B. Muthuraman, managing director, Tata Iron and Steel Company (Tisco), is making a live webcast to the 43,000 employees of the company. Dubbed the MD Online, this interaction has become a regular feature since Muthuraman took over. It is held on the first Monday of every month and any employee can ask Muthuraman any question on any issue.

This is the first webcast after the record results this year. Just four days ago, Tata Steel has declared a net profit of Rs 1,012 crore for the year 2002-2003 - almost five times higher than the previous year's profit, a performance unprecedented in the company's 97-year history. It has declared a whopping 80% dividend for its shareholders.

It is also the first time in recent history that Tisco has turned EVA (economic value added) positive. EVA is an indicator of how much wealth a company has created for its shareholders after taking into account even the cost of capital. For the first time in recent times, Tata Steel has delivered a return that is higher than its cost of capital. And Tata Steel shares are doing great.

In such a situation, almost every other CEO would have reached for the bubbly. Instead, Muthuraman proffers a sobering thought in his webcast: had steel prices not improved last year, Tata Steel's profit would have been significantly lower, maybe by even as much as Rs 500 crore. As the lowest-cost producer of steel in the world, Tisco made pots of money as prices rose sharply. But what if steel prices had headed south?

That's a question that has perennially haunted Tata Steel. And even though Muthuraman's predecessor J.J. Irani had transformed Tata Steel from an insular domestic steel manufacturer to a global player of some reckoning, the inability to weather the cyclical nature of the steel industry has continued to dog the company. The pattern is predictable: Tata Steel makes pots of money when steel prices rise. And then proceeds to lose the gains when prices tank.

That is the crux of the problem. If Tisco doesn't create enough wealth in the long term, why should the Tata group, which owns 26.41% of Tisco, stay invested in the company? Steel has chronically been a value destroyer. Sure, Tata Steel may have destroyed less value than the Jindals and the Ispats of this world, but it surely hasn't created any.

The problem is aggravated by the fact that Tata Steel is one of the biggest companies in the Tata group portfolio and easily one of the biggest profit and cash generators. But, till last year, it did not provide a return higher than the cost of capital, not in recent times at least.

A year ago, Muthuraman began to decisively work on this. "We have inadvertently ignored the shareholder. It's time to fix that," he had said. Simple words, but it's one heck of a task. Wondering why? We'll come to that in a bit.

First, let's understand the background. Through the 1990s, growth had been placed on a back burner and the company first strove to be operationally efficient and earn the right to grow. By the end of 2002, the cost-cutting binge had ensured that Tata Steel was, globally, one of the lowest-cost producers of steel. But it was still puny compared to other global steel companies. For instance, the largest Korean steelmaker, Posco has a capacity six times that of Tata Steel. By the end of 2002, Tisco was also beginning to generate enough free cash flows for investment. The question: where should it invest that money?

The answers were not entirely obvious. Irani had already reached the last lap of his tenure. By then, the future of the manufacturing sector in India was itself under a cloud. Like many other industrial groups, the Tatas, too, had begun to see services as the next big thing. That's how Bombay House mooted a plan to invest Rs 5,000 crore of Tisco's free cash flows in telecom. It looked at the example of German steel giant Mannesman, which had diversified into telecom to beat the commodity cycles and open up new avenues for growth.

But when the Tata Steel board evaluated the plan to diversify into telecom, it did not see any returns coming for a long while. The plan was junked. By then, Muthuraman was firmly in the saddle. Soon after taking charge, he realised that Tata Steel had to learn to manage both shareholder value and growth. Tisco's chief of strategic finance N.K. Misra explains: "A company in a capital-intensive industry has to be able to attract capital." But to do that, Tisco had to find a measure that would help it evaluate the trade-offs between growth and shareholder value more critically.

That's how Muthuraman discovered EVA. His first priority was to ensure that Tata Steel had to turn EVA-positive by 2007. Simply put, that meant that by that year, its rate of return had to be higher than its cost of capital (both debt and equity). But there was another more important target: Tisco had to deliver positive EVA through the business cycles and grow it every year as well. That was a real challenge because no steel company anywhere had ever been consistently EVA positive, leave alone growing it consistently. (Tisco was pure lucky that steel prices improved and it could turn EVA-positive within a year.)

So, can Muthuraman deliver on his ambitious targets? The jury is still out on that one. But the indications are that the EVA journey is already significantly altering the DNA of India's second-largest private sector company. Irani's era was essentially about optimising the hard assets and tonnages. It was about achieving operational efficiency by ruthlessly modernising the plants.

Now, under Muthuraman's leadership, the focus is on smartly managing the intangibles - building brands, developing stronger customer relations, chasing growth aggressively and, above all, aligning all 43,000 employees, from the shop floor assistant to the CEO, to the new performance metric of generating greater shareholder value.

Shareholder Value
Today, every third sentence spoken by the Tisco MD seems to have 'EVA' in it. Muthuraman breathes, sleeps and eats the word, and is trying to get the rest of the company to do so as well. Every sign, placard and memo in Jamshedpur has it. Muthuraman chose EVA because it offers more insights into the true economic value of a company.

Explains Misra: "This is the measure that relates best to the concept of wealth created." For instance, in the traditional methods of accounting, the calculation of net profit only takes into account the interest cost of the debt raised and not the cost attached to the equity raised. Explains Anurag Dwivedi, vice-president, Stern Stewart, the originators of EVA and consultants to Tisco: "Only if a company generates enough wealth over and above the weighted average cost of capital can it call itself economically profitable and is said to be creating wealth for its shareholders.''

There are some things going Tisco's way in its EVA journey. First, interest rates have come down drastically and, therefore, Tisco's weighted average capital costs have dipped in the last few years. Then, initiatives like total operation performance (implemented in Tisco by McKinsey and Company) have helped Tisco push down costs a great deal. For example, although the hot-strip mill has an installed capacity of 2 million tonnes, Tisco now produces 2.8 million tonnes. Though the fixed costs are apportioned over the installed capacity, the excess production adds a lot to the bottomline. Similarly, the sintered products plant now operates at 200% capacity, again adding to the bottomline. In the next few years, Tisco will undertake an all-round debottlenecking exercise to improve efficiency of the plants. McKinsey is also working on Enterprise Value Management and Retail Value Management to get similar efficiencies in these areas. So, a serious cost push will make Tisco a more efficient company and grow the bottomline and, hence, EVA.

But Muthuraman is not content with those advantages. His first step was to fix accountability for EVA and monitor it carefully. There are three elements that need to be monitored constantly for EVA - cost, capital employed and revenue. So four EVA centres - the steel business, the non-steel business (other metals and minerals like ferro-chrome), iron ore and mining, and shared services like power and gas - were set-up to monitor these parameters. Plus, accountability was fixed for the dozen subsidiaries that Tata Steel has stakes in as the performance of these companies would also impact the overall EVA. "Accountability of capital at lower levels in a company tends to be low. So you need close monitoring," says a senior manager.

Yet, Muthuraman's biggest challenge was to actually get the entire company to believe in this exercise. The EVA definition is a sure-shot eye glazer. Even in its simplest terms, it is the operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. Imagine the task of getting this message across to 43,000 workers! Thus started a communication drive, called the EVA Drill Down, that was unprecedented in Tata Steel. To get the message across, parables and presentations are being used. The chief of Tisco's improvement group, Bimalendra Jha, says: "There's a finance manager in every individual. We tried to tap into him."

The challenge now is to get this down to the last maintenance guy on the shopfloor. Says Stern Stewart's Dwivedi: "Each worker should have an idea of how his work will impact the final EVA of the company." Stern Stewart benchmarked Tata Steel against global giants like Posco, China Steel and Bao Steel, and found that it stacked up well. The World Steel Dynamic Report, which ranks global competitiveness on a number of parameters, ranks Tata Steel third after Posco and Bao Steel. Its EBIDTA margin is just behind China Steel, a Taiwanese company that controls 80% of the domestic market in its country.

Yet, none of the companies ahead of it have consistently managed positive EVA - EVA has almost always tanked in the years in which steel prices have gone down. Tata Steel, for instance, declared an EVA of Rs 238 crore in 2002-03, but what of the next year and the year after that? In fact, a consistent EVA performance is associated more with consumer product companies like Coca-Cola globally, or ITC in India. So, the challenge for Tisco is to manage incremental performance. Says Dwivedi: "It's all about managing the delta now."

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