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Tisco: The story of change - Views on News from Equitymaster
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  • Mar 31, 2001

    Tisco: The story of change

    Tata Steel, India’s oldest steel company has been undergoing a dramatic change over the last 12 months. The company, which is the lowest steel cost producer in the world, is now leveraging its cost structure by moving into value added products. The benefits of this coupled with initiative to bring down operating cost would usher in an unprecedented earnings growth for the company. Tata Steel (Tisco) is best known for its quality of products and has won the CII-Exim Bank Award for business excellence for 2000. This would give it the much needed impetus and recognition in the international market.

    The steel industry in India is recovering from the slowdown in the domestic growth over the past few years. Benefits given in the budget to the housing sector and increasing infrastructure spending is expected to fuel the slowing demand. Auto sector, which is a major consumer of steel is however, continues to disappoint by recording a drop of 12% during the first 11 months of the current fiscal.

    (Rs million) 9m FY00 9m FY01 Change
    Sales 48,337 54,668 13.1%
    Other Income 289 398 37.7%
    Total Income 48,626 55,066 13.2%
    Operating Profit 8,114 12,446 53.4%
    Interest (net) 2,555 2,708 6.0%
    Depreciation 3,183 3,559 11.8%
    Profits before tax 2,376 6,179 160.1%
    Tax 300 310 3.3%
    Profits after tax 2,076 5,869 182.7%
    Extraordinary items 286 (2,430)
    Net Profit 2,362 3,439 45.6%
    Equity shares (m) 368 368
    Despite the dismal growth of the auto sector, Tisco has recorded an outstanding performance in the first nine months of the current fiscal. The company’s net profits (before extraordinary item) jumped by more than 180%, driven by an improvement of 590 basis points in operating margins. The rise in margins came on the back of firm international prices and declining costs. Tisco is continuously initiating measures to ensure that its manufacturing process is comparable to the world’s best steel producers. By benchmarking itself with and adopting the best practices of companies like Nippon Steel of Japan and Posco of Korea, Tisco has been able to reduce its cost of production from $225 per tonne in 1998 to $145 per tonne today.

    The cost reduction has been achieved through innovative strategies and an aggressive cost cutting exercise. To begin with, Tisco 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 by the end of current fiscal. 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.

    Key ratios 9m FY00 9m FY01
    Operating profit margins 16.2% 22.0%
    Tax / PBT 12.6% 5.0%
    Net profit margins 4.3% 10.7%
    Cash EPS (Rs) 19.0 34.0
    EPS (Rs) 7.5 21.2
    Over the years, Tisco has been restructuring by selling off non-core businesses, reducing man power and unwinding unviable units. The company is aggressively downsizing its workforce and plans to bring the number to 48,000 by the end of current fiscal (The number was 75,000 in 1994). It is also initiating measures to retire high cost debt and plans to bring down the overall ratio. These would surely add significantly to its cash flow in the coming years and help in growing inorganically.

    The enhancement in the future growth will however, come from making higher-value steel products, like for automobiles and consumer durables, since its steel plants are already operating at full capacity leaving no room to produce more. Tisco 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 its revenues two years from now and its biggest 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 topline growth.

    Apart from organic growth, Tisco has planned 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 the comparatively 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, Tisco plans 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. Worldwide, the call centre business generates revenues of $20 billion annually, indicating a good growth opportunity for the company.

    Tisco has its hands full with offshore acquisitions in Australia, buyouts in India and new initiatives in titanium extractions. These new businesses will complement its existing business and generate revenue growth for the company.

    Edge over competitors
    Companies Operating
    Tata Steel 22.0% 10.7%
    Essar Steel 22.5% 1.1%
    SAIL 14.8% -6.8%
    Posco 18.0% 14.5%
    Pohang Steel 18.1% 14.6%
    Nucor Corp. 10.0% 6.5%
    Although, the future looks bright for the company, all is not so rosy. Weak global demand and subdued steel prices could make a dent in its profitability unless the scenario in the global markets improves. The company is facing stiff competition from the cheap imports. Anti-dumping duties imposed on the domestic steel manufacturers by the US are also pressure points. Beset with the possibility of fresh duties in the US, Tata Steel is planning to reduce its exposure to the American markets and broad base its export markets to include Jordan, Iraq and South-East Asia. Exports would continue to play a crucial part for the fortunes of steel industry with the domestic production out pacing consumption.

    Thus, despite a change in product mix, diversifying market segments and foray into new areas, Tisco still remains a commodity play, impacted by global fluctuation in prices. However, the company will be less susceptible to international steel prices with changing value proposition. Also, HR (Hot rolled coil) prices are at the bottom of the cycle and are expected to improve with a rise in global demand. This could bring cheer to Tisco’s performance in the coming years.



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