New Business Development

For Tata Group

Group 9 Anuj Gupta Sharath Nair Alpana Nagar Saurabh Gupta Vipul Mehta 074 241 259 298 314

New Business Development

Group 9 TATA Scrap

1 28th July 2011

Contents
Steel Industry in India

Metal Recycling for TATA Group

Proposing the Business model for TATA Group

Viability of the Business Model

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Indian Steel Industry An overview

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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 in India. 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
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Environmental Awareness: Stricter environment bills and a mining bill, calls for New Business sharing of 26% of profits withGroup 9 TATA Scrap locals, companies Development

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Indian steel industry problems

Energy Supply: Power shortages hamper production at many locations. Procurement of Raw Materials & Input Costs: Considerable amount of raw materials imported. Indian raw materials low quality and scarcity of raw materials 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.
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Steel Industry Inflection Points

Old Paradigm: Continue expansion through brown and green field projects

Inflection Point: Rising Costs of Raw Materials Inability to set up plants near Iron ore facilities Rising transportation costs Environment friendly organisation in light of the mining bill. New Paradigm: Enter into Scrap recycling in order to cut costs Become more environment friendly Take advantage of Indias huge scrap imports.
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Metal Recycling for TATA Group

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Existing 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 association all regional players in the country Metal Scrap Trading Corporation (MSTC) and its subsidiary FSNL deals with public sector steel mills and other government departments Private sector players like FEENOINDIA and METCO deal with ferrous and Ferrous scrap: Local non ferrous scrap in the country Scrap
Old cars, steel beams, household appliances, railroad tracks, ships, and food packaging and other containers
dealers(Kabadi walas) Intermedia te scrap dealers Scrap processing companies
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Scrap industry scenario in India

Non Ferrous scrap: Aluminium (including foil and cans), copper, zinc, lead, nickel , cobalt , titanium, chromium, and precious metals

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Industry analysis (2/5) Threat of new entrants LOW to MEDIUM

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) 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

Landfills : environmentally unsustainable Fresh ore to make metals : increasing prices and decreasing availability

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)

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Moderately competitive Small local competitors industry with very high High potential for growth owing to rising ore prices High capital intensive with high fixed costs bargaining power of Exit barriers are high Suppliers
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TATA ScrapBenefits to TATA

Benefits to the TATA Group from recycling business : Energy saving: Processing ores is about 60 percent of the total energy used in the production of most metals i.e. crushing and grinding the ores. Metal reuse: Metals can be repeatedly recycled without degradation of their properties. Metals from secondary sources are just as good as metals from the primary sources, at a cheaper cost Environmental impact : e.g. in case of steel, recycling steel 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 as on date 60% of its annual procurement budget of $16-$18 bn is raw material for TATA Steel mills Derives synergies : It uses the existing distribution channels of TATA Motors and TATA steels for establishing its New Business network Group 9 TATA Scrap
Development

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NBD Strategy
Products Existing New Markets New Existing
Related Constrained Diversification Both Operational and Corporate Relatedness

Unrelated Diversification

Related Linked Diversification

a e Rl ano t ar ep O l i

Low High Corporate Relatedness

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NBD Characteristics
Radically Breakthroughs New Next Generatio n Incremental Change Platfor ms Derivati ves Suppor t

Disruptive Technology for TATA Stee

B Use a heavyweight team within the organization C Use a heavyweight team in a separate spinout

No change

POOR
Variant s

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ti wti F s ec or p

GOOD

New New Improvement Category Benefitin existing benefits Impact of the product on the market

A D Use a lightweightDevelopment team within the may occur inorganization house through a heavyweight team ,but commercializatio n requires a spinout

GOOD Fit with organizations12 va

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Proposing the business model 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 a total of 15 plants in each zone Manesar

Warehouses on key ports in the country Considerations: Geographically widespread Cost Benefit Transportation cost and viability to Tata Steel Proximity to collection areas
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Burhanp ur

Jamshedp ur

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 Takes care of supply issues, heads procurement team and manages transportation Look for new customers and diversifying Procurement
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Logistic In charge Business Development Head

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Staffing for each Plant

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Tata Scrap Expansion Plan

10 metal recycling plants in the first year, increasing to 80 plants by year 10 Strategic alliance with companies such as Feen India, Metco Import of junk vehicles and other ferrite junk apart from automobile junk thus adding to capacity Be a market leader in the next 10 years
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Viability of the Business Model

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Approach for Assessment

Junk sources in India in coming years

Junk available for recycling to Tata Group

Competition Installed capacity Operational constraints

Recycling Unit investment and costs

Capital expenditure Variable costs Fixed costs

Revenue options and profit generati on

Revenue generated Profits NPV and IRR

Various Sources Quantity yearwise

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Junk Availability in India

S.N Vehicles . 1 Passenger Cars 2 3 4 5 6 7 8 MUVs LCVs MCVs / HCVs 2-wheelers 3-wheelers Refrigerators Air conditioners CAGR 2012
11% 9.50% 5.60% 4.40% 8.10% 9.10% 325000 74000 68000 93000 2500000 123000

2013
360750 81030 71808 97092 2702500 134193 1100000 6600000

2015
444480.075 97156.9958 80075.6859 105824.066 3158036.1 159727.378 1331000 7986000

2018
607884.729 127560.565 94295.8157 120416.484 3989276.81 207421.426 1771561 10629366

2019
674752.05 139678.819 99576.3814 125714.809 4312408.23 226296.775 1948717.1 11692302.6

2021
831362 167478.396 111041.208 137021.096 5039312.08 269356.752 2357947.69 14147686.1

10.00% 1000000 10.00% 6000000

No. of car equivalents

2001200 2145190

2469555.4 3064527.21 3297233.08 3824074.02

Car equivalents produced considering weight of above products relative to cars (ie 1000 kgs) lakh tonnes of scrap is imported in India every year About 58 About 70 lakh tonnes of scrap is generated domestically Greatest quantity of steel to come from MCV/HCV, passenger cars and industrial scrap
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Source: SIAM, ICRA research report New Business Development

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Profit for TATA Steel

1. The number of vehicle equivalents surging rapidly with CAGR of 1020% 2. Figures in tonnes likely to bring regulationMar- Mar-Life age of vehicles MarGovernment on End of Mar- Mar- MarMar-13 Mar- Mar14 15 16 17 18 19 20 21 Mar22
2001200 214519 230095 246955 265214 285000 306452 329723 354980 3824074 No. of car 0 6 5 9 9 7 3 2 equivalents Vehicles (tonnes) 500000 550000 580000 600000 650000 700000 750000 800000 100000 120000 0 0 (10%) 0 200000 345000 587500 881250 884375 101281 106909 110600 117660 Industrial 3 4 3 3 domestic scrap (tonnes) 0 0 200000 500000 100000 120000 130000 150000 160000 170000 Imported scrap 0 0 0 0 0 0 (tonnes) Car equivalents 500000 750000112500 168750 253125 278437 306281 336909 370600 407660 0 0 0 5 3 4 3 3 (tonnes) Ferrous material 340000 510000 765000 114750 172125 189337 208271 229098 252008 277209 0 0 5 3 4 2 0 (68%) (tonnes) Non-ferrous metal 45000 67500 101250 151875 227812. 250593. 275653. 303218. 333540. 366894. 5 8 1 4 3 3 (9%) (tonnes) In next 5 yrs, the20000 30000plant will supply 2 111375 122512. 134763. 148240. 163064. recycling 45000 67500 101250 mm tonnes of scrap iron to Plastic (4%) 5 8 1 1 (tonnes) Tata Steel

Total saving to Tata Steel in next 5 yrs = (Re. 4.5 Re. 3 ) X 2 bn = Rs

300 crores/yr Source: SIAM, ICRA research report The New Business saving will amount to about Rs 500 crores /yr in a decade.
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Investment Analysis for Recycling

Following 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 Analysis

Particulars
Mar13 Mar14 Mar15 Mar16 Mar17 Mar18 Mar19 Mar20 Mar21 Mar22

Car equivalents recycled per 500000 750000 112500 168750 253125 278437 306281 336909 370600 407660 0 0 0 5 3 4 3 3 year 807 1211 1816 2724 4085 4494 4943 5438 5981 6580 Total Revenues per year (Rs crores) 135 203 304 456 683 752 827 910 1001 1101 Total Variable costs (Rs crores) 71 71 71 71 71 71 71 71 71 71 Total Land rent costs (Rs crores) 29 29 29 29 29 29 29 29 29 29 Total Fixed wage costs (Rs crores) 750 1125 1688 2531 2784 3063 3369 3706 4077 Cost : End-of-Life Vehicle (Rs 500 crores) 73 159 288 481 771 858 954 1060 1175 1303 Operating profits (Rs crores) 72 72 72 72 72 72 72 72 72 72 Depreciation 1 87 216 409 699 786 882 988 1103 1231 Profit Before Tax 0 56 140 266 455 511 573 642 717 800 Profit After Tax (35% tax rate) Initial investment of Rs 720 crores and Free cash 18% 72 128 212 338 527 583 645 714 789 872 WACC offlows to firm (Rs crores) 920 cr (10 yr investment horizon) NPV: Rs

IRR: 37%
Source: SIAM, ICRA research report, business standard New Business Development 26 Group 9 TATA Scrap

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Scenario Analysis
Impact of initial sales growth rate Initial growth rate NPV IRR
Worst case (20 30 %) Likely (45 55 %) Optimistic case (60 80 %) 121 920 1800 21 37 48

Impact of input junk cost

Step by step increase in plant load has been Cost considered based on car equivalent considered input (or ELV) So base taken is quite low Benchmark or Comparative

analysis Management: Leading metals recycler in the UK (230 sites Sims Metal
worldwide)ELV, Consumer goods, Industrial dismantling, In plant processing Deals in etc Handles around 11mmt bn ferrous scrap every 45000 cr); Turnover in excess of 5 of pounds (Approx Rs year Profit around Rs 600 cr (Net Margin: 1.6 %; Operating Margin: 3 %; ROE: 4 %
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References
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.business-standard.com/india/news/the-problemmaking-ferrous-scrap/41

http://www.isri.org/iMIS15_Prod/ISRI/Home/ISRI/Home.aspx?hkey=b5f15281-53ed-4 Worldwide scrap news : http://scrap.org/

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