Corporate Finance-II
Working Capital Management & Dividend Policy of Tata
SteelSection F, Group3 Aquil Arif (11DM-025) Himank Kochhar
(11DM-046) Neetha Nannapaneni (11DM-086) Niladri Majumdar (11DM-91)
Pranav Bajaj (11DM-103) Rohit Chandak (11FN-081)
Prof. N L Ahuja
IMT Ghaziabad Corporate Finance-II
Contents1. Executive Summary.....2 2. Introduction....3 a. Steel
industry.3 b. Indian perspective..3 c. Tata Steel...4 3. Conceptual
Framework...5 a. Working capital management......5 b. Dividend
Policy.9 4. Objectives.10 5. Methodology.....10 6. Data
Collection.10 7. Analysis.....11 a. Working Capital Management..11
i. Net Working Capital Cycle..11 ii. Receivables Management13 iii.
Creditors Management....14 iv. Inventory Management...15 b.
Dividend Policy....16 8. Conclusions...18 9. References19
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Executive SummaryTata Steel has been an industry leader in India
for decades. Tata Steels analysis of working capital management and
dividend policy has been in tune with its image of being the leader
in the Indian steel Industry. Tata Steel pursues an aggressive
working capital management policy wherein its gross operating cycle
is among one of the shortest in the industry and beats the industry
average. Similarly its inventory and receivables management is
better than the industry average. Tata Steel banks on economies of
scale and its image as a Tata group company to negotiate better
credit and debit terms with both its suppliers and distributors so
as to minimize working capital. Tata Steels has ensured that the
shareholders value has incremental growth in both the short and the
long run. It has consistently paid dividends and has been revising
it upwards as per its growth in earnings. Tata Steel has majorly
used cash as a method of paying dividends ad has only once gone in
for stock split in the last 15 years.
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IntroductionSteel IndustrySteel Industry is a booming industry
in the whole world. The increasing demand for it was mainly
generated by the development projects that have been going on along
the world, especially the infrastructural works and real estate
projects that has been on the boom around the developing countries.
It has been observed that Steel Industry has grown tremendously in
the last one and a half decade with a strong financial condition.
The increasing needs of steel by the developing countries for its
infrastructural projects have pushed the companies in this industry
near their operative capacity. The main demand creators for Steel
Industry are Automobile industry, Construction Industry,
Infrastructure Industry, Oil and Gas Industry, and Container
Industry. New innovations are also taking place in Steel Industry
for cost minimization and at the same time production maximization.
Some of the cutting edge technologies that are being implemented in
this industry are thin-slab casting, making of steel through the
use of electric furnace, vacuum degassing, etc. The Steel Industry
has enough potential to grow at a much accelerated pace in the
coming future due to the continuity of the developmental projects
around the world. This industry is at present working near its
productive capacity which needs to be increased with increasing
demand. The global steel industry continued to face an
unprecedented increase in the price of iron ore and coking coal,
accentuated by short-term supply disruptions. These have created
pressures on the viability of the steel industry and consequently
the competitiveness of the user industries. China continued to be
the largest national steel producer and largest domestic consumer
of steel. The steel demand in Western Europe and the UK has
remained more or less stagnant, with intense competition from steel
producers in Eastern Europe utilising lower cost inputs. Asian
countries, including India, on the other hand, continued to enjoy
robust demand from several sectors resulting in increased volumes
and a richer product mix.
Indian PerspectiveIndia'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 was
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.
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Tata SteelTata Steel is among the top ten steel manufacturers in
the world. It operates in more than 20 countries and has a
commercial presence in over 50. The company was established in
Jamshedpur, India, in 1907. In the past few years, Tata Steel has
invested in Corus (UK, renamed Tata Steel Europe), Millennium Steel
(renamed Tata Steel Thailand) and NatSteel Holdings (Singapore).
With these, the company has created a manufacturing and marketing
network in Europe, South East Asia and the Pacific-rim countries.
It has the capacity to produce over 30 million tonnes of crude
steel every year.
Financial OverviewThe Tata Steel Groups financial results for
the financial year 2010-11 demonstrated an overall improvement
compared to the previous year with an 83% increase in the Group
EBITDA from `9,340 crores (US$ 2.09 billion) in 2009-10 to `17,103
crores (US $3.84 billion) in 2010-11. This was possible due to the
continued robustness of the Indian business and significant
turnaround of the operating performance of the European business
even though the market conditions remain challenging in some
sectors including construction. Continued steel usage growth in
India ensured that Indian operations delivered more than their
rated capacity of 6.8 million tonnes of crude steel. Tata Steels
journey on continuous improvement and enrichment of its product mix
continues to deliver results. Sales to the Indian auto segment
touched 1 million tonnes during the year, including best-ever Skin
Panel and Galvanised Annealed product sales. The Companys financial
strategy is focused on managing the capital structure effectively
and to undertake financing based on the Companys funding
requirements for growth. In the past one year, the Companys
financing strategy was focused on raising capital from portfolio
divestments and external financing methods to rebalance the capital
structure and finance the growth projects. Following the above
approach, the Company undertook several initiatives to raise
`10,822 crores (US $2.4 billion) of capital, through divestments of
about `3,121 crores (US $700 million), equity of around `4,546
crores (US $1.02 billion), Indias first rupee hybrid securities of
around `1,500 crores (US $336 million) and debt for the Jamshedpur
expansion and working capital requirement of around `1,655 crores
(US $371 million). All these financing initiatives coupled with
substantially better internal generations enabled us to improve the
financial metrics of Tata Steel Group significantly. The Net
Debt/Equity improved from 1.77 times in 2009-10 to 1.55 times in
2010-11 and the Net Debt / EBITDA improved from 4.75 times in
2009-10 to 2.73 times in 2010-11. The improved cash flows from
operations during the year enabled us to fund the Jamshedpur
expansion programme through internal generations rather than
drawing down the project debt that was tied up. This would
significantly help in keeping the Groups capital structure within
the desired levels. As part of its strategy to de-risk the capital
structure and provide more flexibility to the business, the Company
refinanced the entire long term debt in Tata Steel Europe (TSE),
deferring repayments by four years and allowing deployment of
earnings for growth and improvement initiatives.
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The Conceptual FrameworkWorking Capital ManagementIntroduction
to Working CapitalIn a Cash flow cycle, cash flows into, around and
out of a business. It is the business's lifeblood and every
manager's primary task is to help keep it flowing and to use the
cash flow to generate profits. If a business is operating
profitably, then it should, in theory, generate cash surpluses. If
it doesn't generate surpluses, the business will eventually run out
of cash and expire. The faster a business expands the more cash it
will need for working capital and investment. The cheapest and best
sources of cash exist as working capital right within business.
Good management of working capital will generate cash will help
improve profits and reduce risks. We should bear in mind that the
cost of providing credit to customers and holding stocks can
represent a substantial proportion of a firm's total profits.
What is Working Capital?Working Capital is the money used to
make goods and attract sales. Working capital refers to the
investment by the company in short terms assets such as cash,
marketable securities. Net current assets or net working capital
refers to the current assets less current liabilities.
Symbolically, it means, Net Current Assets = Current Assets Current
Liabilities.
Types of Working Capital1. Net Working Capital: The net working
capital is the different between current assets and current
liabilities. The concept of net working capital enables a firm to
determine how much amount is left for operational requirements. 2.
Gross Working Capital: Gross working capital is the amount of funds
invested in the various components of current assets. 3. Permanent
Working Capital: Permanent working capital is the minimum amount of
current assets which is needed to conduct a business even during
the dullest season of the year. The amount varies from year to year
depending up on the growth of the company and stage of business
cycle in which it operates. It is the amount of funds required to
produce goods and services which are necessary to satisfy demand at
a particular point. 4. Temporary Working Capital: It is represents
the additional assets which are required at different times during
the operating year additional inventory, extra cash etc., seasonal
working capital is the additional amount of current assets
particularly cash, receivables and inventory which is required
during the more active business seasons of the year.
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Working Capital ManagementWorking Capital is the key difference
between the long term financial management and short term financial
management in terms of the timing of cash. Long term finance
involves the cash flow over the extended period of time i.e. 5 to
15 years, while short term financial decisions involve cash flow
within a year or within operating cycle. Working capital management
is a short term financial management. Managing the working capital
needs of the organization is important, because shortage of funds
could disrupt the day to day operations whereas by holding excess
funds the interest burden of the firm starts mounting & eating
into its profits. Working capital management is concerned with the
problems that arise in attempting to manage the current assets, the
current liabilities & the inter relationship that exists
between them. The current assets refer to those assets which can be
easily converted into cash in ordinary course of business, without
disrupting the operations of the firm. Composition of working
capital Major Current Assets: 1) Cash 2) Accounts Receivables 3)
Inventory 4) Marketable Securities Major Current Liabilities: 1)
Bank Overdraft 2) Outstanding Expenses 3) Accounts Payable 4) Bills
Payable The Goal of Capital Management is to manage the firm s
current assets & liabilities, so that the satisfactory level of
working capital is maintained. If the firm cannot maintain the
satisfactory level of working capital, it is likely to become
insolvent & may be forced into bankruptcy. To maintain the
margin of safety current asset should be large enough to cover its
current assets. The main theme of the theory of working capital
management is interaction between the current assets & current
liabilities.
If we .......Collect receivables (debtors) faster Collect
receivables (debtors) slower Get better credit (in terms of
duration or amount) from suppliers Shift inventory (stocks) faster
Move inventory (stocks) slower
Then ......We release cash from the cycle The receivables soak
up cash We increase your cash resources We free up cash We consume
more cash
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Operating CycleThe duration of time required for completing the
following sequences of events in case of manufacturing firms called
the operating cycle. 1. 2. 3. 4. Conversion of raw material into
work in progress. (RMCP) Conversion of work in progress into
finished goods. (WIPCP) Conversion of finished goods into debtors
& bills receivable through sale. (FGCP) Conversion of debtors
& bills receivable into cash. (DCP)
Cash
Receivables
Raw Material
Finished Goods
Work in Progress
The duration of the operating cycle for the purpose of
estimating working capital requirement is equivalent to the sum of
duration of each of these tables less the credit period allowed by
the suppliers of the firm.
Determinants of Working CapitalNumbers of rules are formulated
to determine the working capital requirement of the firm. A large
number of factors influence the working capital needs of the firm.
All these factors have different importance, also the importance of
the factor change for a firm over time. Therefore analysis of the
relevant factor should be made in order to determine the total
investment in working capital requirements of the firm. 1. 2. 3. 4.
5. 6. 7. 8. 9. Nature and size of business Seasonality of operation
Production policy Marketing conditions Business cycle fluctuation
Credit policy Conditions of supply Working capital policy Current
assets in relation to sales 7|Page
Balanced Working Capital positionThe firm should maintain a
sound working capital position. It should have adequate working
capital to run its business operations. Both excessive as well as
inadequate working capital positions are dangerous from the firms
point of view. Excessive working capital not only impairs the firms
profitability but also result in production interruptions and
inefficiencies. The dangers of excessive working capital are as
follows: It results in unnecessary accumulation of inventories.
Thus, chances of inventory mishandling, waste, theft and losses
increase. It is an indication of defective credit policy slack
collections period. Consequently, higher incidence of bad debts
results, which adversely affects profits. Excessive working capital
makes management complacent which degenerates into managerial
inefficiency. Tendencies of accumulating inventories tend to make
speculative profits grow. This may tend to make dividend policy
liberal and difficult to cope with in future when the firm is
unable to make speculative profits.
Inadequate working capital is also bad and has the following
dangers: It stagnates growth. It becomes difficult for the firm to
undertake profitable projects for nonavailability of working
capital funds. It becomes difficult to implement operating plans
and achieve the firms profit target. Operating inefficiencies creep
in when it becomes difficult even to meet day commitments. Fixed
assets are not efficiently utilized for the lack of working capital
funds. Thus, the firms profitability would deteriorate. Paucity of
working capital funds render the firm unable to avail attractive
credit opportunities etc.
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Dividend PolicyDividend Policy refers to the explicit or
implicit decision of the Board of Directors regarding the amount of
residual earnings (past or present) that should be distributed to
the shareholders of the corporation. This decision is considered a
financing decision because the profits of the corporation are an
important source of financing available to the firm. Dividends are
a permanent distribution of residual earnings/property of the
corporation to its owners. Dividends can be in the form of: Cash,
Additional Shares of Stock (stock dividend) or Property. In the
absence of dividends, corporate earnings accrue to the benefit of
shareholders as retained earnings and are automatically reinvested
in the firm. When a cash dividend is declared, those funds leave
the firm permanently and irreversibly. Distribution of earnings as
dividends may starve the company of funds required for growth and
expansion, and this may cause the firm to seek additional external
capital. The firm uses earnings plus the additional financing that
the increased equity can support to finance any expected
positive-NPV projects. Any unused earnings are paid out in the form
of dividends. This describes a passive dividend policy also known
as residual dividend policy. Another school of thought refers to
Modigilani & Miller contends that the effect of dividend
payments on shareholder wealth is exactly offset by other means of
financing. The dividend plus the new stock price after dilution
exactly equals the stock price prior to the dividend distribution.
M&M and the totalvalue principle ensure that the sum of market
value plus current dividends of two firms identical in all respects
other than dividend-payout ratios will be the same. Investors can
create any dividend policy they desire by selling shares when the
dividend pay-out is too low or buying shares when the dividend
pay-out is excessive. But since dividends are taxable the pay-out
of dividends and some investors have a preference for dividends
hence some more options are available with the management like
bonus shares, stock splits etc.
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Objectives1. To analyse the working capital management of Tata
Steel vis--vis the following: a. Operating cycle b. Cash flow c.
Inventory Management d. Receivables Management 2. To analyse the
dividend policy of Tata Steel by analysis of past dividend trends
and the companys current financial status.
MethodologyThe study is based on secondary data collected from
the audited Profit & Loss A/c and Balance Sheet associated with
schedules, annexure available in the published annual reports of
Tata Steel for the period of 10 years (i.e. from 2000 to 2010),
along with various financial ratios available at various financial
databases and websites have been used. For the purpose of the
study, Journals, Conference proceedings and other relevant
documents have also been consulted to supplement the data. In the
present study the liquidity and profitability position have been
taken into consideration by calculating different key liquidity and
profitability ratios in order to judge their financial performance
for the period under study. The dividend policy has been identified
and analysed using trend analysis of the period under consideration
along with a cross-sectional analysis of the industry in the
current period. The Balance sheets, annual reports and Profit and
Loss accounts have also been used to establish the financial and
liquidity position of Tata Steel. The working capital analysis of
Tata Steel has been accomplished by the use of its raw material and
finished goods inventory positions as published in the annual
reports along with data supplemented by secondary sources from the
internet. The ratios, P&L, Balance sheet, creditors &
debtors have also been used to arrive at the analysis.
Data CollectionAnnual ReportsThe annual reports of the company
are available at the company website
http://www.tatasteel.com/investors/performance/annual-report.asp
Secondary SourcesCMIE was used to provide data for trend
analysis and financial ratios augmented by other sources like
Economic Times, BSE India, Yahoo finance, MoneyControl.com etc.
Literature ReviewA host of books & online journals were
reviewed by the group to arrive at certain analysis. The major
contribution was from Financial Management by Prof. I M Pandey. 10
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AnalysisWorking Capital ManagementNet Working Capital CycleTata
Steel Ltd. Currency: Rs. Crore (Annualised) Working cycle (days)
Raw material cycle WIP cycle Finished goods cycle Debtors Gross
working capital cycle Creditors Net working capital cycle 123.6 1.4
47.7 13.5 186.1 88.6 97.5 93.4 1 44.3 12.1 150.9 95.4 55.5 104.9
1.9 44.1 10.8 161.7 90.7 70.9 87.7 1.9 37.3 8.8 135.7 109.5 26.3
99.9 3.1 37.5 7.9 148.4 124 24.5 99.2 2.8 34.3 5.3 141.6 116 25.6
Mar-06 12 mths Mar-07 12 mths Mar-08 12 mths Mar-09 12 mths Mar-10
12 mths Mar-11 12 mths
Net working capital cycle (Days)120 100 80 60 40 20 0 Mar '06
Mar '07 Mar '08 Mar '09 Mar '10 Mar '11 Net working capital cycle
(Days)
Industry Comparision50 40 30 20 10 0 Mar-11 TATA Mar-11
INDUSTRY
11 | P a g e
Interpretation: As can be seen from the graph, the net working
capital cycle days have been decreasing year on year and has been
consistent for the last three years. This shows that the company
has been improving its efficiency of working capital utilisation.
Also the number of NWC cycle days is significantly lower compared
to the steel industry which again proves that the efficiency of
utilising NWC is better at Tata Steels compared to the rest of the
industry. As stated above, the NWC depends on several factors and
the same is seen from the data of Inventory cycle (Raw material
cycle, WIP cycle, FG cycle), Debtors cycle and Creditors cycle. All
these factors combined seem to be helping reduce the NWC cycle
time. Each of the factors will be studied individually in the below
sections.Company Vs Industry Group AggregatesCurrency: Rs. Crore
(Annualised) Quick ratio (times) Current ratio (times)
TATAMar-11 0.2 0.7
INDUSTRYMar-11 0.5 1.1
Liquidity RatiosQuick Ratio Current Ratio 1.1 0.7 0.2 Mar-11
TATA Mar-11 INDUSTRY 0.5
Everything at Tata Steels seems to be helping the profitability
of the company only until we look at the liquidity ratios of the
company in comparison with the industry average. Both the quick
ratio and the current ratio portray a poor picture of the company.
It shows that the company is well behind the industry average when
it comes to the percentage of current assets. The ratios clearly
indicate that if the company is required to pay all its liabilities
in a short period it might have to file for bankruptcy as well in
the worst scenarios. Though that is unlikely to happen as Tata
Steels enjoys an image of one of the most trusted companies in the
country . Also it can be said that the company has been following a
very Aggressive Current Assets Policy from the fact that though the
sales of the company have been increasing consistently, the current
assets havent been able to match the same. Tata Steels also seems
to be using short-term financing for its current assets which again
is an indicator of an aggressive approach for financing its current
assets.
12 | P a g e
Receivables ManagementTata Steel Ltd.Debtors Mar '06 13.5 Mar
'07 12.1 Mar '08 10.8 Mar '09 8.8 Mar '10 7.9 Mar '11 5.3
Debtors16 14 12 10 8 6 4 2 0 Mar '06 Mar '07 Mar '08 Mar '09 Mar
'10 Mar '11 Debtors
Industry Comparision40 20 0
Mar-11TATA
Mar-11INDUSTRY
Interpretation: As can be seen from the graph, the cycle time
for the collection from Debtors has been decreasing every year
which is also contributing to the overall decrease in NWC cycle
days. Also it is significantly less compared to the industry
average of 41.5 days. Though this is a very tempting option but if
it exercised excessively it may also lead to losses due to missing
out on customers looking for better opportunities since the
industry has very liberal policies.
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Creditors ManagementTata Steel Ltd.Creditors Mar '06 88.6 Mar
'07 95.4 Mar '08 90.7 Mar '09 109.5 Mar '10 124 Mar '11 116
Creditors140 120 100 80 60 Creditors
4020 0 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 Mar '11
Industry Comparision120 115 110 105 100 Mar-11 TATA Mar-11
INDUSTRY
Interpretation: From the graph it can be seen that the number of
days taken to pay the Creditors has been increasing every year.
This again helps reduce the overall NWC cycle period since it
allows the company to use the resources from the creditors for a
longer period of time. Also the number of days is higher than the
average number of days for the industry. This probably is due to
the trustworthy image of the Tatas group which helps them avail
more liberal credit policies from the suppliers than are offered to
other industry competitors.
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Inventory ManagementTata Steel Ltd.Raw material cycle WIP cycle
Finished goods cycle Inventory Cycle Mar '06 123.6 1.4 47.7 172.7
Mar '07 93.4 1 44.3 138.7 Mar '08 104.9 1.9 44.1 150.9 Mar '09 87.7
1.9 37.3 126.9 Mar '10 99.9 3.1 37.5 140.5 Mar '11 99.2 2.8 34.3
136.3
Inventory Cycle200 180 160 140 120 100 80 60 40 20 0Mar '06 Mar
'07 Mar '08 Mar '09 Mar '10 Mar '11
Inventory Cycle
Industry Comparision140 135 130 125 120 115 110 105 Mar-11 TATA
Mar-11 INDUSTRY
Interpretation: The more the number of days inventory remains
idle, the more is the opportunity lost to utilise it for making
profits. The Inventory cycle time seems to be decreasing slowly
though not consistently which proves that the company is improving
in terms of efficiency of its resources. But when we look at the
comparison with the industry average it tells a different story.
The inventory cycle period of Tata Steels is much higher than the
industry average. There seems to be lot of scope in terms of
improving the efficiency of utilisation of inventory, especially
raw materials at Tata Steels. This increased efficiency will lead
to better utilisation of inventories and thus increase the overall
profitability. 15 | P a g e
Dividend PolicyTata Steel has been continuously providing
dividend to its shareholders to maximize the shareholder wealth. In
the last financial year 2010-11 the company paid a dividend of `
1151.06 crores. The Board recommended dividend of `12 per Ordinary
Share on 95,92,14,450 Ordinary Shares (2009-10: ` 8 per Ordinary
Share on 88,72,14,196 Ordinary Shares of ` 10/- each) for the year
ended 31st March, 2011. The total dividend pay-out works out to 19%
(2009-10: 17%) for the standalone company. Tata Steel is giving a
significant higher rate of dividend year after year in comparison
to its nearest competitors. The dividends have been largely
following the earnings of the company and show an upward trend from
2000 onwards.
EPS & DPS100.0090.00 80.00 70.00 60.00
50.0040.00 30.00 20.00 10.00 -
EPSDPS
The dividends paid and the earnings during the last 10 year are
summarised as follows: Fiscal Year Mar'00 Mar'01 Mar'02 Mar'03
Mar'04 Mar'05 Mar'06 Mar'07 Mar'08 Mar'09 Mar'10 Mar'11 DPS 4.00
5.00 4.00 8.00 10.00 13.00 13.00 15.50 16.00 16.00 8.00 12.00 EPS
Dividend/ Profit Equity Dividend (%) 11.49 34.81 40 15.05 33.22 50
5.09 78.59 40 27.53 29.06 80 47.48 21.06 100 62.77 20.71 130 63.35
20.52 130 72.74 21.31 155 63.85 25.06 160 69.70 22.96 160 56.37
14.19 80 71.58 16.76 120
16 | P a g e
Dividend paid out as a percentage of earnings can be graphically
depicted as follows:
Dividend / Profit100.00 80.00 60.00 40.00 20.00 0.00
The dividend pay-out as a ratio from the year 2004 to present
has been hovering around 20% of the net earnings. This is
indicative of constant pay-out ratio strategy wherein Tata Steel
gives a constant pay-out of 20% of its net earnings. Another trend
that is visible is that the divided paid out to the investors has
been constantly rising with an exception of FY2009 where it had a
major loss of around 2000 crores in a quarter due to a slump in
global demand and recessionary economic pressures.
Equity Dividend (%)180 160 140 120 100 80 60 40 20 0 Mar'00
Mar'01 Mar'02 Mar'03 Mar'04 Mar'05 Mar'06 Mar'07 Mar'08 Mar'09
Mar'10 Mar'11
Dividend pay-outs depend upon the profitability and the capex
needs of the company in the future, estimation of future dividends
need to take into account these two important variables in mind. A
peep into Tata Steels past may provide some guidelines on how the
future dividends may be like. Since the company may have undertaken
capex plans and steel prices would have fluctuated in the past as
well, did this force the company to cut its dividends
significantly? Since FY91, there have been only two instances where
the company has been forced to cut its dividends. The cut had been
of the magnitude of 30% on one occasion and 20% on the other
occasion. Barring these two instances, the company has never cut
its dividend per share since 1991. However, it should be added that
on quite a few occasions, it has kept its DPS constant. Tata Steel
has large reserves of 47,307.02 which are sufficient for its
planned capital expenditure of 2500 crores or USD $ 500 million.
Hence the company has enough funds to pay-out dividends. Tata Steel
also has a debt of 28,301.14 crores for which the company must
maintain a reserve pool in order to payback the interest and the
principal amount as and when they become due. Tata Steel is a part
of Tata group of companies wherein the investor has grown to expect
stability in earnings and even though there may be a slight drop in
the growth rate of the company but Tata Steels 17 | P a g e
policy of paying constant DPS acts as a signal to its investors
about the long term profitability of the company. A constant
dividend policy also helps in attracting institutional investors.
It improves the credit rating of the company. Tata Steel has been
paying dividends in cash over the past decade with the only
exception being in the year 2004 where it went in for bonus shares
issue. Tata Steel had decided to issue bonus shares in the ratio of
1:2 i.e. one bonus share for every two existing ordinary shares
held by the members of the company in 2004.
ConclusionWorking Capital Management Tata Steels is pursuing an
Aggressive Policy when it comes to its Working Capital Management.
It has done its best to improve its collections from its debtors
and is much better than the industry average with respect to the
same. Though this policy might lead to reduced costs and help
increase the profitability of the company, excessive exercising of
this option might lead to losses due to loss of customers who might
be tempted to move to the other steel companies in the industry who
are offering liberal policies. Unlike its Receivables collection
policy, Tata Steels seems to be making complete use of its
trustworthy image to gain maximum benefits from its suppliers and
delaying the payments for as long as possible. The company has done
well in managing its suppliers and also improving the Creditors
cycle days which again is much better than the industry average.
Though Tata Steels has done a good job with its Creditors and
Debtors, it has only marginally improved in efficient utilisation
of its Inventories. The Inventories of Tata Steel make up a larger
percentage of the companies Current Assets than the industry
average. It proves that there is still lots of scope for
improvement on this front at Tata Steels which can definitely help
improve its profitability. Tata Steels seems to have employed an
Aggressive approach to finance its Current Assets. Most of its
current assets financing is done by short-term financing such as
improving receivables collection time and increasing creditors
payable time. Overall, Tata Steels management of Working Capital
has led to an increased profitability for the company. Tata Steel
definitely seems to be more efficient than the other steel
companies in the industry. But there seems to be scope for
improvement in utilising its inventory to maximise its profits
since inventory forms the major part of its current assets. Also it
needs to improve its liquidity position to avoid the risk of being
short on funds if at all there is a situation where it requires to
pay back its liabilities in a short time.
Dividend Policy Tata Steel has a dividend policy of constant
dividends based upon the EPS which has an upward trend with the
dividend payout ratio constant at about 20%. Tata Steel has enough
reserves and liquidity to payout dividends and to fund its capex as
well hence the company is justified in paying out dividends Tata
Steel can also issue bonus shares, stock splits or share buyback to
pass on shareholder value so as to forgo the dividend tax payable
and to ensure more returns in the long run.
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References 103rd Annual Report Tata Steel 2009-2010 104th Annual
Report Tata Steel 2010-2011 CMIE Database (Updated till 23rd March,
2012) Analysis of financial performance of Tata Steel A Case Study
: Suvarun Goswami, Anirudh Sarkar; published in International
Journal of Multidisciplinary Research Vol.1 Issue 5, September
2011, ISSN 2231 5780 Fundamentals of Financial Management, 12/e
Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha,
WI Introduction to corporate Finance by Laurence Booth & W.
Sean Cleary, John Wiley Publications Financial Managemet by I M
Pandey , Vikas Publications www.worldsteeldynamics.com
en.wikipedia.org/wiki/Working_capital#Working_capital_management
en.wikipedia.org/wiki/Dividend_policy www.investopedia.com
www.moneycontrol.com
www.moneycontrol.com/india/stockpricequote/steellarge/tatasteel/TIS
economictimes.indiatimes.com/tata-steel-ltd/stocks/companyid-12902.cms
www.economywatch.com www.tatasteel.com www.tatasteelindia.com
www.bseindia.com
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