Financial Daily from THE HINDU group of publications
Sunday, May 30, 2004
Tata Steel's tryst with prosperity
Mumbai , May 29
A PROSPEROUS company, but a worried finance chief!
Strong steel years have transformed Tata Steel's balance sheet from FY02's Rs 6,793.53 crore total income and Rs 204.9 crore net profit - its bleakest showing of the last half a dozen fiscals - to FY04's Rs 10,842 crore income and Rs 1746.22 crore net profit.
That is a growth of 60 and 752 per cent in total income and net profit, respectively.
It altered the image of the company, from a traditional manufacturer of a cyclical commodity to a very profitable player in what suddenly became a closely tracked sector.
``I am scared. Prosperity is difficult to manage, austerity in comparison was easier,'' Mr R.C. Nandrajog, Vice-President (Finance), Tata Steel, said, a shade amused by the thought.
The positive side of the company's ascent to its highest ever profitability and the general strengthening of the steel economy is that it enthused people at Tata Steel to talk of globalisation and growth.
For the conservative finance official however, that is a recipe for concern - the number of ``strategies'' floating around.
Projects must be self-supporting. But during good times, companies tend to slip up, dilute the rigour in project scrutiny and be saddled with ``strategies'' gone awry.
``Ideally, every project should be backed by research as they must be sound. But when you have a lot of liquidity, you develop the tendency of asking why not include that project too? After all, it is strategic in nature.
``During good times, we have to guard against this large heartedness,'' he said.
Mr Nandrajog's credit control meetings and investment management committee meetings, therefore, continue with greater rigour than before.
He repaid Rs 852 crore of debt in FY04 and intends to repay Rs 400 crore this fiscal.
Interest rates may be delicately poised and Tata Steel has not raised sizable funds over the last three years. But he confirmed, ``No opportunistic fund raising for us.''
Reason is simple. You may raise funds overseas at an attractive rate, but it will possibly earn lower while parked abroad.
The risk involved can't be predicted as the utilisation of those funds is tied to the timing of a market opportunity, like acquisition.
By close FY04, Tata Steel's reserves were estimated at Rs 3,800 crore, up from the previous Rs 2,816 crore. Is it adding a new item to Mr Nandrajog's responsibilities, that of finding how best to invest the monies? Not exactly, for the company's current position in its growth trajectory - with a disclosed appetite for capacity expansion and acquisitions - automatically fashions investment mix. ``The security of your money is more important than the returns you make,'' he said.
Plus, ensuring liquidity on tap.
Currently most of Tata Steel's surplus funds, around Rs 2,000 crore, is invested in mutual funds. It fetches tax-free dividend income from liquid funds in a manner that hedges against a scenario of rising interest rates. There is a small amount parked in monthly income plans with not more than 15-20 per cent invested in equities.
This fiscal, the company's capital expenditure totals Rs 2,600 crore, funded internally. Is its cash adequate to fund both internal growth and external acquisitions?
In the case of the Rs 15,493 crore-Tata Motors, Chairman Mr Ratan Tata, spoke of a `war chest' requiring to be in place.
Smaller Indian Hotels, chasing an overseas buy for the last few years, raised $150 million recently to stay equipped for an opportunity. As in hotels where property prices rose with an improving global economy, steel company acquisition costs have also risen.
``Though in reality you should assess returns over a cycle, natural tendency in strong steel years will be for the enterprise value of companies to go up,'' Mr Nandrajog agreed.
But he discounts the need for a separate war chest, Tata Steel's mutual fund investments are large and liquid.
Besides with that as initial card on the table, you can raise funds thereafter, given the company's strong capital structure.
For the last two years, steel has had a terrific trip. High prices have made erstwhile losses into profits and erstwhile profits into huge profits.
``As far as Tata Steel is concerned, we haven't tapped full potential yet. We have the ability to add more value-added products,'' Mr Nandrajog said.
His worries may have just begun.
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