Analysis of Cap Structure for 5 Years(a)

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INTRODUCTION

Finance is a important input for any type of business and is needed for working

capital and for permanent investment. The total funds employed in a business are

obtained from various sources. A part of the funds are brought in by the owners

and the rest is borrowed from others-individuals and institutions. While some of

the funds are permanently held in business, such as share capital and reserves

(owned funds), some others are held for a long period such as long-term

borrowings or debentures, and still some other funds are in the nature of short-term

borrowings: The entire composition of these funds constitute the overall financial

structure of the firm. You are aware that short-term funds keep on shifting quite

often. As such the proportion of various sources for short-term funds cannot

perhaps be rigidly laid down. The firmhas to follow a flexible approach. A more

definite policy is often laid down for the composition of long-term funds, known as

capital structure. More significant aspects of the policy are the debt equity ratio

and the dividend decision. The latter affects the building up of retained earnings

which is an important component of longterm owned funds. Since the permanent

or long-term funds often occupy a large portion of total funds and involve long-

term policy decision, the term financial structure is often used to mean the capital

structure of the firm. There are certain sources of long-term funds which are

generally available to the corporate enterprises. The main sources are: share

capital (owners' funds) and longterm debt including debentures (creditors' funds).

The profit earned from operations are owners' funds-which may be retained in the

business or distributed to the owners (shareholders) as dividend. The portion of



profits retained in the business is a reinvestment of owners' funds. Hence, it is also

a source of long-term funds. All these sources together are the main constituents of

the capital of the business, that is, its capital structure.

WHAT IS CAPITAL STRUCTURE?

The term `capital structure' represents the total long-term investment in a business

firm. It includes funds raised through ordinary and preference shares, bonds, deben

-tures, term loans from financial institutions, etc. Any earned revenue and capital '

surpluses are included.

Capital Structure Planning

Decision regarding what type of capital structure a company should have is of

critical importance because of its potential impact on profitability and solvency.

The small companies often do not plan their capital structure. The capital structure

is allowed to develop without any formal planning. These companies may do well

in the short-run, however, sooner or later they face considerable difficulties. The

unplanned capital structure does not permit an economical use of funds for the

company. A companyshould therefore plan its capital structure in such a way that

it derives maximum advantage out of it and is able to adjust more easily to the

changing conditions.



INTRODUCTION

Backed by 100 glorious years of experience in steel making, Tata Steel is amongthe top ten steel producers in the world with an existing annual crude steel

production capacity of 30 Million Tonnes Per Annum (MTPA). Established in

1907, it is the first integrated steel plant in Asia and is now the world`s second

most geographically diversified steel producer and a Fortune 500 Company.

Tata Steel has a balanced global presence in over 50 developed European and fast

growing Asian markets, with manufacturing units in 26 countries.

It was the vision of the founder; Jamsetji Nusserwanji Tata., that on 27th February,

1908, the first stake was driven into the soil of Sakchi. His vision helped Tata

Steel overcome several periods of adversity and strive to improve against all odds.

Tata Steel`s Jamshedpur (India) Works has a

crude steel production capacity of 6.8 MTPA

which is slated to increase to 10 MTPA by 2010.

The Company also has proposed three Greenfield

steel projects in the states of Jharkhand, Orissa

and Chhattisgarh in India with additional

capacity of 23 MTPA and a Greenfield project in

Vietnam.



Through investments in Corus, Millennium Steel (renamed Tata Steel Thailand)

and NatSteel Holdings, Singapore, Tata Steel has created a manufacturing and

marketing network in Europe, South East Asia and the pacific-rim countries.Corus, which manufactured over 20 MTPA of steel in 2008, has operations in the

UK, the Netherlands, Germany, France, Norway and Belgium.

Tata Steel Thailand is the largest producer of long steel products in Thailand, with

a manufacturing capacity of 1.7 MTPA. Tata Steel has proposed a 0.5 MTPA mini

blast furnace project in Thailand. NatSteel Holdings produces about 2 MTPA of

steel products across its regional operations in seven countries.

Tata Steel, through its joint venture with Tata BlueScope Steel Limited, has alsoentered the steel building and construction applications market.

The iron ore mines and collieries in India give the Company a distinct advantage in

raw material sourcing. Tata Steel is also striving towards raw materials security

through joint ventures in Thailand, Australia, Mozambique, Ivory Coast (West

Africa) and Oman. Tata Steel has signed an agreement with Steel Authority of

India Limited to establish a 50:50 joint venture company for coal mining in India.

Also, Tata Steel has bought 19.9% stake in New Millennium Capital Corporation,Canada for iron ore mining.

Exploration of opportunities in titanium dioxide business in Tamil Nadu, ferro-

chrome plant in South Africa and setting up of a deep-sea port in coastal Orissa are

integral to the Growth and Globalisation objective of Tata Steel.

Tata Steel¶s vision is to be the global steel industry benchmark for Value Creation

and Corporate Citizenship.

Tata Steel India is the first integrated steel company in the world, outside Japan, to

be awarded the Deming Application Prize 2008 for excellence in Total Quality

Management.



Capital Structure Analysis for five years



Financial Year 2005-2006

The year that was

Ranked World¶s Best Steel Maker - World Steel Dynamics

Consolidated gross turnover crosses Rs. 22,000 crores Acquisition of Millennium Steel, Thailand

1 MTPA expansion completed. 1.8 MTPA expansion launched

Reduction in domestic clean coal ash content by 1.2 % enables

lower usage of imported coal from 46% in FY05 to 32% in FY06,

resulting in an overall reduction in cost of manufacturing coke.

Standard and Poor¶s upgrades Tata Steel to µBBB¶- two notches

above India¶s sovereign rating

Equity participation in coal mines - Australia

steeljunction - an innovative initiative

Tata Structura launched

Other highlights (Consolidated)2005-2006 2004-2005

2005-2006

2004-2005

Turnover Rs. 22518.75

crores

Rs. 17596.96

crores

Profit After Tax Rs. 3734.62

crores

Rs. 3603.26

crores

NetDebt/Equity

0.31 0.57

Return onEquity

44% 62%

EVA spread Rs. 2536 crores Rs. 2448

crores

Earnings per Share

Rs. 67.62 Rs. 65.27



In the last few years, the Company has been steadily consolidating

its financial position. No major borrowings were undertaken and

the entire funds for capital expenditure were met from internal

generation. Surplus cash reserves were temporarily invested in

money market mutual funds to facilitate liquidity.

The Company was, therefore, in a strong position to leverage

its balance sheet to meet the substantial funds required for the

acquisition of Corus. The Company proposes to infuse USD 4.1

billion as equity to part fi nance the transaction. The equity will

comprise of USD 700 million from internal generation, USD 500

million of external commercial borrowings, USD 640 million from

the preferential issues of equity shares to Tata Sons Ltd. in 2006-07

and 2007-08, USD 862 million from a rights issue of equity shares

to the shareholders, USD 1000 million from a rights issue of

convertible preference shares and about USD 500 million from a

foreign issue of equity-related instrument.



Secured and unsecured loans increased by Rs. 7,129.18 crores

from Rs. 2,516.15 crores as on 31st March, 2006 to Rs. 9,645.33

crores as on 31st March, 2007 due to new syndicate foreign

currency loans drawn for funding the acquisition of Corus

Group plc. The Company has drawn foreign currency syndicate

loans of Rs. 7,225 crores (USD 1.65 billion) during the year as

per details given below:

1. JPY Syndicated External Commercial Borrowings of USD

495million equivalent: Rs. 2,162.66 crores (unsecured loan)

2. External Commercial Borrowings of USD 5 million

equivalent: Rs. 21.77 crores (unsecured loan)

3. JPY Syndicated External Commercial Borrowings of USD

750 million equivalent: Rs. 3,298.88 crores (unsecured loan)

4. International Finance Corporation, Washington -

A Loan USD 100 million equivalent: Rs. 435.35 crores

(secured loan)



5. International Finance Corporation, Washington -

B Loan USD 300 million equivalent: Rs. 1,306.05 crores

(secured loan).




Finance

During FY 2007-08, the financing structure of the Corus

transaction has been reorganised to achieve fi scal unity in

the Netherlands and consequent tax effi ciencies. The Corus

businesses in UK and Netherlands are now organised under

fully owned subsidiaries of Tata Steel NetherlandsB

.V., which in turn is

an indirectly fully owned subsidiary of Tata Steel Limited.

By the close of April 2008, the financing for the Corus acquisition has

been completed with all the recourse bridge funding contracted for the

acquisition having been paid off through a mix of debt, equity and

internal accruals and the non-recourse funding syndicated during the

year.

In September 2007, the Company issued USD 0.875 billion of 1%

Foreign Currency Convertible Alternative Reference Securities(CARS).

Between September 4, 2011 and August 6, 2012, each security is

convertible at the option of holder of the security, at a conversion price

of Rs. 758.10 into a Qualifying Security issued by the Company. The



Company must redeem all outstanding CARS at 123.349% of their

principal amount together with accrued and unpaid interest no later than

September 5, 2012. The Company raised an amount of Rs. 9121 crores

through a Rights and Cumulative Compulsorily Convertible Preference

Share Issue and Rs. 25 billion through a long term loan. The syndication

of the GBP 3.67 billion senior facility consisting of multiple tranches of

term loans and a GBP 0.5 Billion five year revolving credit facility,

secured by the assets of Corus was

successfully closed in December 2007 by which time, a large

number of banks as well as institutions had come into the

transaction. The deal was widely recognised as a landmark

deal and won numerous awards and recognition from fi nancial

journals.

Tata Steel also privately placed Non-Convertible Debentures

totaling upto Rs. 2,000 crores in May 2008. The deemed date

of allotment of these debentures was 7th May, 2008 and they



consist of 3 series: 3 year floating (MIBOR-linked) notes (Rs.

1,090

crores), 7 year fixed rate notes (Rs. 620 crores) and 3 year fixed

rate notes (Rs. 290 crores). These funds may be used by thecompany for various corporate needs.

Rights IssuesDuring the year under review, the Company allotted the

Cumulative Convertible Preference Shares (CCPS) and Ordinary

Shares on a Rights basis to the shareholders of the Company

as under:

(i) 121,611,464 Ordinary Shares of Rs.10 each at a premium

of Rs.290 per share in the ratio of 1:5, aggregating to

Rs. 3,648 crores.

(ii) 547,251,605 2% Convertible Cumulative Preference Shares

(CCPS) of Rs. 100 each at an issue price of Rs. 100 each, in

the ratio of 9:10, aggregating to Rs. 5,473 crores. As per the

terms of the issue, six CCPS of Rs.100 each are compulsorily

and automatically convertible on 1st September, 2009,



into one Ordinary Share of Rs. 10 each, at a premium of

Rs. 590 per share.

The proceeds of the Rights Issue have been utilised to repay

the short term Bridge Loan availed by the Company from the

State Bank of India.

The increases in the total debts by Rs. 8,376 crores from

a level of Rs. 9,645 crores as on 31st March, 2007 to

Rs. 18,022 crores as on 31st March, 2008 were mainly due

to 1% Convertible Alternate Reference Securities ± USD

875 million, short term bridge loans from State Bank of

India and IDBI used for funding the Corus deal.



The loans have gone up from Rs. 24,926 crores as on

31st March, 2007 to Rs. 53,593 crores as on 31st March,

2008 mainly due to inclusion of the Secured loans of

Corus from Banks and Financial Institutions. The increase in

the loan balances of Tata Steel¶s Indian operations

represent 1% Convertible Alternate Reference Securities ± USD 875 million, short-term bridge loans from State Bank

of India and IDBI used for funding the Corus deal.




The increase in net debt by Rs. 2,095 crore represents

an increase in the gross debt by Rs. 6,276 crore due

to the issue of non-convertible debentures and term

loans taken from Banks, by Tata Steel India, partly

compensated by repayment of external debts at Tata

Steel Europe. The increase in gross debts was offset byan increase in current investments (in growth funds) by

Rs. 2,264 crore and an increase in the cash and bank

balance by Rs. 1,917 crore.




Net debt as on 31st March, 2010 at Rs. 20,286 crores was lower

by Rs. 1,800 crores against 31st March, 2009. During the current

fiscal year, the secured and unsecured loans decreased by Rs.1,654 crores and Rs. 53 crores respectively as compared to the

balances as on 31st March, 2009 due to repayments of term

loans and other repayments partly offset by issue of Non-

Convertible Debentures, fresh term loans and other drawals.

Current investment was lower by Rs. 1,550 crores which was

offset by increase of Rs.1,644 crores

in the cash & bank balances.



Bibliographyy Financial Management, I M Pandey

y Financial Management, R K Sharma & ShashiGupta

y www.capitaline.com

y http://www.tatasteel.com/investors/performance/annual-report.asp

Analysis of Cap Structure for 5 Years(a)

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