Group9 Final TATA Scrap

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Group 9 TATA Scrap 28th July 201New BusinessDevelopment

New BusinessDevelopment

Group 9

Anuj Gupta 074

Sharath Nair 241

Alpana Nagar 259Saurabh Gupta 298

Vipul Mehta 314

For Tata Group

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Contents

Steel Industry in India

Metal Recycling for TATA Group

Proposing the Business model for TATAGroup

Viability of the Business Model

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Indian Steel Industry Anoverview

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Indian Steel Industry

Consolidation: Buy outs, an easy way of

getting hold of land and regulatory approvals

by companies seeking growth.

Doggedness of Foreign Firms: Delays in

approvals and setting up plants have not

deterred foreign firms from setting up shop inIndia.

Relocation, Smaller Plants: Arcelor Mittal

has pointed towards setting up smaller modular

Use of Low grade raw Materials: Raw

Materials account for 50-55% of costs,

technology for processing low grade raw

materials

Environmental Awareness: Stricter

environment bills and a mining bill, calls forsharing of 26% of profits with locals, companies

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Indian steel industryproblems

Energy Supply: Power shortageshamper production at many locations.

Procurement of Raw Materials &

Input Costs: Considerable amount of

raw materials imported. Indian raw

materials low quality and scarcity of rawmaterials are jacking up prices.

Inefficient Transport System:

Insufficient freight capacity & transport

infrastructure that is inadequate

Financing Capacity Expansion: Steel

is a capital intensive industry with high

fixed costs. Even though equity market

has boomed, ability to finance a project

is uncertain. 5


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Steel Industry InflectionPoints

Old Paradigm:Continue expansion through brownand green field projects

Inflection Point:

Rising Costs of Raw MaterialsInability to set up plants near Iron orefacilitiesRising transportation costsEnvironment friendly organisation inlight of the mining bill.

New Paradigm:Enter into Scrap recycling in order to cutcostsBecome more environment friendlyTake advantage of Indias huge scrapimports.

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Metal Recycling for TATAGroup

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S i d i i



Scrap industry scenario inIndiaExisting process:

Recycling has not gained scale, not even a SSI status. Ferrous scrap is

often melted by small foundries. No norm exists for End of Life Vehicles (ELV) in India, US and China has

a 10 year limit

Existing players in the industry:

Metal Scrap Recycling Association of India brings under one associationall regional players in the country

Metal Scrap Trading Corporation (MSTC) and its subsidiary FSNL dealswith public sector steel mills and other government departments

Private sector players like FEENOINDIA and METCO deal with ferrous andnon ferrous scrap in the countryLocal Scrap

dealers(Kabadiwalas)

Intermediate scrapdealers

Scrapprocessingcompanies

Ferrous scrap:Old cars, steel beams,household appliances, railroad

tracks, ships, and foodpackaging and othercontainers

Non Ferrous scrap:Aluminium (including foil and

cans), copper, zinc, lead,nickel , cobalt , titanium,chromium, and precious metals

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Industry analysis

Moderately competitiveindustry with very highbargaining power ofSuppliers

Threat of new entrants LOW to MEDIUM (2/5) High economies of scale required No product differentiation possible High initial capital requirements Government norms will be supportive

Threat of substitute products or service LOW to MEDIUM (2/5) Landfills : environmentally unsustainable Fresh ore to make metals : increasing prices and decreasing availability

Bargaining power of customers-HIGH (4/5)

Concentrated buyers in the form of big steel mills Standardized products in the form of shredded scrap % of scrap metal in buyers raw material is low initially Quality of product is important Buyer(Tata Steel) can do backward integration itself

Bargaining power of suppliers VERY HIGH (5/5) Low switching cost as the rate offered is close to existing market rate

Substitute is existing scrap processing companies, reuse after repair Forward integration less likely as scrap dealers are small and unorganized Scrap recyclers are highly important to suppliers

Competitive rivalry- MEDIUM to HIGH (3/5) Small local competitors High potential for growth owing to rising ore prices High capital intensive with high fixed costs Exit barriers are high 9



TATA ScrapBenefits to TATA Benefits to the TATA Group from recycling business :

Energy saving: Processing ores is about 60 percent of thetotal energy used in the production of most metals i.e.crushing and grinding the ores.

Metal reuse: Metals can be repeatedly recycled withoutdegradation of their properties. Metals from secondarysources are just as good as metals from the primarysources, at a cheaper cost

Environmental impact : e.g. in case of steel, recyclingsteel saves

90 % savings in virgin materials 86 % emissions reduction 40 % effluent reduction 76 % water pollution reduction

97 % mining waste reduction Cushion against rising raw material costs:

Tata Steel Expects 15% Jump in Raw Material Costs ason date

60% of its annual procurement budget of $16-$18 bn israw material for TATA Steel mills

Derives synergies : It uses the existing distribution

channels of TATA Motors and TATA steels for establishing itsnetwork10



NBD Strategy

Products

Markets

Existing New

Existing

N

ew

RelatedConstrained

Diversification

Both Operationaland CorporateRelatedness

UnrelatedDiversification

Related LinkedDiversification

LowHighO

pe

rationa

lRela

Corporate Relatedness

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NBD CharacteristicsRadicallyNew

NextGeneration

IncrementalChange

Breakthroughs

Platforms

Derivatives

Support

Nochange

NewCategory

Variants

Improvementin existingbenefits

NewBenefit

Impact of the product onthe market

BUse aheavyweight

team withintheorganization

CUse aheavyweight

team in aseparatespinout

AUse a lightweightteam within the

organization

DDevelopmentmay occur in-

house through aheavyweightteam ,butcommercialization requires aspinout

GOOD

POO

R

Fit with organizations v

Fit

wit

pro

ces

GOOD

Disruptive Technology for TATA Ste

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Proposing the businessmodel for TATA Group

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Operational Model

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Process

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Supply Channel

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Plant Location 10 plants in all the 5 zones

in the first year

Gradual expansion to atotal of 15 plants in each

zone

Warehouses on key ports in

the country

Considerations:

Geographically wide-

spread

Cost Benefit

Transportation cost

and viability to Tata

Steel

Proximity to collection

areas

Manesar

Jamshedp

urBurhanpur

Chakan

Chennai

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Tata Scrap Organizational Setup

CEO Recruited from Tata Steel

Complete knowledge about the customers requirement and synergies Complete check on the quality of scrap that would be sold to the Tata Steel

Corporate Relations Head

Relations with other Tata Companies like Tata Motors Logistic In charge

Takes care of supply issues, heads procurement team and managestransportation

Business Development Head Look for new customers and diversifying Procurement

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Staffing for each Plant

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Tata Scrap Expansion Plan

10 metal recycling plants in the firstyear, increasing to 80 plants by year10

Strategic alliance with companiessuch as Feen India, Metco

Import of junk vehicles and otherferrite junk apart from automobile

junk thus adding to capacity

Be a market leader in the next 10

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Viability of the BusinessModel

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Approach for Assessment

Junk

availableforrecycling toTata Group

Junk

sources inIndia incomingyears

Recycling

Unitinvestmentand costs

Revenueoptions

andprofit

generation

Various Sources Quantity year-wise

Competition

Installed capacity Operationalconstraints

Capital

expenditure Variable costs Fixed costs

Revenue

generated Profits NPV and IRR

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Junk Availability in IndiaS.N

.Vehicles CAGR 2012 2013 2015 2018 2019 2021

1 Passenger Cars 11% 325000 360750 444480.075 607884.729 674752.05 831362

2 MUVs 9.50% 74000 81030 97156.9958 127560.565 139678.819 167478.396

3 LCVs 5.60% 68000 71808 80075.6859 94295.8157 99576.3814 111041.208

4 MCVs / HCVs 4.40% 93000 97092 105824.066 120416.484 125714.809 137021.096

5 2-wheelers 8.10% 2500000 2702500 3158036.1 3989276.81 4312408.23 5039312.08

6 3-wheelers 9.10% 123000 134193 159727.378 207421.426 226296.775 269356.752

7 Refrigerators 10.00% 1000000 1100000 1331000 1771561 1948717.1 2357947.69

8 Air conditioners 10.00% 6000000 6600000 7986000 10629366 11692302.6 14147686.1

No. of car equivalents 2001200 2145190 2469555.4 3064527.21 3297233.08 3824074.02

Car equivalents produced considering weight of above products relative to car(ie 1000 kgs)

Greatest quantity of steel to come from MCV/HCV, passenger carsand industrial scrap

Source: SIAM, ICRA research report

About 58 lakh tonnes of scrap is imported in India every yearAbout 70 lakh tonnes of scrap is generated domestically

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Profit for TATA Steel

Figures in tonnes Mar-13 Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

No. of carequivalents

2001200 2145190

2300956

2469555

2652149

2850009

3064527

3297233

3549802

3824074

Vehicles (tonnes)(10%)

500000 550000 580000 600000 650000 700000 750000 800000 1000000

1200000

Industrial

domesticscrap (tonnes)

0 200000 345000 587500 881250 884375 1012813

1069094

1106003

1176603

Imported scrap(tonnes)

0 0 200000 500000 1000000

1200000

1300000

1500000

1600000

1700000

Car equivalents(tonnes)

500000 7500001125000

1687500

2531250

2784375

3062813

3369094

3706003

4076603

Ferrous material(68%) (tonnes)

340000 510000 765000 1147500

1721250

1893375

2082713

2290984

2520082

2772090

Non-ferrous metal(9%) (tonnes)

45000 67500 101250 151875 227812.5

250593.8

275653.1

303218.4

333540.3

366894.3

Plastic (4%)(tonnes)

20000 30000 45000 67500 101250 111375 122512.5

134763.8

148240.1

163064.1

In next 5 yrs, the recycling plant will supply 2 mm tonnes of scrap iron toTata Steel

Total saving to Tata Steel in next 5 yrs = (Re. 4.5 Re. 3 ) X 2 bn = Rs300 crores/yr

The saving will amount to about Rs 500 crores /yr in a decade.

1. The number of vehicle equivalents surging rapidly with CAGR of 10-20%

2. Government likely to bring regulation on End of Life age of vehicles

Source: SIAM, ICRA research report24

Investment Analysis for


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Investment Analysis forRecyclingFollowing are the main things considered:

1. Investment in dismantling and shredding units

To reach full installed capacity in 7-8 years ( 4mmt/yr)

2. Revenue sources:Sale of ferrous, non-ferrous and plastics

2 stage growth model has been considered

3. Cost factors:

Fixed costs (land rents, equipments, permanent staff etc)Variable costs (labor, energy, consumables, handling etc)

Cost of input junk + transportation cost

Straight line depreciation considered

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Microsoft Excel

Worksheet


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Cash Flow AnalysisParticulars Mar-

13Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Car equivalents recycled peryear

500000 750000 1125000

1687500

2531250

2784375

3062813

3369094

3706003

4076603

Total Revenues per year(Rs crores)

807 1211 1816 2724 4085 4494 4943 5438 5981 6580

Total Variable costs (Rscrores)

135 203 304 456 683 752 827 910 1001 1101

Total Land rent costs (Rscrores)

71 71 71 71 71 71 71 71 71 71

Total Fixed wage costs (Rscrores)

29 29 29 29 29 29 29 29 29 29

Cost : End-of-Life Vehicle (Rscrores)

500 750 1125 1688 2531 2784 3063 3369 3706 4077

Operating profits (Rscrores)

73 159 288 481 771 858 954 1060 1175 1303

Depreciation 72 72 72 72 72 72 72 72 72 72

Profit Before Tax 1 87 216 409 699 786 882 988 1103 1231Profit After Tax (35% tax

rate)

0 56 140 266 455 511 573 642 717 800

Free cash flows to firm(Rs crores)

72 128 212 338 527 583 645 714 789 872Initial investment of Rs 720 crores andWACC of 18%NPV: Rs 920 cr (10 yr investment horizon)IRR: 37%

Source: SIAM, ICRA research report, businessstandard

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Scenario AnalysisImpact of input junkcostInitial growth rate NPV IRR

Worst case (20 30 %) 121 21

Likely (45 55 %) 920 37

Optimistic case (60 80%)

1800 48

Impact of initial salesgrowth rate

Step by step increase inplant load has been

consideredSo base taken is quite

low

Cost considered based on car equivalentinput (or ELV)

Benchmark or Comparative

analysis Sims Metal Management: Leading metals recycler in the UK (230 sitesworldwide)Deals in ELV, Consumer goods, Industrial dismantling, In plant processingetcHandles around 11mmt of ferrous scrap every yearTurnover in excess of 5 bn pounds (Approx Rs 45000 cr);Profit around Rs 600 cr(Net Margin: 1.6 %; Operating Margin: 3 %; ROE: 4 %

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lNew Business

References

http://www.business-standard.com/india/news/the-problemmaking-ferrous-scrap/4

Imacs, SIAM 2006: Report on Fleet Management and Vehicle

Recycling Policy for India

Sims Metal Management

Steel recycling institute :

http://www.recycle-steel.org/en/Recycling%20Resources

http://www.recycle-steel.org/Steel%20Markets/Automotive.aspx

Scrap recycling institute :

http://www.isri.org/iMIS15_Prod/ISRI/Home/ISRI/Home.aspx?hkey=b5f15281-53ed-

Worldwide scrap news : http://scrap.org/

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http://www.business-standard.com/india/news/the-problemmaking-ferrous-scrap/413425/http://www.recycle-steel.org/en/Recycling%20Resourceshttp://www.recycle-steel.org/Steel%20Markets/Automotive.aspxhttp://www.isri.org/iMIS15_Prod/ISRI/Home/ISRI/Home.aspx?hkey=b5f15281-53ed-4f73-8dc0-a238a1d8c4b4http://scrap.org/http://scrap.org/http://www.isri.org/iMIS15_Prod/ISRI/Home/ISRI/Home.aspx?hkey=b5f15281-53ed-4f73-8dc0-a238a1d8c4b4http://www.recycle-steel.org/Steel%20Markets/Automotive.aspxhttp://www.recycle-steel.org/en/Recycling%20Resourceshttp://www.business-standard.com/india/news/the-problemmaking-ferrous-scrap/413425/

Documents

Group9 Final TATA Scrap