Final PROJECT

EVALUATION OF STEEL SECTOR

Submitted to: Dr. V. K. VasalDepartment of Financial Studies, University of Delhi

Submitted By: Naveen Pachisia (2230)

MFC Part-II

Certificate

This is to certify that the project entitled, “Evaluation of Steel Sector” is based on my original research work, and my indebtedness to other works has been duly acknowledged at the relevant places in this study. Further this work has been not been submitted earlier for the award of any other degree.

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(Naveen Pachisia)Master of Finance and ControlDepartment of Financial StudiesUniversity of Delhi, South Campus

Internal Guide External Guide

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(Dr. V.K. Vasal) (Mr. Anil Sodani)Faculty Deputy General ManagerDepartment of Financial Studies Jindal Saw LimitedUniversity of Delhi, South Campus

Acknowledgement

At the successful completion of my project, I would like to express my sincere gratitude to all the people without whose support this project would not be completed.

I wish to express my heartiest thanks to Dr. V. K. Vasal, Faculty, Department of Financial Studies, University of Delhi South Campus for his valuable support and advice for carrying out this project. I thank him sincerely for giving me the opportunity to work on this project, and being the guiding spirit behind this project.

I would also like to express my sincere gratitude towards Mr. Anil R. Sodani, Deputy General Manager, Syndicate Bank, for his kind co-operation and valuable inputs throughout the duration of this project, and also for helping me have a keen insight of the steel sector.

I also take this opportunity to thank my family and friends, and above all the Almighty for being with me throughout the time that it took to complete this study.

Executive Summary

India is a reputed name in the world steel industry; the country's steel industry is catching up the pace and luring the steel majors from all over the world. The industry has gained strength from the strong Indian economy, and strong sectors like infrastructure, construction and automobile.

Although India consumes less steel as compared to other Asian countries, it was ranked the fifth major crude steel producer in the world in 2008. Thus, the country offers vast scope for the steel industry in future

Analyzing the Indian Steel Industry focuses on the Indian Steel Industry and analyses each and every aspect of the industry. Starting from an analysis of the competitiveness of the industry to the production/consumption scenario of the industry, the report analyzes the Indian Steel Industry through a SWOT framework analysis, a PEST framework analysis, and a Porter's Five Forces Strategy

Analysis.

To realise the potential of the Indian Steel Industry the steel makers have to realise the potential of having strategic alliances. There have been almost revolutionary changes in the global steel scene with fierce competitive pressures on performance, productivity, price reduction and customer satisfaction. National boundaries have melted to encompass an ever increasing world market. Trade in steel products has been on the upswing with the production facilities of both the developed and the developing countries complementing each other in the making of steel of different grades and specialty for the world market. The TATA-Corus deal viewed as one of the revolution in the Indian Steel Industry. In this study, the detail aspect of the strategic alliances would be studied. The technical feasibility, economic feasibility and the social aspects entailed in it

Introduction

The global steel industry has been going through major changes since 1970. China has emerged as a major producer and consumer, as has India to a lesser extent. Consolidation has been rapid in Europe.

Growth of the industry

Global steel production grew enormously in the 20th century from a mere 28 million tonnes at the beginning of the century to 781 million tonnes at the end.

World Steel Production in the 20th Century

Over the course of the 20th century, production of crude steel has risen at an astounding rate, now fast approaching a production level of 800 million tons per year. Today, it is difficult to imagine a world without steel.

During the 20th century, the consumption of steel increased at an average annual rate of 3.3%. In 1900, the USA was producing 37% of the world’s steel. With post war industrial development in Asia that region now (at the turn of the century) accounts for almost 40%, with Europe (including the former Soviet Union) producing 36% and North America 14.5%.

Steel consumption increases when economies are growing, as governments invest in infrastructure and transport, and build new factories and houses. Economic recession meets with a dip in steel production as such investments falter. If you were to overlay the above graph with a time sheet showing major historical events, the peaks and dips become meaningful. Note for example the peaks corresponding to the years of the two World Wars, followed each time by a dip, and soon after by strong climbs as the major economies recovered from the war and entered new periods of prosperity and growth, most notably in the 1950s and 1960s. The trend over the past three decades can also be seen to be in line with cyclical economic trends, with alternating periods of prosperity and recession. That was the period when the steel industry developed in Western Europe and the USA followed by the Soviet Union, Eastern Europe and Japan. However, steel consumption in the developed countries has reached a high stable level and growth has tapered off.

After being in the focus in the developed world for more than a century, attention has now shifted to the developing regions. In the West, steel is referred to as a sunset industry. In the developing countries, the sun is still rising, for most it is only a dawn.

Towards the end of the last century, growth of steel production was in the developing countries such as China, Brazil and India, as well as newly developed South Korea. Steel production and consumption grew steadily in China in the initial years but later it picked up momentum and the closing years of the century saw it racing ahead of the rest of the world. China produced 220.1 million tonnes in 2003, 272.2 million tonnes in 2004 and 349.36 million tonnes in 2005. That is much above the production in 2005 of Japan at 112.47 million tonnes, the USA at 93.90 million tonnes and Russia at 66.15 million tonnes.

Growth potential of the industry

Growth of the Chinese steel industry appears to be staggering. However, when one considers that China has a population of 1.3 billion, the per capita steel consumption is around or below that of the developed countries. Indeed, while China has been progressively raising steel production for many years, it has also been importing substantial quantities of steel. It is only now that China has become a net exporter of steel. This indirectly means that China has also reached a level of production saturation and its steel industry is more likely to witness more of consolidation and reorganisation in coming years rather than any major expansion of its assets.

Amongst the other newly steel-producing countries, South Korea has stabilised at around 46-48 million tonnes, and Brazil at around 30 plus million tonnes. This brings the focus of the industry to India. Considering a steel consumption of 300 kg per man per year to be a fair level of economic development, India will have to come up to somewhere around 300 million tonnes, if it is to fulfil its ambitions of being a developed country. That of course is a long journey from the present production level of around 50 million tonnes but one must consider its past before coming to a conclusion about its potential. India was producing only around a million tonnes of steel at the time of its independence in 1947. By 1991, when the economy was opened up steel production grew to around 14 million tonnes. Thereafter, it doubled in the next 10 years, and then it is doubling again, maybe over a slightly longer span. Steel Production in India is expected to reach 124 million tons by 2012 and 275 million tons by 2020 which could make it the second largest steel maker.

In the developed countries, the trend is on consolidation of industry. Cross-border mergers have been taking place for several years. The focus is on technological improvements and new products.

Globally, the steel industry became a billion tonne industry in 2004. How much more it will grow will depend primarily on how much more steel is consumed in the developing countries.

Reduction in workforce

Steel is no more the labour-intensive industry it used to be. Earlier, it was often associated with the image of huge work force living in a captive township. All that has changed dramatically. A modern steel plant employs very few people. In South Korea, Posco employs 10,000 people to produce 28 million tonnes. As a thumb rule, one can put the direct employment potential at 1,000 per million tonnes. It could be less. However, steel being a basic industry; it generates substantial growth of both upstream and downstream facilities. According to some estimates one person-year of employment in the steel industry generates 3.5 person-years of employment elsewhere. Considering all these, total employment generation will be substantial.

The third quarter of the twentieth century witnessed massive growth of the global steel industry. Annual production rose more than three times in 15 years from 1960. In the last quarter of the century, production reached a plateau, rising only by around 100 million tonnes. Increase in production gave way to increases in productivity.

During the period 1974 to 1999, the steel industry had drastically reduced manpower all around the world. In USA, it was down from 521,000 to 153,000. In Japan, it was down from 459,000 to 208,000. In Germany, it was down from 232,000 to 78,000. In UK, it was down from 197,000 to 31,000. In Brazil, it was down from 118,000 to 59,000. In South Africa, it was down from 100,000 to 54,000.

South Korea already had a low figure. It was only 58,000 in 1999. The steel industry had reduced manpower around the world by more than 1,500,000 in 25 years.

Employment in the steel industry 1974, 1990 and 1996-2000 In thousand

Country 1974 1990 1996 1997 1998 1999 2000

Austria44 21 13 12 12 12 12

Belgium 64 26 23 21 20 20 20Denmark 2 1 1 1 1 1 1Finland 12 10 7 7 8 7 8France 158 46 39 38 38 38 39

FR Germany (1) 232 125 86 82 80 78 77Greece 0 3 2 2 2 2 2Ireland 1 1 0 0 0 0 0

Italy 96 56 39 37 39 39 39Luxembourg 23 9 5 5 4 4 4Netherlands 25 17 12 12 12 12 12

Portugal 4 4 2 2 2 2 2Spain 89 36 24 23 22 22 22

Sweden 50 26 14 14 14 13 13United Kingdom 197 51 37 36 34 31 29European Union 996 434 306 293 290 280 278

Yugoslavia (2) 42 69 17 17 17 15 15ECanada 77 53 53 53 55 57 56

United States 521 204 167 163 160 153 151Brazil 118 115 79 74 63 59 63

South Africa 100 112 71 70 61 54 56Japan 459 305 240 230 221 208 197

Republic of Korea n/a 67 66 64 59 58 57Australia 42 30 21 20 20 24 21E

World Production 644 (3) 770 750 799 777 789 848

INDIAN STEEL INDUSTRY

India's Steel Industry is more than a century old. Before the economic reforms of the early 1990s the Indian steel industry was a predominantly regulated one with the public sector dominating the industry. Tata Steel was the only major private sector company involved the production of steel in India. Sail and Tata Steel have traditionally been the major steel producers of India. In 1992, the liberalization of the India economy led to the opening up of various industries including the steel industry. This led to the increase in the number of producers, increased investments in the steel industry and increased production capacity. Since 1990, more than Rs 19,000 crores (US$ 4470.58 million) has been invested in the steel industry of India.

India's steel industry went through a rough phase between 1997 and 2001 when the overall global steel was facing a downturn and recovered after 2002. The major factors that led to the revival of the steel industry in India after 2002 were the rise in global demand for steel and the domestic economic growth in India.

India has now emerged as the eighth largest producer of steel in the world with a production capacity of 35MT. almost all varieties of steel is now produced in India. India has also emerged as a net exporter of steel which shows that Indian steel is being increasingly accepted in the global market.

The growth of the steel industry in India is also dependant, to a large extent, on the level of consumption of steel in the domestic market. Steel consumption is significant in housing and infrastructure. In recent years the surge in housing industry of India has led to increase in the domestic demand for steel.

More than 3500 different varieties of steel are available in the steel industry of India. These can however be classified into two broad categories -

Flat Products - Flat products include plates and hot rolled sheets such as coils and sheets. Flat products are derived from slabs. One of the major uses of steel plates is in ship building.

Long Products - Long products include bars, rods, wires, ropes and piers. These are called long products due to their shapes. Long products are made from billets and blooms. Long products are mostly used in housing and construction and also in rail tracks.

Size of the Indian Steel Industry

The steel industry is one of the major industries of India. It has also gained considerable importance in the global steel industry. This century old industry of India was mostly a regulated one till 1990.

The economic reforms undertaken in India in the early 1990s gave a major boost to the steel industry and it grew considerably in terms of investment, production capacity and number of producers. The industry faced a downturn during the late nineties but revived again by 2002.

The size of India's steel industry has increased considerably in recent years. According to latest available estimates, India ranks eighth among the top steel producers of the world with a production capacity of 35 MT.

The steel industry of India has capital investments

Of more than Rs 100, 000 crores. The total employment in the industry is more than two million (including direct and indirect employment).

Some of the major reasons that have led to the growth in the size of India's steel industry are -

Abundant availability of iron-ore in IndiaGood facilities for steel productionIncreased consumption of steel in the sectors like construction.

Growth Potential of India’s Steel Industry

India has traditionally been one of the major producers of steel in the world. Till the 1990s the steel industry of India was regulated and controlled by government policies. After the economic

reforms of the early 1990s, the Indian steel industry has evolved significantly to conform to global standards.

India has set a vision to be an economically developed nation by 2020. The steel industry is expected to play a major role in India's economic development in the coming years. The steel industry of India has a very high growth potential and is expected to register significant growth in the coming decades. India is expected to emerge as a strong force in the global steel market in coming years.

The two major aspects that are expected to play a significant role in the growth of the steel industry in India are -

Abundant availability of iron ore in the country

The country has well established facilities for steel production

Steel production in India has grown from 17 MT in 1990 to 36 MT in 2003. It is expected that by 2011, the steel production in India will grow to 66 MT.

The current scenario of the Indian steel industry indicates that there is huge growth potential in his industry. The per capita-consumption of steel in India, according to latest available estimates, is only 29 kg. This is much less compared to the global average of 140kg. The per capita consumption level of developed nations like the United States of America is 400kg. In this respect, one of the major initiatives that need to be taken is to focus on increasing the consumption of steel in the rural areas of India. The potential for the growth of consumption of steel in the rural areas of India for purposes like rural housing, rural infrastructure, etc is high which needs to be tapped efficiently.

In order to realize the growth potential in the steel industry of India, it is essential to ensure that the industry can remain competitive. One of the major aspects in this regard is the availability of inputs. Shortage of inputs like coke has led to increase in costs earlier. Moreover proper infrastructure facilities like transport infrastructure, power etc are of prime importance in maintaining the competitiveness of the industry.

Most developed countries have regulations that are aimed to protect the domestic steel industry. The Indian steel industry has comparatively much lesser protection through regulations. Proper regulatory measures should be adopted by the government to protect the domestic steel industry.

FDI in Steel IndustryThe foreign direct investment in India being made in the steel industry of India has been picking up in the recent years as a result of the immense growth potential of the country's steel industry. In

the Asian continent India is second only to China in terms of growth potential. The gross domestic product of India has increased in the recent times.

This has sparked off the demand for production of steel in the country and the production has increased as well. In the recent times India has been among the top producers of crude steel of the world. All these factors are supposed to be important for attracting foreign direct investment in the Indian steel industry.

The Indian national government also has been pretty liberal with their approach to the foreign direct investment being made in the country. The Indian government has also relaxed the various foreign investment laws. This has led to more international steel giants coming to India to tap the abundant resources present in the country.

The increased interest shown by such companies has led to a growth in the steel industry of India. Research and studies have shown that Orissa and Jharkhand would be the steel junctions of India.

In the recent times these two states, which are located in the eastern part of India, have been experiencing a number of steel projects in India. These projects have been funded by the Indian national government, as well as, a number of companies that are forces to reckon with in the context of the Indian steel industry.

Since, the government has also been taking steps to make sure that the production and demand for Indian steel remains high in the international market, it may be assumed that an increasing number of companies from around the world would be interested in the Indian steel industry

Challenges before Indian Steel Industry

There are certain challenges before the steel industry of India in the recent times. India has been one of the major producers of steel in the world and has also been attracting a lot of foreign direct

investment. A few issues would need to be attended to if India wants to be counted as one of the

major and most economical producers of steel. The three areas that need to be improved upon in the view of the exports are the infrastructure, ability to draw the top names in steel, and wealth creation issues.

The condition of the infrastructural facilities of the steel industry in India is not at all conducive to a sustainable growth and development of the steel industry of the India.

The methods that are adopted for the creation of wealth in the Indian steel industry are also supposed to act as hindrances to the growth and development of the Indian steel industry. The Indian steel industry has also not been able to draw the best professionals in the steel industry and that has been a major drawback of the industry.

The experts are also of the opinion that not enough policies or measures have been adopted to amend the situation in case of the infrastructural facilities available in the steel sector. Even though India is capable of producing steel at a good rate and also increase the volume of production there is not enough land available to support such activities. One of the major reasons for such problems is the consistently increasing population of India.

Porter’s Five Forces Analysis of the Steel Industry & Firm Level capabilities analysis

SUPPLIER POWER Supplier concentration

Importance of volume to supplier Differentiation of inputs

Impact of inputs on cost or differentiation Switching costs of firms in the industry

Presence of substitute inputs Threat of forward integration

Cost relative to total purchases in industry

BARRIERSTO ENTRY

Absolute cost advantages Proprietary learning curve

Access to inputs Government policy Economies of scale

Capital requirements Brand identity

Switching costs Access to distribution

Expected retaliation Proprietary products

THREAT OFSUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes

BUYER POWER Bargaining leverage

Buyer volume Buyer information

Brand identity Price sensitivity

Threat of backward integration Product differentiation

Buyer concentration vs. industry Substitutes available

Buyers' incentives

DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes

1. Competition from substitutes.Increasing substitutes in the form of plastics, aluminium and advanced composites.

2. Threat of EntryHigh barriers to entry in the integrated mill segment. However, with the mini-mills, the barriers are being lowered due to lower costs (a tenth of those in the integrated mills per ton of steel produced).

3. Competition from rivals.Highly competitive since products are not differentiated and have high fixed costs as well as exit barriers. There is also competition from the cheaper imports as well as the cyclicity of demand.

4. Bargaining power of buyersPrice sensitive market due to no product differentiation.

5. Bargaining power of suppliersUnionised labour leading to high bargaining power of labour supply. Cost competition among steel manufacturers also leads to high bargaining power of suppliers.

Sources of competitive advantage in the steel industry

1. Length of production time, i.e., technology used in production process.

2. The cost of production, especially since the steel market is highly price-sensitive. Low-cost, high-quality imports pose a significant threat to the domestic industry and hence, competitive pricing is essential to be ahead.

3. “Dependable delivery”, i.e., lower delivery time to consumers.

4. Quality of steel produced and distributed.

5. People• High productivity of labour at its plants/production facilities.• High performance orientation through performance linked compensation plans for employees.• Dedicated workforce indicated by lower turnover (only 5%) than the industry average (10%-12%). This could be attributed to the equality of treatment among workers at the production facilities (same colour jackets).

6. Firm level capabilities• Simple and flat organization structure with only about 5 layers.

SWOT Analysis of Indian Steel Industry

Strengths:

1.The government offers a wide range of concessions to investors in India, engaged in steel industry. The main concessions include, inter alia:

* Steel in specified backward districts is eligible for a complete tax holiday for a period of 5 years from commencement of production and a 30 percent tax holiday for 5 years thereafter.

* Environment protection equipment, pollution control equipment, energy saving equipment and certain other equipment eligible for 100 percent depreciation.

* One tenth of the expenditure on prospecting or extracting or production of certain minerals during five years ending with the first year of commercial production is allowed as a deduction from the total income.

* Export profits from specified minerals and ores are eligible for certain concessions under the Income tax Act.

* Minerals in their finished form exempt from excise duty.

* Low customs duty on capital equipment used for minerals; on nickel, tin, pig iron, unwrought aluminium.

* Capital goods imported for steel under EPCG scheme qualify for concessional customs duty subject to certain export obligation.

2. World's largest producer of mica; third largest producer of coal and lignite & barites; ranks among the top producers of iron ore, bauxite, manganese ore and aluminium.

3. Labours easily available

4. Low labour and conversion costs.

5. Large quantity of high quality reserves.

6. Exports iron-ore to China and Japan on a large scale

7. Strategic location: Proximity to the developed European markets and fast-developing Asian markets for export of Steel, Aluminium

Weakness:

Coal steel in India is associated with poor employee productivity. The output per miner per annum in India varies from 150 to 2,650 tonnes compared to an average of around 12,000 tonnes in the U.S. and Australia; and

Historically, opencast steel has been favoured over underground steel. This has led to land degradation, environmental pollution and reduced quality of coal as it tends to get mixed with other matter;

India has still not been able to develop a comprehensive solution to deal with the fly ash generated at coal power stations through use of Indian coal. Clean coal technologies, such as Integrated Gasification Combined Cycle, where the coal is converted to gas, are available, but these are expensive and need modification to suit Indian coal specifications.

Poor infrastructure facilities

Steel technology is outdated

Low innovation capabilities

Labour force is highly un-skilled and inexperienced

High rate of accidents

Lack of R&D programs and training and development

Most of the Indian steel companies do not have access to Indian capital market

There is a lack of respect for the steel industry and it suffers from the incorrect perception that ore deposits are depleted.

There is limited access to capital, and mines are increasingly more costly to find, acquire, develop and produce.

There are long lead times on production decisions.

The Indian steel industry suffers from an out-dated, unattractive approach to steel education that is partly to blame for insufficient human resources.

Improvement in operational efficiency of the steel companies - Steel companies are in need of an organizational transformation to gradually align its operating costs to international standards. Steel costs of Indian companies are at least 35 percent higher than those of leading coal exporting countries such as Australia, Indonesia, and South Africa. To match productivity, they will need to invest in new technologies, improve processes in planning and execution of projects, and institutionalize a comprehensive risk management framework.

Steel operations are not environment friendly. Least importance is given to environment concerns.

High rate of illegal steel

The Opportunities

India has an estimated 85 billion tonnes of mineral reserves remaining to be exploited. Besides coal, oil and gas reserves, the mineral inventory in India includes 13,000 deposits/ prospects of 61 non-fuel minerals. Expenditure outlay on steel is a meagre sum when compared to other competing emerging steel markets and the investment gap is most likely to be covered by the private sector. India welcomes joint ventures between foreign and domestic partners to mobilise finances and technology and secure access to global markets.

Potential areas for exploration ventures include gold, diamond, copper, lead, zinc, nickel, cobalt, molybdenum, lithium, tin, tungsten, silver, platinum group of metals and other rare metals, chromate and manganese ore, and fertiliser minerals.

The main opportunities in the steel sector (excluding coal and industrial minerals) are in the development and production of surplus commodities such as iron ore and bauxite, mica, potash, few low-grade ores, steel of small gold deposits, development of placer gold resources located on the frontal belt of the Himalayas, steel known deposits of economic and marginal categories such as base metals in Bihar and Rajasthan and exploitation of lacerate for nickels in Orissa, molybdenum in Tamil Nadu and tin in Haryana.

Considerable potential exists for setting up manufacturing units for value added products.

There exists considerable opportunities for future discoveries of sub-surface deposits with the application of modern techniques.

Current economic steel practices are generally limited to depths of 300 meters and 25 percent of the reserves of the country are beyond this depth

Strengthening of logistics in coal distribution - In India, the logistics infrastructure such as ports and railways are overburdened and costly and act as bottlenecks in development of free market. Privatization of ports may bring the needed efficiencies and capacities. In addition, capacity addition by the Indian Railways is necessary to increase freight capacity from the coal producing regions to demand centres in the northern and central parts of the country. On the Indian rail network, freight trains get a lower priority than passenger trains, a problem that promotes delays and inefficiency. Special freight corridors would raise speeds, cut costs, and increase the system's reliability.

Focusing on technology for future - India's numerous technology research institutes are working on energy related R&D. However, there is a possibility that they are operating in a fragmented fashion. The Government may get improved recoveries on its investment by concentrating on few important technology areas. To start with focus may be applied for tighter emission standards and development of inexpensive clean-coal technologies viz. extraction of methane from coal deposits.

Estimated 82 billion tonnes of reserves of various metals yet to be tapped

While India has 7.5% of the world's total bauxite deposits, aluminium production capacity is only 3% of world capacity, indicating the scope and need for new capacities

Threats:

Foreign Investment in the Steel Sector

During 1999, the Government had cleared 7 more proposals of leading international steel companies for prospecting and exploration in the mineral sector to the tune of US$ 62.5 million. 65 licenses have been issued till date for prospecting an area of around 90,142 skims in the states of Rajasthan, Maharashtra, Gujarat, Bihar, Haryana and Madhya Pradesh. Prospecting licenses have been granted in favour of Indian subsidiaries of well-known steel companies...

Large integrated international metal manufacturers including POSCO, Mittal Steel and Alcan have announced plans for expansion in India

Steel companies and equipment suppliers are under the constant threat of being taken over by foreign companies.

A heavy tax burden discourages further investment.

Politicians undervalue the industry's contributions to the economy

Competition Analysis of the Steel Industry

Differential Pricing

Downstream producers compete with integrated producers for the same end-product

Allegations of differential pricing between the intermediate and the end product

Cartelization?

Threat of imports, public perception, users’ of HRC constitute a large lobby

Suspicions of concerted action by steel majors (PSUs operation)

Cartelization, when the market is strong, but not when it is weak

Single largest steel product traded, and requires large investment

Five producers dominate the market

Vertical integration: example, SAIL and TISCO also manufacture downstream products, though much of it is merchandised

Intra-industry competition is complex due to merchant operations, where users of intermediate face competition with the same finished product also produced by the producers of intermediates

Government intervention has played a major role in determining the competition scenario

Tata - Corus: Visionary deal or costly blunder?

Is the Corus acquisition by Tata Steel a defining moment for the company has made out to be?

After four months of twists and turns, Tata Steel has won the race to acquire Corus Group. The bidding war between Tata Steel and Brazilian company CSN was riveting and ended in a rapid-fire auction. Initial reactions to the deal are highly diverse and retail investors are completely puzzled by the market reaction.

Going by the stock market reaction yesterday, the acquisition is a big blunder. The stock tanked 10.5 per cent after the deal was announced and another 1.6 per cent today. Investors are worried about the financial risks of such a costly deal.

Media reaction to the deal has been just the opposite. Almost all the reports were adulatory while editorials praised the coming of age of Indian industry. A prominent financial daily presented the deal almost as revenge of the natives against the old colonial masters with a picture of London covered in our national colours.

Its editorial warned the market 'not to bet against Tata', citing the previous instances when sceptics were proved wrong by the group. Official reaction has been no different and the finance minister even offered all possible help to the Tata Group.

Is the acquisition too costly for Tata Steel? Is price the only criterion while evaluating an acquisition? Should managers focus on keeping shareholders happy after every quarter or should they focus on the long-term, big picture? These are tough questions and, unfortunately, answers would be clear only after many years - at least in this case.

When could the steel cycle turn?The last few years were some of the best ever for the global steel industry as robust demand from emerging economies like China pushed up prices. Profits of steel manufacturers across the globe swelled and their market capitalisations have multiplied many times.

Global Steel output(in million tonnes)

Country 2005 2006 % change

China 355.8 418.8 17.7

Japan 112.5 116.2 3.3

US 94.9 98.5 3.8

Russia 66.1 70.6 6.8

South Korea 47.8 48.4 1.3

Germany 44.5 47.2 6.1

India 40.9 44.0 7.6

Ukraine 38.6 40.8 5.7

Italy 29.4 31.6 7.5

Brazil 31.6 30.9 (2.2)

World production 1,028.8 1,120.7 8.9

How long will the good times last? Tata Steel believes the steel cycle is in a long-term uptrend and the risk of a downturn in prices is low. In fact, the global steel industry might witness sustained growth as during the 30-year period between 1945 and 1975.

The massive post-war infrastructure build-up in Western countries led to the sustained steel demand growth in that period. The coming decades would see similar infrastructure spending in emerging economies and steel demand would continue to grow, according to this view.

The International Iron and Steel Institute (IISI), a respected steel research body, corroborates this in its outlook. The growth in demand for global steel would average 4.9 per cent per year till 2010 according to the IISI. Between 2010 and 2015, demand growth is expected to moderate to 4.2 per cent per annum according to IISI forecasts. Much of this demand growth would come from China and India, where the IISI estimates growth rates to be 6.2 per cent and 7.7 per cent annually from 2010 to 2015.

Now consider steel prices. Expectations of sustained demand growth have already led to massive capacity additions, mostly in emerging markets. Chinese steel capacity has expanded significantly over the last decade while a large number of mega steel plants are being planned in India. Capacity additions by Russian and Brazilian steelmakers would also be significant in future as they have access to raw material.

Would the capacity additions outrun the demand growth and lead to subdued steel prices? Under normal circumstances, that could have been a very strong possibility. But many industry leaders believe that the global steel industry would see a structural shift in the coming years.

Some of the inefficient steel mills in mature markets would face closure while others would shift production to high value-added products using unfinished and semi-finished steel supplied by steel mills in locations like India, Russia and Brazil with access to raw material. This would limit aggregate supply growth and keep prices stable in future.

Major global steel makers are also not unduly worried about the possibility of large-scale exports from China, which would depress international steel prices. Chinese capacity is expected to continue to grow in the coming years, but so would the demand.

Besides, Chinese steel plants are not expected to emerge very efficient as they depend on imported raw materials, which limit their pricing power. Many steel analysts expect significant consolidation in the Chinese steel industry as margins erode further in future. The Chinese government has already started squeezing the smaller units by withdrawing their raw material import permits.

The need for scalegoing by the IISI forecasts, global steel demand would be 1.32 billion tonnes by 2010 and 1.62 billion tonnes by 2015. Even Arcelor-Mittal, the largest global steel player by far, has a present capacity, which is just 6.8 per cent for projected demand in 2015. To maintain its current share, Arcelor-Mittal

would have to add another 50 million tonnes of capacity by then. This confirms the view that there is still considerable scope for consolidation in the steel industry.

Global steel ranking

Company Capacity (in million tonnes)

Arcelor - Mittal 110.0

Nippon Steel 32.0

Posco 30.5

JEF Steel 30.0

Tata Steel - Corus 27.7

Bao Steel China 23.0

US Steel 19.0

Nucor 18.5

Riva 17.5

Thyssen Krupp 16.5

As the industry consolidates further, Tata Steel - even with its planned Greenfield capacity additions - would have remained a medium-sized player after a decade. This made it absolutely vital that the company did not miss out on large acquisition opportunities. Apart from Corus, there are not many among the top-10 steel makers, which would become possible acquisition targets in the near future.

Tata Steel - Corus : Present capacity(in million tonnes per annum)

Corus Group (in UK and The Netherlands) 19

Tata Steel - Jamshedpur 5

NatSteel - Singapore 2

Millennium Steel - Thailand 1.7

Aggregate present capacity 27.7

Tata Steel - Corus : Projected capacity(in million tonnes per annum)

Corus Group (in UK and The Netherlands)

19

Tata Steel - Jamshedpur 10

Tata Steel - Jharkhand 12

Tata Steel - Orissa 6

Tata Steel - Chattisgarh 5

NatSteel – Singapore 2

Millennium Steel - Thailand 1.7

Aggregate projected capacity 55.7

With Corus in its fold, Tata Steel can confidently target becoming one of the top-3 steel makers globally by 2015. The company would have an aggregate capacity of close to 56 million tonnes per annum, if all the planned Greenfield capacities go on stream by then.

Neat strategic fitCorus, being the second largest steelmaker in Europe, would provide Tata Steel access to some of the largest steel buyers. The acquisition would open new markets and product segments for Tata Steel, which would help the company to de-risk its businesses through wider geographical reach.

A presence in mature markets would also provide Tata Steel an opportunity to go further up the value chain as demand for specialised and high value-added products in these markets is high. The market reach of Corus would also help in seeking longer-term deals with buyers and to explore opportunities for pushing branded products.

Corus is also very strong in research and technology development, which would add to the competitive strength for Tata Steel in future. Both companies can learn from each other and achieve better efficiencies by adopting the best practices.

But at what cost?Now that Tata Steel has achieved its strategic objective of becoming one of the major players in the global steel industry and steel demand growth is likely to be robust over the next decade, has the company paid too much for Corus? Even those analysts and industry observers who agree on the positive outlook for steel demand growth and the need to achieve scale believe so.

The enterprise valuation of Corus at around $13.5 billion appears too steep based on the recent financial performance of Corus. Tata Steel is paying 7 times EBITDA of Corus for 2005 and a higher 9 times EBITDA for 12 months ended 30 September 2006. In comparison, Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that Arcelor has much superior assets, wider market reach and is financially much stronger than Corus, the price paid by Tata Steel looks almost obscenely high.

Tata Steel's B Muthuraman has defended the deal arguing that the enterprise value (EV) per tonne of capacity is not very high. The EV per tonne for the Tata-Corus deal is around $710 is only modestly higher than the Mittal-Arcelor deal. Besides, setting up new steel plants would cost anywhere between $1,200 and $1,300 per tonne and would take at least five years in most developing countries.

But, are the manufacturing assets of Corus good enough to command this price? It is a well-known fact that the UK plants of Corus are among the least efficient in Europe and would struggle to break even at a modest decline in steel prices from current levels.

Recent financial performance of Corus would dent the hopes of Tata Steel shareholders even further. EBITDA margins, after adjusting for one-time incomes, have steadily declined over the last 3 years. For the 9-month period ended September 2006, EBITDA margins of Corus were barely 8 per cent as compared to around 40 per cent for Tata Steel.

Corus Financials

Year 2004 2005 Jan-Sep 2006

Revenues 18.32 19.91 14.10

EBITDA 1.91 1.86 1.12

EBITDA Margin (%) 10.44 9.34 7.96

Operating Profits 1.30 1.17 0.75

Operating Profit Margin (%) 7.09 5.89 5.29

Net Profit 0.87 0.72 0.25

Net Profit Margin (%) 4.73 3.63 1.77

Figures in $ Billion

The price of an asset is more a factor of its future earnings potential than its past earnings record. Operating margins of Corus can be significantly improved if Tata Steel can supply slabs and billets.

Tata Steel is targeting consolidated EBITDA margins of around 25 per cent as and when it starts supplying crude steel to Corus. If the company can sustain such margins on the enlarged capacities, it would be quite impressive.

But that is a long way off as Tata Steel would have sufficient crude steel capacity only when its proposed new plants become operational. Till then, the company is targeting to maximise gains through possible synergies between the two operations, which are expected to yield up to $350 million per annum within three years.

In the meanwhile, Tata Steel has to make sure that cash flows from Corus are sufficient to service the huge amount of debt, which is being availed to finance the acquisition. According to the details available so far, Tata Steel would contribute $4.1 billion as equity component while the balance $9.4 billion, including the re-financing of existing debt of Corus after adjusting for cash balance, would be financed through debt. The debt facilities are believed to be structured in such a way that they can be serviced largely from the cash flows of Corus.

Interest rates on credit facilities for such buy-outs are often higher than market rates because of the risks involved. At an expected interest rate of 7 per cent per annum, the interest outgo alone would be over $650 million per year. Along with repayment of principal, the annual fund requirement to service this debt would be around $1.5 billion - assuming a 10-year repayment horizon.

The current cash flows of Corus are barely sufficient to cover this, even after considering the synergy gains. If international steel prices decline even modestly, Tata Steel would have to dip into its own cash flows or find other sources like an equity dilution to service the debt.

Besides, funds may also be required for upgrading some of the Corus plants to improve efficiencies. Tata Steel would have to manage all this without jeopardising its Greenfield expansion plans which may cost a staggering $20 billion over the same 10-year period.

No wonder investors are deeply worried!

To its credit, the Tata Steel management has acknowledged that it would not be an easy task to manage the next five years when Corus would have to hold on to its margins without the help of cheaper inputs supplied by Tata Steel. If the group can survive this initial period without much damage, life may become much easier for the Tata Steel management.

Investors would consider Corus a burden for Tata Steel until such time there is a perceptible improvement in its margins. That would keep the Tata Steel stock price subdued and any decline in steel prices would have a disproportionately negative impact on the stock.

However, long-term investors would appreciate that right now steel manufacturing assets are costly and Corus was a prized target which made it even more costly. With the strategic importance of such a large deal in mind, Tata Steel management has taken the plunge.

If it can pull it off, even after a decade, the Corus acquisition would become the deal, which would transform Tata Steel.

Other Mergers

Merger of KISCO with IISCO

KISCO was set up in 1995 as a Joint Venture Company of Kudremukh Iron Ore Company Limited (KIOCL), MECON Limited and MSTC Limited (all PSUs under the administrative control of Ministry of Steel) for manufacturing of Pig Iron and Ductile Iron Spun Pipe (DISP). The profitability of the composite project was assured from the DISP component being a finished product with high margins. However, due to poor market condition prevalent then, KISCO could not access the primary market for public equity and DISP plant could not be installed as per schedule. Due to heavy losses, its net worth was eroded and the company was referred to BIFR in 2003. In the meantime, KIOCL has acquired the entire equity and KISCO became its subsidiary. Based on the merger/ rehabilitation scheme submitted by KIOCL, BIFR approved the merger of KISCO with KIOCL with effect from 1.4.2007 vide their Orders dated 18.6.2007 and 18.7.2007. Accordingly, KISCO has been merged with KIOCL for all practical purposes with effect from 1.4.2007. Consolidated Balance Sheets indicating positive Net Worth after the merger are to be filed with BIFR to get the name of KISCO struck from its records.

Merger of SIIL with NMDC

Sponge Iron India Ltd. (SIIL) a Public Sector Undertaking under the administrative control of Ministry of Steel was set up in 1975 to develop indigenous rotary kiln based technology for sponge iron production using iron ore and non-coking coal extensively available in the country with the assistance of UNDP/ UNIDO. Due to various constraints, both internal and external, the company could not make profits in sponge iron business over a long period of time and the accumulated loss of the company continued to increase particularly due to recession in steel market during 1993-99. The Government of India granted a financial re-structuring package to the Company in 2000 envisaging waiver of interest and conversion of loan into equity. After this, the Company was referred for disinvestment. However, due to continuous improvement in overall techno-economic performance, improving market trend and financial restructuring, the company turned around during 2000-01 and continued to remain in profit during the subsequent years. After that the Company was taken out of disinvestment list because of it being a profit making Company as per the policy envisaged through National Common Minimum Programme (NCMP).The Ministry of Steel had set up an Expert Group to examine the various merger proposals of the PSUs under the Ministry. The Expert Group has recommended the merger of SIIL with NMDC keeping in view the raw material potential of SIIL and proposed capacity expansion of sponge iron by the NMDC.

Acquisition and merger of Neelachal Ispat Nigam Ltd. (NINL) by SAIL

As per the recommendations of Committee of Secretaries (CoS), an Empowered Committee headed by Secretary, Department of Disinvestment (DOD) was constituted in January, 2006, to oversee the modalities of the merger. SAIL Board in its 312th meeting held on 24.3.06 accorded in-principle approval for acquiring equity share capital of NINL through cash payment and subsequently merging it with SAIL.

Merger of Maharashtra Elektrosmelt Ltd. (MEL) with SAIL

Pursuant to the approval of the Expert Group set up by the Ministry of Steel that MEL should be merged with SAIL, Board of Directors of SAIL in their 314th meeting held on 25.5.06 and in the 193rd meeting of MEL Board held on 26.5.06 accorded in principle approval for the merger of MEL with SAIL.

Merger of Bharat Refractories Ltd. (BRL) with SAIL

In-principle approval in respect of merger of BRL with SAIL was obtained from the SAIL Board on 22.9.06 on a clean-slate basis and communicated to the Ministry of Steel on 13.10.06. BRPSE had also recommended the financial restructuring package for BRL. Valuation of assets of BRL has been carried out by MECON Ltd. and thereafter approval of the cabinet for the merger process will be sought.

Acquisition of NISCO and developing it further

For taking over of the assets of National Iron & Steel Company Limited (NISCO) including about 125 acres of land on a clean slate basis, Government of West Bengal has been requested to provide the final clearance for transfer of NISCO at a nil cost to SAIL. SAIL has proposed to modify the existing mill at NISCO and set up rolling facilities to produce 45380 tonnes per annum of Fe 500 grade TMT bars at an estimated investment of Rs. 48.28 crore (Road – Rs 16 Crore, TMT Mill – Rs 27.89 crore, Contingency – Rs 4.389 crore).

Acquisition of Steel Complex Ltd., Calicut, Kerala

Steel Complex Ltd.(SCL), with a 50,000 tonnes per annum capacity for producing continuous cast billets has approached SAIL through the Government of Kerala for necessary help for its revival. SAIL provided technical guidance from June to December, 2007 due to which the performance of SCL improved by about 18%. SAIL has also provided an interest free trade advance of Rs. 5 crore in December, 2007 for purchase of scrap. The billets produced by SCL will be purchased by SAIL for onward conversion and sale by SAIL.

Possible Impact of Mergers and Acquisitions

Mergers and acquisitions bring a number of changes within the organization. The size of the organizations change, its stocks, shares and assets also change, even the ownership may also change due to the mergers and acquisitions. The mergers and acquisitions play a major role on the activities of the organizations. However, the impact of mergers and acquisitions varies from entity to entity; it depends upon the group of people who are being discussed here. The impact of mergers and acquisitions also depend on the structure of the deal.

Impacts on Employees

Mergers and acquisitions may have great economic impact on the employees of the organization. In fact, mergers and acquisitions could be pretty difficult for the employees as there could always be the possibility of layoffs after any merger or acquisition. If the merged company is pretty sufficient in terms of business capabilities, it doesn't need the same amount of employees that it previously had to do the same amount of business. As a result, layoffs are quite inevitable. Besides, those who are working would also see some changes in the corporate culture. Due to the changes in the operating

environment and business procedures, employees may also suffer from emotional and physical problems.

Employment in the iron and steel industry, 1975-1996

Country 1975 1996

Australia

Belgium

Brazil

France

Germany

Hungary

India

Italy

Japan

Poland

Spain

Russian Federation

South Africa

United Kingdom

United States

35.000

61.400

123.900

157.000

226.700

64.000

200.000

96.000

324.400

156.000

90.900

837.600

108.700

190.700

470.400

12.300

23.100

80.000

38.500

85.900

14.200

280.000

39.200

155.000

91.600

23.800

705.200

60.400

37.000

237.500

Impact on Management

The percentage of job loss may be higher in the management level than the general employees. The reason behind this is the corporate culture clash. Due to change in corporate culture of the organization, many managerial level professionals, on behalf of their superiors, need to implement the corporate policies that they might not agree with. It involves high level of stress.

Impact on Shareholders

Impact of mergers and acquisitions also include some economic impact on the shareholders. If it is a purchase, the shareholders of the acquired company get highly benefited from the acquisition as the acquiring company pays a hefty amount for the acquisition. On the other hand, the shareholders of the acquiring company suffer some losses after the acquisition due to the acquisition premium and augmented debt load.

Impact on Competition

Mergers and acquisitions have different impact as far as market competitions are concerned. Different industry has different level of competitions after the mergers and acquisitions. For example, the competition in the financial services industry is relatively constant. On the other hand, change of powers can also be observed among the market players.

A Sector Analysis

For the quarter ended December 2009 the Steel sector as a whole reported impressive set of numbers. During the quarter under review the Aggregate Sales of 90 companies increased by 20% to Rs 44680 crore. Thanks to higher capacity utilization and lower input costs, the Aggregate Operating Profit Margins (OPM) more than doubled to 22.2% in the quarter ended September 2009 from 10.6% in the corresponding previous quarter. . As a result of rise in revenues and spike in margins, the aggregate Operating Profits surged by 150% to Rs 9931 crore.

With 35% rise in Other Income to Rs 906 crore, and relatively lower 8% and 10% increase in interest and depreciation to Rs 1878 crore and Rs 1791 crore respectively, the steel sector shined with remarkable 460% surge in PBT to Rs 7168 crore. Despite 484% jump in provision for tax, the sector secured 451% jump in net profit to Rs 4962 crore in the quarter ended December 2009.

On the back of robust demand scenario from key user industry segment the steel sector as a whole reported impressive performance for the quarter ended December 2009. Furthermore the performance of the steel industry as a whole looks spectacular because of lower base effect. The corresponding quarter last year (i.e. quarter ended December 2008) was one of the most challenging quarters for most of the domestic players within the steel sector.

For the quarter ended December 2009 SAIL's net turnover increased by 11% to Rs 9697 crore. Its sales volume increased by 24.5% to 2.9 million tonnes during this period. The lower growth in turnover as compared to volume growth was primarily due to 12% fall in sales realization during quarter ended December 2009/ But thanks to fall in cost of imported coal, and as the company not only increased volumes but enriched product mix, Sail's net profit almost doubled (99% higher) to Rs 1675.55.

During the quarter under review Tata Steel reported a 33% increase in Total Income to Rs 6374.88 crore. During this period, the company recorded 37% rise in steel production to 16.88 lakh tonnes, while Steel sales surged by 49% to 15.96 lakh tones. Thanks to surge in sales and as input cost eased, the company's OPM increased by 310 basis points to 33.8%. The subsequent Operating Profit for the quarter under review stood at Rs 2156.90 crore which was 46% higher when compared with corresponding period last year. The ensuing net profit for the period under review increased sharply by 156% to Rs 1191.75 crore.

JSW Steel's Net Sales for the quarter ended December 2009 stood at Rs 4587.66 crore, which was 65% higher when compared with corresponding period last year, mainly driven by volumes in spite of lower realizations. The PBIDT for the quarter under review was Rs 1222.15 crore including forex gains of Rs 102.55 crore and PBIDT margin for the quarter was 26.5% as against 15.3% during the corresponding quarter last year. The company turned around with a net profit of Rs 514.23 crore in the quarter ended December 2009 from a net loss of Rs 127.50 crore in the corresponding previous quarter.

The pig iron Industry reported impressive set of numbers for the quarter ended December 2009. For the quarter under review the Aggregate Sales of 4 pig iron companies stood at Rs 741 crore which was 23% higher on a Y-o-Y basis comparison. The ensuing Aggregate PAT for the period under review stood at Rs 60 crore as compared to an Aggregate Net loss of Rs 229 crore during the corresponding period last year.

The sponge iron Industry also reported remarkable set of numbers for the quarter ended December 2009. For the quarter under review the Aggregate Sales of 11 sponge iron companies stood at Rs 3313 crore which was 2% higher on a Y-o-Y basis comparison. The Aggregate OPM of the sponge iron companies increase by 630 basis points to 26.3%. The subsequent Aggregate Operating Profit for the period under review stood at Rs 872 crore which was 34% higher on a Y-o-Y basis comparison. The resultant PAT for the period under review stood at Rs 430 crore, which was 50% higher on a Y-o-Y basis comparison.

Why Mergers & Acquisitions??- Is It Technical Viable and economically feasible?

The challenges that confront Indian steel industry in the age of globalisation are complex in nature. The secret of sustainable turnaround lies in how Indian steel industry faces the challenges and develops combative and anticipatory prowess. Problems and solutions may vary with organisations but there is more a commonality than initially meets the eye.

Important performance indices such as Debt-Equity Ratio (D/E), Return on Net worth (Post tax) (RONW), Net Sales/Total Assets and Net Profit/Net Sales have been calculated and depicted in the excel sheet. The rising trend of D/E from 2.13 to 2.90 in the last four years. This shows that the industry is shouldering an increasing debt burden and becoming more leveraged.

An improvement in Net Sales/Total Assets (Asset Turnover Ratio) from 0.42 to 0.52, although this figure lags behind international standards. (This ratio for the US steel industry was 1.2 during the period 1975-1993)8. This improvement indicates that the industry is utilising its assets more efficiently and/or is shedding assets.

RONW (Post-Tax), as depicted, has plummeted from a + 3% return in 1997-1998 to -9% before making a partial recovery to +3% in 2001-2002. This indicates that the industry, in general, is eroding its networth, losing money and thus, becoming unattractive to the equity investors.

The ratio of Net Profit/Net Sales exhibits the decreasing profit levels, from + 2% in 1997-1998 to a low of -6% and to somewhat recovered position of + 2% in 2000-2001. This indicates losses and heightening competition in the Indian steel industry.

These four indices taken together show that the steel industry had been passing through a difficult phase characterised by increasing debt, low asset utilisation, industry wide losses (except Tata Steel) and intense competition. The reason being its timely collaboration with Corus. The rejuvenating performance of the company is reflected in the rising share prices of Indian steel companies. As can be seen from the consolidated statements, the company have now been able to perform consistently and the share prices have remained above Rs 100 (face value Rs 10) defying the industry trend.

Reasons for Alliances

Survival Strategy- Considering the factor of its competition from international rivals such as Mittal Steel who were trying to have a stronghold in the country as well as it was losing its share in the international market. As such its collaboration with Corus made it the 5th largest steel making company.

Cost Reduction- Reducing operating costs. Reduction in working capital costs. Reduction in product inventory (unsold stock). Improving techno-economic parameters. Substitution of raw material. Differentiated sourcing. Effective supply chain management. Social infrastructure costs.

Revenue Maximisation- The alliances within the major steel producers gives the companies access to larger markets. Wider markets offer large sources of increasing the revenue. Aggressive marketing and large source provide large access to revenue.

Focussed Marketing- The objective of focussed marketing is to have a differentiated marketing strategy for products and services. Though the concept may be new to the steel industry, it may be emphasized that focussed marketing with the help of differentiation strategy is the only way by which steel makers can outpace competition in today’s business scenario.

Market Expansion-Enhancing steel consumption could prove to be a potent medium-term strategy for the Indian steel manufacturing units. New avenues should be explored and market expanded for steel companies to turnaround. As is evident today, most of the consumption of steel is concentrated in the urban institutional segment and a smaller chunk goes to the urban trade. There is a need today to expand the market beyond to the rural market.

Growth Strategy- While survival strategy must ensure that the company should survive and sustain itself, it becomes necessary that effective long-term strategies should also be formulated that could go beyond the immediate present and ensure the company’s future prospects.

Technological Strategy-Technology strategy should involve assessment and benchmarking of the strengths and weaknesses of the technological scenario of the whole industry and consequent identification of technological threats and opportunities.

Market Sustenance-In order to be ahead of the competition, it is necessary for the Indian steel industry to aggressively handle the market and adopt either the differentiated strategy, strategy of cost leadership or the strategy of focus.

Conclusion

The steel producers witnessed strong growth in sales volumes and savings in input costs. Steel is highly capital intensive, with higher fixed costs, and hence the rise in capacity utilization leads to disproportionately higher growth in margins. So, despite fall in average realizations, the sector reported exceptionally good growth in profits on better volumes, lower costs, and also due to lower base. Further, the cut in excise duties too have helped.

Flat Steel prices in Mumbai have increased by over 5% to Rs 31537 per tonne in January 2010 from Rs 29932 in November 2009. Long Steel prices in Gobindgarh in Punjab have surged by 18% from Rs 21691 per tonne in November 2009 to Rs 25613 in January 2010. On the other hand, the sponge iron prices at Raipur in Chattisgarh have sizzled by over 26% from Rs 14035 in November 2009 to Rs 17749 per tonne in January 2010. Though iron ore and coal prices have also hardened during this period, we still expect healthy growth in revenues, margins and profits, factoring in strong growth in demand and improving realizations. The uptick in various steel intensive user industries like automobile, construction, real estate, infrastructure and capital goods sector together augurs well for the steel sector.

Steel Sector Aggregates

Powered by strong demand and fall in costs

Figures in Rs Crore

Particulars 0912(03) 0812(03) Var. (%)

Sales 44680 37362 20

OPM 22.2 10.6

Operating Profit 9931 3971 150

Other Income 906 670 35

PBIDT 10837 4641 134

Interest 1878 1738 8

PBDT 8959 2903 209

Depreciation 1791 1624 10

PBT 7168 1279 460

Tax 2206 378 484

PAT 4962 901 451