Management Discussion & Analysis

k) Risk Management
Tata Steel
Tata Steel has been on a path of accelerated growth with foray into several geographies. Associated with such growth is the resultant change in the risk profile. The Company today faces greater complexities/challenges and even greater expectations from its stakeholders. The Company, therefore, needs to evaluate how much risk the company is taking in light of its growth initiatives. In other terms, the residual risk in the expected return needs to be formally recognised and disclosed.

In the past, the Company’s Risk Management framework was based on the Tata Business Excellence Model (“TBEM”). This framework has served us very well as the Company modernised, pursued the goal of being one of the lowest cost producers of steel and adopted an approach of Value Based Management in order to maximise the shareholders’ value. Given the pace and complexity of the current growth with its associated risks, Tata Steel now is in the process of implementing a more structured approach in the form of Enterprise Risk Management (ERM).

The key objectives of the Company through
ERM are :

To enshrine the process of ERM as a usual Business Process and integrate into all decision making and planning processes.
To ensure that all levels of Management identify and monitor risks through a properly defined framework.
To provide periodic information and updates to the Board and the Shareholders on the significant risks and the ways of mitigating the same.

Continuing with its best-in-class approach, the Company endeavours to create a “Risk Dash Board” for periodic reporting to the Management as decision support and to assist in developing better controls aligned to the best practices in mitigating the risks.

The ERM initiative is currently under implementation and is expected to be completely rolled out in the financial year 2008-09.

Some of the key risks the Company has been monitoring, reviewing and managing are:

Raw Material Linkage - While the stand alone raw material security of Tata Steel is 80%, with the acquisition of Corus the combined security of the group stands at 22%.

With a view to increasing its raw material security so as to maintain its cost competitive position and to de-risk supplies, Tata Steel continues to look at opportunities for backward integration guided by the following factors: favourable geographical operations, resource potential with suitable quality, favourable political, socio-economic conditions and infrastructural support.

Accordingly, the Company has entered into three significant joint venture agreements with respect to coal, iron ore and limestone properties with large resource base.

Post Acquisition Integration Risk – Post Acquisition, Tata Steel recognises that there could be considerable risk emanating from a possible lack of adequate alignment of management on strategic issues and in common functional areas. The Tata Steel Group has therefore taken some substantive measures to mitigate the above risks:

An Operating Model has been instituted to govern management collaboration and decision making in areas such as Finance, Strategy, IT, HR, Continuous Improvement. A Joint Executive Committee, comprising executive leadership of both entities, provides high level direction and guidance.
To ensure that synergies in operations are identified and implemented for pre-defined bottom line impact, the following enabling mechanisms have been set up soon after the acquisition transaction was completed:

Focused integration teams
Setting up of a Strategy and Integration Committee
Setting up an Integration Programme Office to facilitate synergy identification and enable smooth working of integration teams
An external independent party has been engaged to audit implementation plans and to track synergy realisation
Review of synergy implementation and realisation The above approaches are expected to mitigate risks associated with realisation of synergies

Growth Execution Risk – Tata Steel has undertaken several Greenfield projects at low cost locations to ensure that modern upstream facilities meet the requirements of the finishing/downstream facilities operating at locations closer to the market. The Greenfield ventures require balancing of various stakeholders needs. Hence the Company adopts the framework of Corporate Sustainability Management System and Triple Bottom Line performance (Economic, Environmental, and Societal) reporting. This facilitates the Company’s efforts to proactively manage concerns and address the needs beyond compliance to norms. The Company’s goals of ensuring safety, improved quality of life and environmental sustainability are cascaded down the organisation through the deployment of its Environmental, Health & Safety Policy. The project teams also ensure that they liaison with the government to ensure that the right rehabilitation package is offered to those who offer their land.

During formulation of the scheme, focus is kept on selecting the most suitable technology. The orders are placed with firm and fixed prices so that the likely increase in cost does not affect project cost. Further, Sensitivity Analysis is done considering variation in capital cost, manufacturing expenses and sales price. Along with this Sensitivity Analysis the project feasibility is analysed for different scenarios. The overall project cost is monitored minutely and reviewed on a weekly basis.

Business and Operational Risks
Market Risks – Tata Steel addresses the risk of cyclicality of the Steel industry by marinating rich product mix and higher value added products whose volatility is lower. Moreover, the industry itself has been undergoing some structural changes with Consolidations. These changes are expected to bring in greater stability to prices.

Regulatory & Compliance Risks – The Government plays a key role in the economics of a Steel industry. It has a role as a resource allocator (the mining policies of the Government), as Competitor (the public sector steel companies) and as Regulator. In volatile times the regulatory risk rises with measures like reduction in import duties, levy of export duties and withdrawal of DEPB benefits, threats of price curbs etc. Tata Steel counters this risk by being a role-model corporate citizen and playing an important role in contributing to the Nation building.

Tata Steel is the second largest steel producer in terms of Geographical spread of its facilities. The Company recognises that this spread across various countries increases the compliance risk and hence the Company has set up a focused team headed by a Group Head for Corporate Assurance and Compliances to proactively deal with and mitigate all such potential concerns and issues.

Technology Risks – Tata Steel with its modernisation plans has ensured that it deploys the best technologies to ensure quality, cost-efficiency and environment-friendly processes. Through acquisition of Corus and with new Greenfield ventures, Tata Steel has ensured that it has diversified the concentration risk in single technology of Iron & Steel making. Moreover the Research & Development team of Corus addresses the need for greater R&D capability of the company.

Safety & Environmental Risks – In the developed world, industries have been facing rising environmental costs due to the increased concerns on Global Warming. It is, therefore, a challenge and responsibility for the Steel industry to be the trustee in conservation of nature for future generations. In Tata Steel, the impact of the Company’s products, services and operations on employees, society and environment are systematically analysed through stakeholder engagement, “risk analysis” under ISO-14001, OHSAS-18001 and “Life Cycle Assessment” of products.

Tata Steel has also adopted the best-in-class DuPont’s safety programme. Every activity in Tata Steel is carried out not only with a cost efficient, quality conscious purpose but also with a view for safe practice.

Corus Group
The key business risks affecting Corus are as follows:

Health, safety and environmental matters
Corus’s businesses are subject to numerous laws, regulations and contractual commitments relating to health, safety and the environment in the countries in which it operates. The risk of substantial costs and liabilities related to these laws and regulations are an inherent part of Corus’s business. Corus has policies, systems and procedures in place aimed at ensuring substantial compliance and there is a strong commitment from the Board and the Executive Committee to enforce compliance, to continuously improve safety performance and to minimise the impact of Corus’s operations on the environment.

Financing
TSL financed the acquisition of Corus in part by a significant level of debt. On 30th April, 2007, TSUK signed an agreement for £3,670 million of senior secured facilities for this purpose and to provide future working capital for Corus, which had final maturities of between five and seven years. The agreement is subject to financial covenants. Repayment of the debt and adherence to the covenants represent risks. The forecast requirements of Corus are closely monitored and ‘downside’ sensitivities undertaken regularly to ensure the adequacy of facilities, and to assess actual and projected adherence to covenants.

Key personnel
Corus’s ability to attract and retain good quality, appropriately qualified and experienced staff is important to the achievement of its objectives. Corus has in place an effective benefits structure including long-term incentives and a talent management programme to optimise development of employees. There is regular communication with employees through various means and during 2007 the operating model of the new Group has been extensively communicated throughout the organisation.

Raw materials and energy
Corus’s raw materials depend, to a large extent, on worldwide supply and demand relationships, notably iron ore, metallurgical coal and scrap. Driven by strong demand, particularly from China, prices have risen substantially in recent years and again in 2008 and for coal in particular availability is also a concern. Energy prices have shown similar upward movements. There is a risk that such substantial increases cannot be fully passed on in selling prices and/or that there is a time lag in doing so. Corus closely monitors market conditions to ensure that rising input costs are recovered fully or to the extent possible and puts in place contractual arrangements to ensure security of critical supplies.

Pensions
Corus provides retirement benefits for substantially all of its employees, including defined benefit plans. The market value of pension assets and liabilities is significantly greater than the net assets of Corus and therefore, any change can have a material impact on Corus’s financial statements as well as impacting the level of company pension contributions. Corus has put in place a framework to manage pension risks and works with Schemes’ Trustees to ensure that obligations remain affordable and sustainable. A range of measures has already been adopted by the principal schemes in Corus to manage liabilities and to protect against investment market risk exposure, whilst maintaining asset performance. Further actions will be considered as and when appropriate.

Exchange rates
Corus derives most of its revenue in the EU, but has substantial assets and sales in the UK, which is not a member of the euro-zone. Major raw material supplies purchases are, however, denominated mainly in US dollars. As a result, Corus is impacted by the relationship between the Sterling, the Euro and the US dollar. Corus operates a hedging policy to minimise the volatility of rapid and significant movements in these exchange rates.

Financial risks
The Company actively monitors Foreign Exchange and Interest Rate exposure. Based on an informed view and assessment of these risks, it has developed a Risk Management Policy. The Risk Management policy of the Company operates to achieve greater predictability of earnings and provides a stable planning environment. Corus’s main financial risks are related to the availability of funds to meet its business needs and movements in interest and currency exchange rates as well as commodity costs. Derivative and other financial instruments are used to manage any exposures where considered appropriate.

The Company hedged the foreign currency risk (in Japanese Yen and US Dollar) on repayment of the major part of the USD 1.65 billion of external commercial borrowings drawn in FY 2006-07. The Company also drew down USD 875 million through a convertible bond issue (CARS), which may be converted to the underlying securities in FY 2011-12 and FY 2012-13. The repayment of this liability is uncertain and accordingly the foreign currency exposure remains unhedged.

The Company also actively and selectively hedged its export receivables and import payables during the last financial year.

The Company endeavours to pursue the following long-term financing objectives as part of its Strategic Plan:

Raising cost efficient funds for the growth plans of the Company
To be an Investment grade Company in the long-term
To provide financial flexibility in the Balance Sheet
Funding strategy to focus on EPS accretion
To comply with the expectations of various lenders in terms of financial covenants