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I N S T I T U T T E K N O LO G I B A N D U N G

SCHOOL OF BUSINESS AND MANAGEMENT


INDONESIA BUSINESS CASE CENTER (IBCC)
083-0503-12

Krakatau Steel (B) : Global Competition


Currently Krakatau Steel has been claimed as the biggest steel company in
Indonesia. Even all Indonesias citizen presumes Krakatau Steel as one of the
valuable asset for Indonesia. However being the biggest local steel company is not
enough. Going global is another step that Krakatau Steel must take. Having
corporation with POSCO, the biggest steel company in South Korea to make a joint
venture which requires 388 hectares land, has shown that Krakatau Steel is ready to
go to the next level. Therefore Anto, a financial analyst in PT Krakatau Steel, would
like to see the position and the opportunity of PT Krakatau Steel to compete with
other global steel companies. This assessment will also be used as a mean to find
an appropriate company as a benchmark.
Anto will use three reputable global steel companies which come from different
region in the world. Those three steel companies are Arcelor Mittal (Luxembourg),
POSCO (Pohang Iron and Steel Company, South Korea) and U.S Steel (United States
Steel Company). Besides Anto will also use PT Gunawan Dianjaya Steel Tbk and PT
Jaya Pari Steel Tbk as a local comparison.
Moodys Corporation is a reputable company which provides credit ratings,
research, tools and analysis that contributes to transparent financial markets.
Moodys also creates financial rating for steel industry that is used to measure the
financial performance of steel industry globally. This methodology encompasses
companies whose revenue is generated from selling and producing semi-finished
and finished steels. It first published in 2005 and it keeps on updating towards the
conditions and dynamics of the global steel industry nowadays. This measurement
is made to help investors and others to assess the financial performance,
specifically the credit risk of a steel company. Using moodys global steel
measurement people can also assign rating to each company and rank it.
This case was written by Raharsi Dethirafuri under the supervision of Subiakto Soekarno
from School of Business and Management Institut of Teknologi Bandung. It was prepared
solely to provide material for class discussion. The author does not intend to illustrate either
effective or ineffective handling of a managerial situation. The author may have disguised
certain names and other identifying information to protect confidentiality.
IBCC prohibits any form of reproduction, storage or transmittal without its written
permission. To order copies or request permission to reproduce materials, contact IBCC at
School of Business and Management ITB Bulding. Jl. Ganesha No. 10, Bandung. P. +62222531923 F. +6222-2504249 or e-mail to ibcc@sbm-itb.ac.id
Copyright 2012, Indonesia Business Case Center (IBCC)

INDONESIA BUSINESS CASE CENTER (IBCC)


083-05-03-12

To assess the Moodys assessment, financial statements of 2008, 2009 and 2010
are needed. Some of the ratios in Moodys Global Steel measurement are using data
of three years while other ratios only use the data of 2010.
In this rating methodology, there are four categories that Moody is focusing. Those
categories are:
1.
2.
3.
4.

Size and Business Profile


Operating Performance and Volatility
Financial Policies
Financial Strength

The four categories will be broken down into ten sub factors. Below are the key
rating factors including the weight score of each category:
Categorie
s

Broad
Rating
Factor

Rating factors/sub-factors weighting


Broad
Rating
Rating
Factor
Sub-factor
Weighting
1. Net Consolidated Sales ($USD billions)
(most recent year-end or LTM period)

Size and
Business
Profile

35%

Subfactor
Weight
ing
25%

2. Operational Diversity
10%

3. Regional Diversity
4. Import Threat/Export Reliant

Operatin
g
Performa
nce and
Volatility

10%

1. EBIT Margin (3 year average)


2. Return on Average Tangible Assets

25%

Financial
Policies

25%

Financial
Strength

5%

(3 year average)
3. Volatility based on the Coefficient of
Variation of CFO/Net Sales
1. Debt/Capital

10%
15%

(most recent year-end or LTM period)

15%

2. Debt / EBITDA (3 year average)


1. EBIT/Interest (3 year average)2

10%
5%

2. CFO-Div/Debt (3 year average)

5%

3. FCF / Debt (3 year average)


Total

5%
100%

100%

To analyze using Moodys there are seven rating categories. Those categories vary
from Caa to Aaa. Caa is the worst rating that a company can achieve while the Aaa
rating is the highest one. Score attached for each rating is also vary, from zero to
six. Below are the indicated rating categories in Moodys.
Aaa
6
Cate
gorie
s

Aa
5

A
4

Broad
Rating

Rating

Factor

Sub-factor

Baa
3

Ba
2

B
1
Subfacto
r
Weig
hting

Caa
0
Aaa

Aa

Baa

INDONESIA BUSINESS CASE CENTER (IBCC)


083-05-03-12
1. Net Consolidated Sales ($USD
billions)

25%

Aaa
35

25 Aa <
35

15 A <
25

5 Baa
< 15

10%

Aaa=
8

Aa=7

A=5 or 6

Baa=3 or
4

10%

Aaa
30%

20% Aa
< 30%

15% A
< 20%

8.0%
Baa <
15%

5%

Aaa
20%

15% Aa
< 20%

10% A
< 15%

5% Baa
< 10%

10%

Aaa <
15%

15% Aa
< 25%

25% A
< 40%

40%
Baa <
60%

15%

Aaa <
20%

20% Aa
< 30%

30% A
< 40%

40%
Baa <
50%

10%

Aaa <
0.75x

0.75x
Aa <
1.25x

1.25x
A <
2.0x

1. EBIT/Interest (3 year average)

5%

Aaa
15x

10x Aa
< 15x

7x A <
10x

2. CFO-Div/Debt (3 year average)

5%

Aaa
55%

45% Aa
< 55%

35% A
< 45%

3. FCF / Debt (3 year average)

5%

Aaa
30%

20% Aa
< 30%

14% A
< 20%

(most recent year-end , year 2010)


Size and
Business
Profile
1

2. Operational Diversity
3. Regional Diversity
4. Import Threat/Export Reliant
1. EBIT Margin (3 year average)

Operatin
g
Performa
nce and
Volatility
2

2. Return on Average Tangible


Assets
(3 year average)
3. Volatility based on the Coefficient
of Variation of CFO/Net Sales
(3 years data)
1. Debt/Capital

Financial
Policies

(most recent year-end, year 2010)


2. Debt / EBITDA (3 year average)

Financial
Strength
4
Total

100
%

Exhibit 1
Moodys Global Steel Methodology Factor Grid

2.0x
Baa <
3.0x
4.0x
Baa
<7.0x
25%
Baa <
35%
8%
Baa <
14%

INDONESIA BUSINESS CASE CENTER (IBCC)


083-05-03-12

Exhibit 2
Size and Business Profile
Size and Business
Profile (score)

Krakata
u Steel

Net Consolidated
Sales
Operational
Diversity Regional
Diversity Import
Threat / Export
Reliant

Gunawa
n
Dianjay
a

Jaya
Pari
Steel

POSC
O

Arcelo
r
Mittal

U.S
Steel

(must be in USD billion)


5

For the Business Size and Profile (the net consolidates Sales), the currency used is
USD.
And 1 USD is assumed to be 8555 IDR.
For the EBIT Margin, it is derived from Average EBIT of three years (2008-2010) is
divided by Average Revenue of three years. For the EBIT itself it is gotten from
Income before tax - EBT gain on foreign exchange + interest Interest Income gain on investment - gain on assets. While for the return average tangible asset,
Anto uses EBIT/(Total asset-other asset).
Exhibit 3
Collected Data of Three Local Steel Companies
(in IDR
million)

Krakatau Steel

COGS

2008
20631
431
17915
367

2009
16913
535
15728
146

2010
14856
156
12621
376

gross profit
Operating
Exp

27160
64
13556
76

11853
89
11594
49

22347
80
12418
51

Operating
Income

13603
88

25940

99292
9

net income
EBIT

45957
1
15366

49467
2
41349

10626
83
12984

Revenue

Gunawan Dianjaya
Steel
2008
2009
2010
3020
1641
1710
530
555
132
2460
1829
1413
755
359
251
5597
1878
2968
75
04
81
1425
8562
9075
73
2
7
1425
2734
2061
73
26
24
8307
1500
1714
0
55
28
2610
1456
2112

Jaya Pari Steel


2008
7327
03
6173
19

2009
3028
68
2674
60

2010
4277
92
3720
59

1153
84
1703
3

3540
8
1510
3

5573
3
1731
4

9835
1

2030
5

3841
9

4915
8
9281

1917
2172

2844
5
4127

INDONESIA BUSINESS CASE CENTER (IBCC)


083-05-03-12

Asset
Debt
Equity

CFF

00

80

10

76

34

15374
427
99346
66
54397
61

12795
803
69899
65
58058
38

17584
059
82901
44
92939
15

2092
780
1919
567
1732
13

9707
37
4964
52
4742
85

1074
570
4288
56
6457
13

3993
44
1296
33
2697
11

3539
51
8226
2
2716
89

4112
82
1111
48
3001
34

26634
32

-7468

18400
1

9626
9990
0

4882
6
3722
0

60712
3
20321
0

CFO
CFI

88337
9
18216

2138
74

9885
1
5240
2

3499
5

1168
95

-90

-542

-1336

4676

10

84842
9
10283
99

Exhibit 4
Collected Data of Three Global Steel Companies

Operating Exp

200
8
331
41
240
48
909
3
339
8

POSCO
200
9
316
49
245
67
708
2
376
0

201
0
534
30
430
35
103
95
533
9

Operating
Income

569
5

332
2

net income

345
4

EBIT

(in USD
million)
Revenue
COGS
gross profit

Asset
Debt

Arcelor Mittal
2008

2009

2010

1249
36
1000
10
2492
6
1269
0

6511
0
5801
9
7091

7802
5
6668
9
1133
6

8769

7731

505
6

1223
6

1678

3605

276
4

368
4

9399

118

2916

512
7

370
2

527
6

1405
3

2741

3434

U.S Steel
200 200 201
8
9
0
237 110 173
54
48
74
197 115 162
23
97
59
403
111
1 -549
5
113 122
962
5
6
306 168
9
4 -111
211 140
2
1 -482
317 168
6
6 -190

372
84
153
21

432
06
166
63

598
69
291
22

1330
88
7789
0

1276
97
6665
2

1309
04
6847
4

160
87
111
92

154
22
107
46

153
50
114
99

INDONESIA BUSINESS CASE CENTER (IBCC)


083-05-03-12

Equity

CFF
CFO
CFI

219
63

265
43

307
47

5519
8

6104
5

6243
0

489
5

467
6

385
1

247
4
297
1
460
7

740
738
9
834
4

500
4
178
4
607
1

2132
1465
2
1242
8

6347

-7

938

335

7278

4015

-61

-379

2784

3438

-305
165
8
103
2

-374

-583

Exhibit 5
Other Collected data of Six Steel Companies
Three Years
Average
(2008-2010) in
million
Depreciation
interest
Expense
Other Asset
Free Cash Flow

Krakata
u Steel
(IDR)
353292
360295
256230
415816

Gunawa
n
Dianjay
a (IDR)
29116

Jaya
Pari
Steel
(IDR)
933

2215

Arcelo
r
Mittal
(USD)
4935

40877
6692

802
74

423
797

1930
11299

174
279

110098

60343

2220

916

116

Posco
(USD)

U.S
Steel
(USD)
481

Exhibit 6
Aggregate Weighted Factor Score
Factor Numeric
Indicated
Rating
Aggregate Weighted
Factor Score
Aaa
x > 5.5
Aa1
5.2 < x 5.5
Aa2
4.8 < x 5.2
Aa3
4.5 < x 4.8
A1
4.2 < x 4.5
A2
3.8 < x 4.2
A3
3.5 < x 3.8
Baa1
3.2 < x 3.5
Baa2
2.8 < x 3.2

INDONESIA BUSINESS CASE CENTER (IBCC)


083-05-03-12

Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1

2.5
2.2
1.8
1.5
1.2
0.8
0.5
0.0

<
<
<
<
<
<
<
<

x
x
x
x
x
x
x
x

2.8
2.5
2.2
1.8
1.5
1.2
0.8
0.5