Management Discussion & Analysis

Raw materials
Tata Steel:
Tata Steel’s Indian operations are self-sufficient in iron ore through its captive mines. It is 60% self-sufficient for coking coal. The balance amount of coking coal or coke is procured mostly through imports largely covered by annual contracts. In the Jharia collieries, the raw Coal production increased by 4.5% over FY 2006-07 to 1.58 million tonnes; with all time lowest ash at 15.47% from Bhelatand and 16.4% from Jamadoba. The West Bokaro division achieved the highest ever raw coal production at 5.63 million tonnes (1.8 million tonnes of clean coal at 13% ash). The iron ore sized production grew by 2.7% to 4.56 million tonnes and the fines production was higher by 3.3% to reach a level of 5.46 million tonnes. The Noamundi and Joda iron ore mines have achieved 1.96% and 1.98% Fines Alumina respectively with respect to the previous best of 2% in
FY 2006-07.

Corus Group:
The principal raw materials in the carbon and engineering steel making processes are iron ore, metallurgical coal and steel scrap. There was an increase of 9.5% in the market reference price of iron ore fines in calendar year 2007 compared to 2006, with around a further 65% increase in 2008. During 2007, growth in demand, predominantly from China, was offset to some extent by increased availability from Australia, Brazil, India and China. However, the continued strong growth in demand into 2008 has resulted in the substantial increases now experienced. The price of hard coking coal decreased by 16% in 2007 compared to 2006. However, the supply/demand balance tightened during 2007, caused by increased growth in Asian demand, delays to new projects and supply chain bottlenecks. This was exacerbated by the impact of floods in Australia and has resulted in prices more than doubling in 2008.

Corus has also been subject to the movements in world-wide energy prices during the year, and saw natural gas and electricity prices rise substantially in 2007 compared with 2006.

Research & Development
Tata Steel:
Research and Development were carried out in the areas of raw materials, blast furnace productivity, steel making, product development, process improvement etc. Several thrust area projects were taken up:

8% Ash in Coal without reducing yield
Complete beneficiation of iron ore
Improving Blast Furnace productivity
Lowering Phosphorus in Steel making
Development of Advanced Coatings
Flat Products for Automobiles

During the year, some of the successful research and development activities that were taken up are:

Development of Nano coating to improve corrosion resistance of re-bars
Development of Plasma cleaned wire rods to avoid pickling
Substituting BHQ from Noamundi and Joda in place of Quartz in Blast Furnace
Develop Hydro-formed tube for Tata Nano application

Corus Group:
Process developments
Corus is a major partner in the ULCOS (Ultra Low CO₂ Steel making) project, aimed at developing technology to achieve a 50% reduction of carbon emissions by 2050. In 2006, a programme focusing on four technologies was devised:

A new blast furnace process using pure oxygen and top gas recycling
SARNA - a new smelting reduction process with very high efficiency
A new direct reduction process using gas or hydrogen, with geological storage of CO₂
Direct production of steel by electrolysis of iron ore

Product developments
The main focus for strip products continued to be the further development and improvement of steel grades with high strength and good formability, such as the ‘Dual Phase’ family of steels.

Work continued on the improvement of chromium-free passivation coatings for tinplate and for hot-dip galvanised material. For tinplate, this work is being carried out with other tinplate producers, lacquer suppliers and can makers, with the aim of developing one single, standardised, chromium-free passivation coating worldwide.

A new metallic coated steel product has been developed jointly with Salzgitter with a coating containing zinc, magnesium and aluminium, which gives higher corrosion resistance than conventional metallic coatings.

Two new families of rail steel have been developed, targeting the key degradation mechanisms of rail, namely rolling contact fatigue (RCF), resistance and wear. Bainitic and ultrahigh carbon (UHC) rails both display exceptional resistance to RCF and could provide cost effective solutions to meet customer requirements.

Application developments
A successful full scale plant trial with High Efficiency Combustion burners in one of the reheating furnaces at Llanwern works has proven that applying this technology leads to significant energy savings as well as substantial reduction of CO₂ and nitrogen oxide emissions. Based on these results, it is planned to apply this technology to reheating furnaces in IJmuiden.

e) Strategy:
In terms of value creation, the Tata Steel Group strategy is twofold:

To increase the quality of earnings of its existing assets, Tata Steel Group will pursue the optimisation of its European assets, restructure assets that are of low profitability and continue to derive benefits through continuous improvement and synergies.
To generate strategic growth. This will be pursued through capacity expansions and securing access to raw materials. The Tata Steel Group is expanding its capacity in India through expansion of its current operations in Jamshedpur to 10 million tonnes and through the construction of a 6 million tonnes ‘greenfield’ site in Orissa. Other greenfield opportunities in Asia are being assessed. The Tata Steel Group is also looking at further integration upstream in raw materials. In India, it is currently 100% integrated on iron ore and 60% on coal.

The Tata Steel Group has a vision to become the world steel benchmark for value creation and corporate citizenship. The corporate citizenship benchmark means providing a safe working place, respecting the environment, caring for its communities and demonstrating high ethical standards.

In terms of communities, the Tata Steel Group promotes and encourages economic, environmental, social and educational development. In India, its focus is on fulfilling certain basic requirements including healthcare, food security, education and income generation through the development of rural infrastructure, empowerment and community outreach programmes. In Europe, it is actively involved in a broad range of community initiatives, such as being premier sponsor of the British Triathlon.

f) Finance
Financing of Acquisition of Corus

i. Financing Structure
The financing structure of the Corus transaction has been reorganised to achieve fiscal unity in the Netherlands and consequent tax efficiencies.

ii. Funding Structure
The bulk of the financing for the Corus acquisition has now been completed with all the bridge funding having been paid off through a mix of debt, equity and internal accruals. The funding structure as on 31st March, 2008 is as follows:

	in GBP Bn	in USD Bn
Equity Capital from Tata Steel Limited Non-recourse long-term debt at Corus	3.75 3.15	7.45 6.26
Total	6.90	13.71

The sources of the contribution towards equity capital included the following:

Tata Steel Asia Holdings Pte. Ltd. and Tulip UK Holdings (No. 1) Limited drew down GBP 2.21 billion of bridge loans. These loans were repaid using monies infused by Tata Steel Limited out of equity issues, CARS and loans as described below and also out of internal generation.
The Company had allotted to Tata Sons, on a preferential basis, 27,000,000 ordinary shares (at a price of Rs. 516 per share) and 28,500,000 warrants to subscribe to an equal amount of ordinary shares. Tata Sons fully exercised the warrants and 28,500,000 ordinary shares were issued to Tata Sons at a price of Rs. 484.27 per share, for total proceeds to the Company of Rs. 1,380 crores.
The Company issued USD 0.875 billion of 1% Foreign Currency Convertible Alternative Reference Securities (“CARS”). The CARS accrue interest on the outstanding principal amount at a rate equal to 1% per annum and are classified as unsecured debt on the balance sheet of the Company. Between 4th September, 2011 and 6th August, 2012, each security is convertible at the option of holder of the security, at a conversion price of Rs. 758.10 per share into a Qualifying Security issued by the Company. The Company must redeem all outstanding CARS principal amount together with accrued and unpaid interest no later than 5th September, 2012.
The Company entered into a loan agreement with the State Bank of India and other banks for Rs. 9,500 crores. In January 2008 Rs. 9,000 crores was repaid with proceeds from the Company’s Rights Issue and Rs. 500 crores was repaid on 28th February, 2008.
In November 2007, the Company made a rights issue offering to shareholders in India, (i) 1 ordinary share for every five ordinary shares at a price of Rs. 300 per share and (ii) 9 cumulative compulsorily convertible preference shares (“CCPS”) for every 10 ordinary shares at a price of Rs. 100 each. A total of 121,611,464 ordinary shares and 547,251,605 were allotted pursuant to the rights issue. Every six CCPS issued will be automatically converted into one ordinary share of the Company on 1st September, 2009. Total proceeds from the rights issue aggregated Rs. 9,121 crores. In January 2008, the Company used the proceeds from the rights issue to repay the loan from the State Bank of India described above.

In addition, the non-recourse long term debt (at Tata Steel UK) was syndicated. GBP 3.12 billion of Bridge Funding was drawn in full into Tata Steel Netherlands as borrower. Based on it’s assessment of the appropriate quantum of debt that could be serviced by Corus, the Company restructured the initial higher cost inflexible leveraged debt financing consisting of loans and bonds. This even involved a change in the financing banks. The replacement financing package consisting solely of lower cost pre-payable corporate term loans offered substantial savings and benefits to the company. This was a GBP 3.670 billion senior facility consisting of multiple tranches of term loans and a GBP 0.5 billion five year revolving credit facility. These facilities are secured by the assets of Corus.