Ultra Final Draft_Off Summers

OFF-SUMMERSPROJECT REPORT ON

JAPANESE ECONOMY, COMPARATIVE ANALYSIS OF THE STEEL INDUSTRY, AND EQUITY RESEARCH

PROJECT GUIDE:MR. VICKY SAJNANI

SUBMITTED TO:PROF. HITESH PUNJABI

SUBMITTED BY:PRATIK R. PARULEKAR

MMS FINANCE, ROLL NO: B-96

(2014-2016)A PROJECT REPORT SUBMITTED IN PARTIAL COMPLETION (OFF-SUMMERS) OF MASTERS OF MANAGEMENT STUDIES (MMS).

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DECLARATIONThis is to declare that the study presented by me to Chetana’s R.K. Institute of Management and Research, in part completion of the MMS-II Semester under the title “Japanese Economy, Comparative Analysis Of The Steel Industry And Equity Research” had been done under the guidance of Prof. Hitesh Punjabi. The information submitted in the project is true and original to best of my knowledge.

Pratik

Parulekar

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ACKNOWLEDMENTThe following is the documentation of my research on “Japanese Economy, Comparative Analysis of the Steel Industry and Equity Research” given to me as a Live Project in the partial completion of my 2-Years degree of Masters of Management Studies.

It gives me great pleasure in expressing sincere gratitude towards our CEO Mrs. Madhumita Patil & our Director Dr. Jayshree Bhakay for providing us with state of the art infrastructure to comfortably carry out the project work.

I would also like to express my sincere gratitude towards my industry mentor Mr. Vicky Sajnani who gave me valuable inputs to improve my skill sets in the corporate world. I wish to express my sincere gratitude to Prof. Hitesh Punjabi without whose supervision at each stage of research, the task would not have been accomplished.

Pratik Parulekar

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CERTIFICATEThis is to certify that the study presented by Pratik Parulekar to the Chetana’s

R.K. Institute of Management and Research, in part completion of MMS-II

Semester under the title “Japanese Economy, Japanese Steel Industry,

Comparative Analysis of Indian and Japanese Steel Exports & Equity Research

on Tata steel, Nippon Steel Sumitomo Corporation” has been done under the

guidance of Prof. Hitesh Punjabi.

The project is in the nature of original work that has not so far been submitted for

any course of Chetana’s R.K. Institute of Management & Research or any other

University / Institute.

Prof. Hitesh Punjabi Mr. Vicky Sajnani

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(Academic Guide) (Industry Mentor)

TABLE OF CONTENTS

CHAPTER TOPIC PAGE NUMBER

1 Japanese Economy

1.1 Introduction 7

2 Japanese Steel Industry

2.1 Introduction 10

2.2 Production Process 10

2.3 Efficiency of Japanese Steel Industry 12

2.4 Why Japanese Steel Industry is Investing in India? 14

2.5 Japanese and Indian Steel Company Joint Ventures 14

3 Data Analysis

3.1 Export Data 19

3.2 Production Data 21

3.3 Analysis of Japan - India Exports and Production 22

3.4 How steel prices behave before and after major World events like Olympics

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4 Equity Research Report: TATA Steel and Nippon & Sumitomo Metal Corporation

4.1 Fundamental Analysis 26

4.2 Regulatory Risks Unwind 27

4.3 Global Steel Prices 28

4.4 Key Risks 31

4.5 Conclusion 34

5 Conclusion 35

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6 Bibliography 36

Japanese Economy

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Chapter 1: Introduction

Japan sees itself and is commonly viewed by others—as the worst student in the class in terms

of economic performance. Japanese complain of their country’s slow growth and big

government debt, and they worry about deflation and Japan’s rapidly ageing population. They

point to labour-market inflexibility and claim unemployment is more widespread than official

rates indicate. They also contend that Japan seems unable to attract foreign investment and

suffers from sluggish exports and deterioration in its balance of payments- all the familiar

refrains of struggling business executives and beleaguered policymakers across Europe and the

United States. A controversial hike in consumption taxes to deal with the country’s budget

deficit has only increased concerns.

It is true that Japan has intermittently seen gradual deflation since its financial bubble burst at

the end of the 1980s, but this has not prevented consumers from spending—the household

savings rate has declined sharply as the population has aged—nor has it prevented worker

productivity and the standard of living from rising. Deflation has probably made it more difficult

to service Japan’s large and rising government debt, now some 240 percent of GDP in net

terms. However, nearly all the debt is held internally by the Japanese public, which affords the

government a great deal more leeway than if the debt were held by foreigners, especially since

the tax burden in Japan remains relatively light and the Japanese are still the world’s largest

international creditor.

To compete more successfully with these rising powers, Japan will need to address some of its

self-inflicted handicaps, which have received too little attention until recently. The most

economically damaging is the underutilization of its highly educated women, who are under-

represented in the labour force, dramatically so above entry level. The other big handicap is

Japan’s extremely restrictive immigration policy, which deprives the country not only of skills

and vitality but also of young unskilled workers willing to do the menial jobs that overqualified

Japanese men and, above all, women take on. Correcting these shortcomings could easily add 1

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percent a year to the growth of Japan’s labour force and—more than likely—between 1 and 2

percent a year to the country’s economic growth as far as the eye can see.

Japan will also need domestic structural reforms- an area in which Abe’s program is lagging—to

help rectify other distortions in its economy, beginning with high agricultural protectionism,

inflexible labour markets, and inefficient services in some sectors, and practices that discourage

foreign competition. But these are far from unique to Japan. To varying degrees, each of these

impediments can be found in other advanced countries. Trade reforms—such as those

envisaged under the

Trans-Pacific Partnership, which aims to create a free trade area across the Pacific—can also

help deal with some of these weaknesses.

Abenomics failed to:

Lower Trade barriers

Loosen labour markets

Reduced red tape or encourage entrepreneurship

Only after that the workers will be paid higher salaries/wages and the economy is expected to

gain some momentum.

Currently, Japan is a laboratory for what happens when:

An entire population ages

It’s a testing ground for whether zero interest rates can do more harm than good

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Japanese Steel Industry

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Chapter 2.1: Introduction

Iron and Steel production – The iron and steel production process can be subdivided into 3 sub-

processes: iron-making, steel-making and steel manufacturing. Conventional steel production

takes place in integrated steel mills that often include facilities for coking and sintering. In the

basic process, the input materials - a combination of sinter, iron pellets, limestone and cokes -

enter a blast furnace (BF) to be converted into molten pig iron. The pig iron is then loaded into

an oxygen furnace to produce steel slabs. Alternative processes are direct reduction iron (DRI)

and smelting reduction iron (SRI). Ferrous scrap can also be processed in an electric arc furnace

(EAF) to obtain steel. Today most used steel-making processes consist of a combination of a

blast furnace and basic oxygen furnace. Some SRI processes can produce steel directly.

2.2 Production Process

Basic Oxygen Furnace – The basic oxygen furnace (also called LD converter, from the Linz-

Donawitz process, 1956) is based on an oxygen injection into the melt of the hot metal. The

oxygen burns out the carbon as carbon monoxide CO and carbon dioxide CO2 gas which is

collected in the chimney stack and dust-cleaned.

As the oxidation reactions are highly exothermic, the process needs cooling in order to control

the temperature of the melt. This cooling is done by charging scrap (Recycled and mill scrap)

and by adding iron ore during the blowing process. Scrap and lime are charged into the

converter to also remove phosphorus, silicon and manganese. The converter is lined with

dolomite or magnesite refractory which best resist erosion by slag and heat during oxygen

blowing. The life of a converter lining is about 800 to 1400 cycles. The process provides a high

productivity of steel with low levels of impurities. Inert gas (e.g. argon) is injected into the

bottom of the converter to stir melt and slag. This increases productivity and metallurgical

efficiency by lowering iron losses and phosphorus content. The amount of O2 consumed

depends on the hot metal composition (C, Si, P, etc.)

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Electric Arc Furnace (EAF) - EAFs were first used to convert ferrous scrap into steel. Scrap is first

pre-heated by EAF off-gases (energy recovery) and then charged into the EAF together with

lime or dolomitic lime. Lime is used as a flux for the slag formation (dolomitic lime contains

calcium and magnesium whereas normal lime contains more calcium). Charging the EAF is a

gradual process. At about 50%–60% load, the electrodes are lowered to the scrap and an arc is

struck. This melts the first load before further loading. When fully loaded, the entire content of

the EAF is melted. To achieve this result, oxygen lances and/or oxy-fuel burners can be used in

the initial stages of melting. The ferrous scrap used in the EAF includes scrap from steelworks

and steel manufacturers and consumer scrap. DRI is increasingly used as a feedstock in the EAF

as it contains a small amount of gangue.

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2.3 Efficiency of the Japanese Steel Industry

The Kalina Cycle is an innovative power cycle technology that involves the use of ammonia-

water mixtures in specific ratios, as a highly efficient working fluid, in a Rankine Cycle

configuration for power generation. Due to the superior thermodynamic properties of

ammonia-water mixtures, including boiling at variable temperatures, the Kalina Cycle® can

deliver significant improvements in power output from a given heat source.

Operational Advantages:

Use of existing and proven power plant components

Underlying principles are simple and understood

Ammonia has zero ozone depleting potential

Less sensitivity to decreases in heat source temperature

Safe power plant configuration

Economic Advantages:

10% to 50% more power than conventional technologies

Lower power plant auxiliary loads

Ammonia is a relatively inexpensive working fluid

Very high capacity factor with minimal downtime

Lower capital cost for fixed output rating

Optimize plant efficiency with ammonia-water variation

Through the Japan Iron and Steel Federation (JISF), NEDO coordinates the energy efficiency

activities of the following corporations:

JFE Steel Corporation

Nippon Steel Corporation

Kobe Steel Ltd

Nippon Steel Engineering Co Ltd

Nisshin Steel Ltd

Sumitomo Metal Industries Ltd

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The energy intensive global steel manufacturing industry is confronted with substantial energy

efficiency and sustainability challenges. Major sources of energy consumption in the steel

manufacturing process include the blast and electric arc furnaces, as well as a number of waste

heat sources including reheating and heat treatment furnaces. Due to the increasing costs of

energy supply and the various forms of penalties facing energy intensive industries in the form

of taxes associated with emissions, many companies are exploring the use of energy recovery

technologies, to reduce the overall emissions intensity of their operations. Due to the

intermittent nature and variable temperature of waste heat resources often available in the

iron and steel industry, it is important for an energy recovery system to be both efficient and

responsive.

The Japanese steel manufacturing industry is one of the most significant producers of high

value steel in the world, with annual production in the order of 100 million tons. Since the oil

shock of the 1970’s, the Japanese steel industry has implemented major energy conservation

technologies including the recovery of waste heat, in an effort to reduce energy input costs as

well as reducing the intensity of carbon dioxide emissions. Today, the Japanese steel industry is

one of the most innovative steel industries in the world, and is widely recognized as leaders in

highly efficient and sustainable steel production. Through the Japan Iron and Steel Federation

(JISF) which represents the major Japanese steel manufacturers, NEDO (New Energy and

Industrial Technology Development Organization) has recently identified the Kalina Cycle one of

the most suitable technologies for further improving the energy.

2.4 Why Japanese Steel Industry is investing in India?

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Abundant sources of iron ore and coal available in India

Saves costs for Japan steel companies of importing them to Japan

Rising costs and dip in demand in Japan had led to Japanese industries to find a new

home elsewhere, i.e. India

Reason for majority of the JV’s is to have a better bargaining power over sourcing iron-

ore from the likes of Vale and BHP Billition

Japan auto industry slowed down at the end of 2010, but in India it grew by 31%

At the time of the JVs, construction sector was booming with a lot of demand for steel

Major reason why Japanese firms are investing in India is to take advantage of the

marketing capability of Indian firms and increase sales in the Indian market as well as

take a pie of the profit that’s made in supplying Indian automobile and construction

sector

The Joint Ventures are a “survival strategy” for the Japanese companies since the

demand in their home country is low

(Why Japanese Steel Companies are in India- Forbes India)

2.5 Japanese and Indian Steel Company Joint Ventures:

TATA Steel - Nippon Steel & Sumitomo Metal Corporation (NSSMC)

Set up India’s first continuous annealing and processing line (CAPL)

600,000 tonnes per annum production of automotive cold-rolled steel

Location: Jamshedpur, India

Shareholding: TATA Steel: 51% Nippon Steel Corporation 49%

Approx. Capital Cost: Rs.2750 CR

Reason for Joint Venture: Meet Indian automotive customers’ need for high-grade cold-

rolled steel sheet and the growing Indian automotive industry (Automotive Grade

Continuous Annealed Products)

Equipment provided by NSSMC

TATA Steel has 42% share of domestic automotive steels market

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(Tata Steel-Nippon Steel & Sumitomo joint venture inaugurates new Rs.2750 crore auto steel

line at Jamshedpur- Economic Times)

JSW Steel - JFE Holdings

JFE invests $1bn for 14.9% stake in JSW Steel

Reason: To gain foothold in fast growing Indian market

JSW wanted money but didn’t want to be controlled by JFE Holdings

Better technology from JFE Holdings would help JSW in reducing costs of production and

hence increasing revenues and profits

JFE would charge JSW for the use of better technology and use their marketing network

to sell specialized steel to the Indian firm's customers.

Investment was with a view of long term payment of dividends

JFE would provide technical assistance for 2.3 MT a year cold rolling mill

Would also assist in 1.9 MT a year continuous annealing lines and 400,000 tonnes a year

continuous galvanizing line

Project Cost: Rs.4500 CR

Steel is used to make body parts of automobiles

JSW Steel wouldn’t have to qualify to sell steel to companies since it already uses JFE

Holdings superior technology

JFE Holdings would leverage its position in JSW Steel to sell more steel products and

grow in the Indian automotive steel sheet market

(JFE invests $1 billion for India's JSW Steel stake- Reuters)

(JFE to share tech with JSW for auto steel- Business Line)

SAIL - Kobe Steel (SAIL-Kobe Iron India Pvt. Ltd.

Setting up a 0.5 million tonne per annum iron nugget making plant

Use Kobe’s patented ITmK3 technology at SAIL’s Alloy Steels Plant in Durgapur, Bengal

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Investment: Rs 1500 cr

Equity Holding; 50%-50%

Will produce 0.5MT of pig iron/ iron ore nugget per annum

ITmK3 technology will use dump iron ore fines, disposal of which is an environmental

issue

Motive is to bring latest technologies in India and environment friendly mfg processes

SAIL will contribute land, iron ore and other engineering services for the project, Kobe

steel will provide the technology for setting up the plant and its operation

Steel Authority will provide iron-ore fines from its mines in the eastern state of

Jharkhand for at least 15 years

Non-coking coal will be sourced from elsewhere locally

ITmk3 technology developed for production of iron nuggets used for steel production

ITMk3- Iron making technology mark three

Features of ITMk3:

o It can produce iron nuggets by utilizing relatively low-grade iron ore fines and

non-coking coal as major raw materials and does not require either iron ore

lump or blast furnace coke/coking-coal

o Does not require coke oven plant or sinter plant for producing iron nuggets

o CO2 emission is also less as compared to production through the blast furnace

route, making the technology very environment-friendly

Project funded through 70% debt and 30% equity

Loans taken from Japan Bank for International Cooperation as well as Japanese

commercial banks

(SAIL, Kobe Steel seal pact to bring environment-friendly steelmaking to India- sail.co.in)

(Steel Authority, Kobe Steel Plan $284 Million India Plant- WSJ)

Bhushan Steel - Sumitomo Steel

Sumitomo would provide technical know-how for Bhushan Steels 2.2 mtpa steel in

Orissa

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Hot Rolled Coil and Billets will be made

Steel production under the Orissa plant will be sold under Sumimoto name to auto

makers locally

(Sumitomo Metals forges ties with Bhushan Steel)

Essar Steel - Kobe Steel

Manufacturing of advanced high-strength steel (AHSS) grade steel sheets used in

automotive and other relevant applications

Also auto grade steel at Hazira plant in Gujarat

Joint Venture is in order to design, construct, own and operate a continuous annealing

line (CAL) and a continuous galvanizing line (CGL for galvannealed (GA) steel sheets)

Umbrella agreement for sharing of advanced technology and resources to manufacture

high grade iron and steel products to help growing demand for high-grade steel

products in India

(essar.com)

L&T - Kobe Steel

Reason: For manufacturing equipment for tyre and rubber industry

Stake: 51% L&T, 40% Kobe Steel

Sell 50-60% of output in the first 4-5 years in India and export the rest

Will sell in all markets except USA and Japan

(Kobe Steel, L&T form JV for tyre machinery - ET)

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Data Analysis

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3.1 Japanese and Indian Steel Industry- Export Data

TABLES AND GRAPHS

All figures in million tons (MT)

Japan (%): Japan’s production/exports as a percentage of the World

India (%): India’s production/exports as a percentage of the World

India vs Japan (%): India’s production or exports as a percentage of the Japan

EXPORTS

Year World Japan India Japan (%) India (%) India vs Japan (%)

2004 365.9 33.7 5.5 9.21 1.50 16.32

2005 371 32 6 8.63 1.62 18.75

2006 418 34.6 6.9 8.28 1.65 19.94

2007 444.9 35.6 6.6 8.00 1.48 18.54

2008 436.6 36.9 7.5 8.45 1.72 20.33

2009 327.3 33.3 5.6 10.17 1.71 16.82

2010 388.8 41.98 10.638 10.80 2.74 25.34

2011 416.6 40.7 10.2 9.77 2.45 25.06

2012 414 41.5 8.2 10.02 1.98 19.76

2013 409.4 42.5 10.1 10.38 2.47 23.76

Average 399.25 37.278 7.7238 9.37 1.93 20.46

Table 1

The above ‘Table 1’ indicates the total world steel exports, exports from Japan, India, and the

percentages of exports

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Graph 1.1

The above Graph 1.1 shows the comparison of steel exports between the World, Japan, and

India

Graph 1.2

The above Graph 1.2 shows the comparison of steel exports between Japan and India

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3.2 Production Data:

PRODUCTION

Year World Japan India Japan (%) India (%) India vs Japan

2004 1063 112.7 32.62 10.60 3.07 28.94

2005 1148 112.5 40.90 9.80 3.56 36.36

2006 1250 116.2 44.00 9.30 3.52 37.87

2007 1348 120.2 53.10 8.92 3.94 44.18

2008 1343 118.7 57.80 8.84 4.30 48.69

2009 1238 87.5 63.50 7.07 5.13 72.57

2010 1433 109.6 68.30 7.65 4.77 62.32

2011 1537 107.6 71.30 7.00 4.64 66.26

2012 1599 107.2 77.60 6.70 4.85 72.39

2013 1606 110.6 81.20 6.89 5.06 73.42

Average 1356.5 110.28 59.03 8.13 4.35 53.53

Table 2

The above ‘Table 2’ indicates the total world steel production, production in Japan, India, and

the percentages of exports

Table 2.1

The above Graph 2.1 shows the comparison of steel production between the World, Japan, and

India

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Table 2.2

The above Graph 2.2 shows the comparison of steel production between Japan and India

3.3 Analysis of Japanese - Indian Exports and Production

Total steel production of Japan was around a 110 MT in 2013, which is around 7% of the world’s

production, whereas India had a production of 81 MT which is just 5.05% of the world’s

production.

The difference in the average production in the last 10 years between India and Japan is 29.5

MT which is 36% of India’s average 10 years production.

For the last 10 years the average exports for Japan have been 37.2 MT, whereas for India it has

been 7.72 MT. It seems to be pretty clear that Japan has always been much more competitive in

exports in comparison to India.

Since Japan has always produced much more steel in comparison to India, and has always been

the second largest steel producer after China, their exports also have been much more.

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Japanese companies have tie ups or joint ventures with Indian companies so as to take

advantage of the increasing demand of steel in the growing economy of India. In this way they

market their own products in the Indian market and take a pie of the profits.

On an average for the last 10 years, the total amount of steel exported in the world market is

399.25 MT. Japan having exported 9.37% (37.28 MT) of world exports and India exporting

1.93% (7.72 MT) of the world exports.

3.4 How Steel prices behave before and after major World events like Olympics?

Olympics lead to increase in the price of steel in the run up to the games, only in the case of big

ticket host city e.g.: China and America, primarily due to their expenditure in public works

before the games. Japan earlier hosted Olympics but at that point of time, steel prices steadily

declined like in 1998.

So we conclude that Olympics affect the steel price to the effect of increase in expenditure for

infrastructure development. But the big ticket demand for steel declines after the games and

hence the demand is unsustainable.

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Tata Steelvis-à-vis

Nippon Steel & Sumitomo Metal

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List of acronyms and abbreviations

A Total assets

E Total equity

IT Information technology

NSE National Stock Exchange

L Total leverage

EV Enterprise Value

EBITDA Earnings before interest, taxes, depreciation, and amortization

CFR Cost and Freight

INTRODUCTION

This equity research report is a comparative analysis. It aims to find out fundamentally and

technically stronger investment opportunity between Tata steel, Nippon Steel & Sumitomo

Metal Corporation.

OVERVIEW OR BACKGROUND

Before starting with this equity research, we learnt about Japanese economy and its structure

to better facilitate understanding Nippon Steel & Sumitomo Metal Corporation. Since one of

the companies is Japanese and the other company is Indian, we give full disclosure that the

foreign exchange rates is not taken into consideration while analyzing the Investment.

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RESEARCH FOCUS

Analysing the balance sheet, comparison of the ratios, economic moat, cash flows, valuation,

future growth guidance, technical charts are taken into consideration to find the better fit for a

long term investment

BRIEF ABOUT THE COMPANIES

TATA STEEL

It expected that the restart of captive iron ore mines will support a near-term bounce back in

Q4FY15, volume growth initiatives and non-core asset sales will play out only in the long term.

In addition, a sustained recovery looks unlikely given weak steel prices amid rising Chinese and

Russian imports, stretched net debt/EBITDA. At 6.4 times FY17EV/EBITDA, the stock is trading

at its 9-year average if we value India/EU businesses at 6x/5x FY17E EBITDA.

NIPPON STEEL & SUMITOMO METAL CORPORATION

4.1 FUNDAMENTAL ANALYSIS

Valuation Tata Steel NSSME

PE (x) 13.49 13.6

Price to Book Value (x) 0.76 0.8

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Management Effectiveness Tata Steel NSSME

Return of Capital Employed

(%)

9.01 4.83

Return on Equity (%) TTM 9.59 7.86

Solvency and Margins Tata Steel NSSME

Debt to Equity Ratio (x) 1.3 0.54

Net Profit Margin (%) 2.42 4.40

While analysing the two companies performance the Sales Growth, Debt/equity ratio, return on

equity, return on capital employed, free reserves and Cash flow was scrutinized.

While understanding all the values the percentage increase and decrease along with

consistency was taken into consideration and ignoring the real value since the balance sheets

were in JPY and INR.

4.2 REGULATORY RISKS UNWIND

One of the key sources of TATA’s competitive advantage was 100% captive iron ore. However,

stalled mining renewals over Sep-Dec 20114 had severely affected captive ore output, resulting

in a lackluster Q3FY15 performance. Its expected profitability to get back on track in Q4FY15

given the Govt.’s recent ordinance permitting resumption of iron ore and chrome ore mining,

the resultant decline in imported iron ore cost, and higher scrap sales.

With the Govt.’s mining ordinance expected to supersede state-related issues, captive mining is

unlikely be hindered for the next 15 years. Assurance of captive ore supply over the long run

clearly outweighs the potential increase in recurring costs as prescribed in the ordinance.

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The negative EBITDA/EPS impact due to additional Govt. taxes on royalty works out to just

2%/8% for TATA vs. 20%/70% in the case of imported ore purchases. Our numbers factor in

higher costs attributable to both the District Mineral Fund and National Mineral Trust. This

apart, the Khondbond mine is now likely to remain with TATA against earlier expectations of it

going under the hammer. Q4FY15 and Q1FY16 will see the partial impact from higher cost

imported ore and from thereon iron ore costs are likely to decline.

BUT STEEL MARKET CHALLENGES PERSIST

While mining headwinds are likely to subside because of the ordinance, TATA’s longer-term

spreads remain vulnerable due to falling steel prices and the decline in domestic iron ore prices.

India has seen a sharp increase in steel imports, especially in long products, with prices offered

by Russia and China now below US$ 400 before duties. However, volumes are currently thin as

importers are risk averse given the potential increase in import duty in the upcoming budget. In

addition, emerging supply discipline in the steel industry is a positive sign marked by a decline

in China’s capacity utilization as domestic demand there cools off, forcing Chinese

manufacturers to dump abroad.

4.3 GLOBAL STEEL PRICES TO REMAIN SOFT

According to World Steel Association estimates, incremental steel demand for 2015 will be

32mn tonnes (MT). With global capacity utilization is sub 75%, any incremental demand easily

met from additional supply. Suppliers are waiting on the side-lines (because of low demand) to

gain market share, which will keep steel prices in check. The delta in growth rates is higher for

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the EU than China over the next two years. China accounts for 5x the EU’s apparent steel

consumption; therefore a deceleration in China exposes the world to lower raw material prices

and higher exports from China, both of which effectively lower steel prices. China’s shutdown of

outdated facilities a year in advance will not materially result in higher steel prices. For the EU,

the headwinds emerge from unemployment (>10%), tight credit, low inflation and the

lumpiness seen in the construction segment (35% of EU’s steel user).

TATA STEEL MARGINS FORTIFIED BY RECENT INVESTMENTS

Tata has invested heavily in its European business over the last few years. Its various initiatives

included asset refurbishment, cost rationalization, efficiency improvement, different products,

marketing initiatives and restructuring of operations. While a bulk of the beneficial impact of

various investments might already be reflected in margins, further gains are still likely,

especially if European demand picks up.

WEAK DEMAND, PRICES TO WEIGH ON PROFITS

EBITDA bouncing back to Rs.27bn (11,159/ton) vs. Rs.19.8bn (9,300) in Q3FY15 due to the

resumption of captive mining in iron ore and Ferro chrome, higher scrap sales and lower

imported iron ore cost. However, a return to its erstwhile profitability of Rs.17000 EBITDA/t is

highly unlikely in the medium term due to weak steel prices and narrowing spreads.

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EXPECTING FLAT TO NEGATIVE GROWTH

A weaker trouble (70% since 2Q15) and slowdown in Chinese demand have led to higher than

usual steel exports from China. It’s noted that emerging supply discipline in the steel industry is

a positive sign marked by a decline in China’s capacity utilization. Nevertheless, by not taking

risk on steel prices, especially considering that the removal of export rebates on 30-35% of

Chinese exports has had little impact on steel prices thus far. The realization/t estimates are set

at US$ 710/US$ 714 for FY16/FY17 as against US$ 718 for FY15. The EBITDA/t estimates are US$

203/US$ 206 for FY16/FY17 as against US$216 for 9MFY15.

TATA STEEL APPEARS TO HAVE BEEN LAGGING BEHIND NSSME AS AN INVESTMENT

OPPORTUNITY

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4.4 KEY RISKS

Downside risks:

Any correction in global steel prices is a key risk to Indian steel stocks, given that

pricing is largely import-parity based.

Delays in resumption of iron-ore mining in Odisha and Jharkhand will significantly

affect margins. TATA’s captive cost of ore is less than a third of global prices.

A slowdown in European steel demand and the consequent negative impact on

pricing (sensitivity of margins is very high given their low levels) would mean

increasing funding support to this business.

Upside risks:

The European business has negative equity value and any restructuring here will reduce

the drain on the entity.

A strong pick-up in demand could potentially result in a faster ramp-up of the

Kalinganagar plant and also lead to visibility on phase-2 expansion.

TECHNICAL ANALYSIS- DONE ON OTC MARKETS NSSME

Having found out that fundamentally NSSE is stronger and has better prospects of performing

in the forecasted environment, through technical analysis the intention is to find out the right

opportunities/Price range to enter the stock.

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RSI (Relative Strength Index):

Currently the stock is undervalued and is range bound between 27.05 resistance and 23.20

support NSSME chart.

Once the script decisively breaks the resistance or support level can the stock give a confirm

directions .PB ratio is 0.80 as of 29th March 2015; hence it is unlikely to break its support.

23.20 seem to be a strong long-term support base if we see 2-year chart. Hence, the stock be

accumulated near 23.20-24.20 levels.

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TECHNICAL ANALYSIS ON NSSME ACCORDING TO TOKYO STOCK EXCHANGE

RSI indicates the market price of NSSME is near its oversold region.

The 2-year chart indicates a sideway going stock, which can see levels of around ¥250, which

should be the accumulation price for the stock.

There is a possibility for the stock to confirm an uptrend by going above ¥ 324 levels, in which

case it will prove a higher top higher bottom trend.

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In any case we need to wait for ¥ 250-260 levels to accumulate the stock, these levels can be

seen in the coming months with the given business climate.

4.5 CONCLUSION

Nippon Steel & Sumitomo Metal Corporation seems to be the better investment opportunity

for long-term view in the sector. Given that both are global cyclical stocks, any uptick in the

economy has positively effects on both stocks.

Investment at around ¥250 will be beneficial in the long term.

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Chapter 6: CONCLUSION

Even after the inclusion of Abenomics in the Japanese economic policies by their Prime Minister Shinzo Abe, it hasn’t been effective enough in taking off the economy and lifting the inflation up to 2% levels.

The effects of Abenomics have been such that the measures have led to increasing the gap between the rich and poor. Reduction in the corporate taxes have led to higher profits for companies like Toyota. This increase in profits is according to Shinzo Abe’s plan, an effect of which would lead to an expected transfer of the profits to the workers by a way of a wage or salary increase. What should naturally happen is the workers should be getting a fair share of the profit, but in reality they’re not. The problem herein lies with the companies and the Japanese government. The companies want better labour reforms from the government, only after which they’re ready to increase the pay of the workers.

Even though there is some sort of revival in the economy, it seems to be because of the reducing oil prices and depreciating yen which in turn would help cheapen the exports leading to an increase in the foreign currency. This would only help in a short term revival of the economy and such effects wouldn’t last for a longer period of time.

Japan’s ever rising debt currently stands at 240% of their Gross Domestic Product. Majority of the debt is being held by Japanese Government Institutions, hence the cost of paying interest on the debt is not that high. However the cost of debt that’s supposed to be paid to other parties is being paid through the cash flow from exports.

The decision to hike consumption tax in April, 2014 was taken by the previous government. Before April, 2014 the Japanese households had purchased all their goods required for the whole year. Demand at that time increased along with prices bringing a bit of inflation in the market due to the play of market forces, but that also was a short term phase and didn’t stay long enough for more than a couple of months.

It also has a lot to do with the age of population present in Japan with over 25% of the population aged above 65 years. Majority of the people are old who don’t tend to spend much and the young population doesn’t have stable jobs or wages due to which the overall spend in the economy also decreases.

Currently the Japanese Banks are offering lending rates at nearly zero. Companies or Institutions from other countries come and take loans from these banks for long term needs.

The Japanese economy is now more of a testing ground for other economies similar to the likes of Japan, e.g. Greece or other Eurozone countries in a lot of debt. It’s a test on whether zero interest rates can do more good than harm.

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Chapter 7: BIBLIOGRAPHY

World Steel in Figures (Yearly Reports)

http://www.worldsteel.org/dms/internetDocumentList/bookshop/World-Steel-in-

Figures-2014/document/World%20Steel%20in%20Figures%202014%20Final.pdf

MESTEEL

http://www.mesteel.com/cgi-bin/w3-msql/goto.htm?url=http://www.mesteel.com/

info/international_steel_statistics.htm

World Trade Organization

https://www.wto.org/english/res_e/statis_e/its2011_e/

its11_merch_trade_product_e.htm

Equity Master

https://www.equitymaster.com/

Yahoo Finance

http://finance.yahoo.com/

http://www.iea-etsap.org/web/e-techds/pdf/i02-iron&steel-gs-ad-gct.pdf

http://www.worldsteel.org/dms/internetDocumentList/bookshop/Steelmaking-poster/

document/Overview%20of%20the%20steelmaking%20process.pdf

http://www.globalgeothermal.com/ironsteelindustry.aspx

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