fall in price realisations far outstripped the cost savings, resulting in a fall in the operating margins to 14.9% from 15.5% in the previous year.
    • The steel industry got some reprieve from the dumping of steel products as the government imposed floor prices for imports of steel products in December 1998. The imposition of floor prices made the import of steel products unviable. This resulted in relatively higher demand for domestic output, and also led to the steel producers hiking the prices. However, Indian companies did not fare well in the international markets. Tisco recorded a drop of 2% in export volumes primarily due to the excess supply in the international markets.

    • Tisco has been able to cut costs in the areas of operations, procurement and supply chain. It sources a large part of its raw materials from its own captive mines and therefore it is in direct control of these costs. Tisco, long criticised for being overstaffed, has reduced its labour force to just over 59,000 from a high of over 72,000 in FY96. This has further reduced costs, even though it still has a long way to go meet the levels of its international peers.

      Concerns

    • The current spurt in domestic demand has been aided by the floor prices imposed by the government, as the importers turned to local manufacturers to meet their needs. Once these barriers to imports are diluted, it is uncertain whether steel companies, including Tisco, would be able to effectively compete with international majors. Moreover, there could be retaliatory action in the international markets if the floor prices were to stay for long. This would adversely affect exports, leading to excess supply in the domestic markets.

    • Tisco's mega steel project at Gopalpur has been shelved for the time being. Instead, the company has decided to set up a cold rolling mill, having a capacity of 1.2 mn tpa, at its Jamshedpur site. With Tisco already operating close to its capacity levels, it could face a capacity constraint in the future. However, if the company were to go ahead with the new project, it would have to seek external funding, which would lead to an escalation in debt servicing costs. This is primarily because Tisco's internal cash generation is insufficient to meet the expenses involved in setting up the new project.

     

     

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