JSW Steel Project Finance

Feasibility Results Yes

ABOUT CORPORATE BRIDGE

Corporate Bridge Group is formed by graduates from leading institutes (IITs, IIMs & AIM). "Corporate Bridge" as the name suggest, helps in bridging the gap between the aspiring entrant and the corporate world. Corporate Bridge is globally recognized training firm, providing blend of instructor-led and online financial training programs along with e-learning services. With Corporate Bridge's entrepreneurial spirit coupled with unparalleled experience (CLSA India, KPMG, YES Bank, JPMorgan, SBI Capital Markets, CRISIL etc) and comprehensive capabilities (MBA, CFA, FRM, CAs) across all industries and business functions, we commit to deliver a world class professional training and learning services that continues improving knowledge efficiency.

Corporate Bridge Group; has two verticals "Educorporatebridge" and "Elearninglabz"

EduCorporateBridge deals with Online and Instructor Lead Training Programs in various financial courses viz. Equity Research, Wealth Management, Technical Analysis Investment banking, Private Equity, Fundamental Analysis, Investment Research, Credit Research etc and preparatory courses like CFA Level I & II and FRM Level I & II, Campus Placement Trainings.

Elearninglabz solution portfolio consists of custom e-content development for training and
learning needs in collaboration with our clients and subject matter specialist, custom Learning Management System (LMS) suite, Test & Assessment solutions.

Corporate Management Team

Kishor Gandhi- (Ex-MD at J.P. Morgan Chase & Company) Chief Mentor, Corporate Bridge Dheeraj Vaidya - (IIT Delhi, IIM Lucknow) Chief Executive Officer S. Premananda- (Ex-Yes Bank, IIT Delhi, IIM Calcutta) Kayideni Kholi - (Ex-Hinduja Group and SRSL, IIT Delhi, IIM Ahmedabad)

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Business Model

Product Offered by Corporate Bridge

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PROJECT FINANCE
Project financing is an innovative and timely financing technique that has been used by many high-profile corporate projects. Employing a carefully engineered financing mix, it has long been used to fund large-scale natural resource projects, from pipelines and refineries to electricgenerating facilities and hydro-electric projects. Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects worldwide. International Project Finance Association (IPFA) defined project financing as: The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flows generated by the project. Project finance is especially attractive to the private sector because they can fund major projects off balance sheet. Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, one must understand the cogent analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility Project finance is finance for a particular project, such as a mine, toll road, railway, pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of that project. Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the nonproject assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.
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Characteristics of Project Finance

The key characteristics of project financing are: 1) Financing of long term infrastructure and/or industrial projects using debt and equity. 2) Debt is typically repaid using cash flows generated from the operations of the project. 3) Limited recourse to project sponsors. 4) Debt is typically secured by projects assets, including revenue producing contracts. First priority on project cash flows is given to the Lender. Consent of the Lender is required to disburse any surplus cash flows to project sponsors Higher risk projects may require the surety/guarantees of the project sponsors.

Advantages of Project Finance

1) Eliminate or reduce the lenders recourse to the sponsors. 2) Permit an off-balance sheet treatment of the debt financing. 3) Maximize the leverage of a project. 4) Avoid any restrictions or covenants binding the sponsors under their respective financial obligations. 5) Avoid any negative impact of a project on the credit standing of the sponsors. 6) Obtain better financial conditions when the credit risk of the project is better than the credit standing of the sponsors. 7) Allow the lenders to appraise the project on a segregated and stand-alone basis. 8) Obtain a better tax treatment for the benefit of the project, the sponsors or both.

Disadvantages of Project Finance

1) Often takes longer to structure than equivalent size corporate finance. 2) Higher transaction costs due to creation of an independent entity. Can be up to 60bp 3) Project debt is substantially more expensive (50-400 basis points) due to its non-recourse nature. 4) Extensive contracting restricts managerial decision making. 5) Project finance requires greater disclosure of proprietary information and strategic deals.

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Stages in Project Financing

1) Project identification 2) Risk identification & minimizing 3) Technical and financial feasibility 4) Equity arrangement 5) Negotiation and syndication 6) Commitments and documentation 7) Disbursement. 8) Monitoring and review 9) Financial Closure / Project Closure 10) Repayments & Subsequent monitoring. Post Financing Stage Financing Stage Pre Financing Stage

About the Project

I have selected the project finance topic to check the feasibility report for JSW Steel. There are various assumptions taken into consideration for the making of this report and they are mentioned below. The project has various parts that it is divided into and they are Steel Sector Analysis, Historical Ratio analysis of JSW Steel, preparation of financial model of the project taking into consideration various mentioned assumptions, calculation of various ratios to check the feasibility of the project and then giving final recommendation on the basis of the above steps taken into consideration.

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Steel Industry & Importance of this Project Steel Industry Sector Overview
Restructuring of Steel Industry

o No of economic reforms were made in FY91-92 by the Indian Government which enhanced the Steel Industries growth process particularly. o Major changes No license required for capacity creation, unrestricted external trade; low import duties, easy tax structure and also the doors were opened to the private sector through the route of Foreign Investment which was predominately occupied by the public Sector.

Market Scope

o India is fourth largest crude steel producing country in the world and is expected to grow as the 2nd largest producer by FY15-16 according to World Steel Association. o India remains at 1st position in terms of producer of Direct Reduced Iron (DRI) in the world since 2002. o The Steel Industry contributes about 2% to the GDP of the country and

Industry Contribution

weighs 6.2% in terms of IIP (Index of Industrial Production).

Additional capacity created

o De-licensing in the Indian Iron and Steel Industry resulted in additional capacity creation in the private sector which required an investment of Rs.3083.5mn or approximately 13mn tonnes per annum. o 301 MoUs signed with various states for strategic expansion of capacity of approximately 488.56mn tonnes.

India heading forward

o Production of steel increases by 3.5% for April 2012 higher than the world average.

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Figure 1 Production in Million Tonnes

120 100 80
Improvement in Production after Economic Restructuring

25.00 20.00 15.00 10.00 5.00 0.00 -5.00 1991-1992 1992-1993 1993-1994 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Finished Carbon Steel Pig Iron DRI Growth

60 40 20 0

Source: Joint Plant Commission (JPC) As in the above chart, we can see that the production has been increasing on the continuous basis after the reforms of 1991 as there were the doors opened to privatization, globalization and liberation thus leading to the growth of the country. Figure 2 Indias growing crude steel production
Million Tonnes
Under-utilized Production Capacity thus, living a room for expansion

100 70 60 Million Tonnes 50 40 30 20 10 0 Capacity Crude Steel Production Utilization (%) 80 60 40 20 0

90.5 90 89.5 89 88.5 88 87.5 87

Source: Joint Plant Commission (JPC)

The above chart show, how there is still under-utilization of the capacity and thus there is a possibility of brown field expansion.
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Figure 3 Import Export Trend of India

India to soon become a net exporter of steel

8.000 7.000 6.000 5.000 4.000 3.000 2.000 1.000 0.000

120 100 80 60 40 20 0

Demand expected to grow at 10.3% per annum

Import

Export

Demand

Source: Joint Plant Commission (JPC), Planning Commission Report for 12th Five Year Plan The above chart shows the demand pattern for steel in the country and we can observe that the demand for steel has been increasing continuously and also the exports are expected surpass import as there are many Greenfield and brown expansion expected to be carried on in the near future.
Growth Prospects

o The Steel Industry contributes about 2% to the GDP of the country and weighs 6.2% in terms of IIP (Index of Industrial Production). Provides direct employment to 5 lac people.

Creation of Additional Capacity

o De-Licensing in the Indian Iron and Steel Industry resulted in additional capacity creation in the private sector which required an investment of Rs.3083.5mn or approximately 13mn tonnes per annum. o Current Account Deficit has expanded to 3.7% and fiscal deficit

Impact of Economic reforms

expected to escalation ~5-5.5% in FY12. o High interest rate, double digit inflation, policy restructuring and global economic conditions is hampering the growth of the sector.

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Figure 4 Per Capita Consumption (Kg) of Steel

Per Capita Consumption has CAGR of around 9%

Steel Demand Drivers in India

Construction & Inrastructure Auto & Auto Components 62% Capital Goods White Goods

60 50 40
Construction and Infrastructure major sector which demand steel

5% 6% 5% 12%

30 20 10 0 200506 201011 10%

Source: Joint Plant Commission (JPC)

Source: JSW Steel Annual Report

In the above chart we can observe that the per capita consumption of steel has CAGR of around 9%. Also in the other chart we can observe that the major demand for steel is from the infrastructure sector and then followed by Auto, Capital Goods and White Goods respectively. Figure 5 Estimated Raw Materials Requirement
Steel Industry on the way of expansion

2016-17
Production to reach new levels

2011-12

100

200

300

400

500

600

700

800

Coking Coal Ferro Alloys

Non-Coking Coal Refractories

Iron Ore

Source: Planning Commission Report for 12th Five Year Plan As we can see in the above chart, we can observe that the production is expected to increase and therefore also the raw material requirement of various inputs like Coking Coal, Non-Coking Coal, Iron Ore, Ferro Alloys and Refractories.
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Figure 6 Movement in Price Index of Steel and its Inputs: Base Year FY07-08=100
Steel Prices to rise further thus, leading to increasing index price

400 350 300 250 200 150 100 50 0 2007-08(Q1) 2007-08(Q2) 2007-08(Q3) 2007-08(Q4) 2008-09(Q1) 2008-09(Q2) 2008-09(Q3) 2008-09(Q4) 2009-10(Q1) 2009-10(Q2) 2009-10(Q3) 2009-10(Q4) 2010-11(Q1) 2010-11(Q2) 2010-11(Q3) 2010-11(Q4) 2011-12(Q1) 2011-12(Q2) TMT H R Coil Iron Ore Coking Coal

Source: Planning Commission Report for 12th Five Year Plan, Specifications: TMT (10mm), HR Coil (2.5mm), Coking Coal (10.5-12.55 ash) Figure 7 World Production of Crude Steel
India moving up in the ladder, expected to be 2nd largest producer by FY15-16

3% 5% 5%
World Crude Steel Production in FY11 was 1527mn tonnes which increased by 6.8%as compared to FY10

3% 3%

3%

China Japan United States India Russia 56% South Korea Germany Ukraine

6% 7% 9%

Source: World Steel Association (WSA)

The above graph shows the production of steel in different countries of the world and as we can see China ranks no.1 in the production of steel and it produces around 56% of the world steel production. India ranks 4th in the world steel production after Japan and United States ranks 2nd and 3rd respectively and India is expected to climb the ladder to the 2nd position by 2015-16 as reported by WSA.

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Figure 8 Public Sector Undertakings

Dipping profits and under performance of PSUs leads to rising concern for Government
MOIL SAIL KIOCL Ltd.

NMDC Public Undertakings

HSCL

FSNL

RINL

MSTC

MECON Ltd.

Source: Joint Plant Commission Figure 9 Major Players

Players in Steel Industry according to their production capacity in Million Tonnes

4%

4% Sail 20% Tata Steel JSW Steel RINL

20%

4% 14%

ESSAR 34% JSW Ispat JSPL

Source: Company Reports The above chart shows the major players in the steel sector according to their production capacities and according to this, Tata Steel is the major producer of steel followed by Sail and Essar and then JSW Steel-low cost producer of steel and then JSPL, JSW Ispat and RINL respectively. But now

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Figure 10 Foreign Investment-100% FDIs allowed

Foreign Investments increased by 20% in Indian Company thus leading to the growth of the sector

900 800 700 600 500 400 300 200 100 0 2008-09 2009-10 2010-11 2011-12

Source: Department of Industrial Policy & Promotion, Ministry of Commerce Strengths

SWOT Analysis of Steel Sector

Weakness

Abundant Iron Ore availability of high Fiscal deficit quality Cost effective labour Available Technical manpower High possibility for Stock Market Volatility Increasing Inflation

technical Increasing cost of Materials

captivation Low investment because of increasing cost of credit

Opportunities Growing domestic market Market Opportunities in

Threats Uncertain Global Market some Dependency on imported technology

neighboring countries and other parts of the world Proposed huge investment in Increasing Domestic Demand

Infrastructure expansion and also new National Manufacturing Policy during 12th five year plan Unused Capacity China becoming Net Exporter
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Importance of this Project in the Current Environment

o Growth in consumption of steel in an economy is dependent on the rate of growth in the GDP of that country. o Increasing consumption in allied industries such as automobiles, packaging, engineering industries, irrigation and water supply has led to the requirement of additional production of the steel in the country. o Investment in Infrastructure Sector is expected to be around 1 trillion dollars in the 12th five year plan as reported in the planning commission report, which shows there is a requirement to increase the steel consumption in the country. o It is also expected that the manufacturing sector is expected to grow at 11-12% from the current growth of 8%. o Increasing demand from the rural/ semi urban and retail sector is leading to a growth in demand from these sectors which are an untapped market as of now leaving a room for expansion in these sectors. o Increasing middle class population also leads to create extra demand for automobiles, non-durable consumer goods thus increasing the per capita consumption of steel. o This type of financing is very helpful for the company as it gives them advantage of repaying the loan from the cash flows the company generates.

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Company Description
JSW Group is one of the fastest growing conglomerates with a strong presence in the economic sector. This enterprise is led by Sajjan Jindal and has grown
JSW Steel production has augmented by 25% y-o-y in May 2012 as compared with May 2011

from a steel rolling mill in 1982 to a multi business conglomerate which is worth US$ 10bn within a short span of time. SW Group has diversified interests in Steel, Energy, Minerals and Mining, Aluminium, Infrastructure and

Company is expected to raise Rs.3,000 cr through debt for auto steel plant in berllary district

Logistics, Cement and Information Technology. JSW Steel is the largest private steel producer in India in terms of installed capacity after it had acquired major stake in Ispat Industries Ltd. and with manufacturing facilities in Karnataka, Maharastra and Tamil Nadu. It is engaged in manufacture of flat and long products viz. HR Plates / Coils/ Sheets/ Profiles, Bar, Rounds & Rebars. The product range caters to a gamut of industries in White goods & construction sectors. It has the largest Galvanising capacity in India and also the largest Indian exporter of with its presence in 74 countries. The Group set up its first steel plant near Mumbai in Vasind in 1982 and after that it acquired Piramal Steel Ltd., which was operating a mini steel mill at Tarapur in Maharashtra and renamed it as Jindal Iron and Steel Co. Ltd. It has strong universal existence in the global value-added steel sector with the purchase of steel mill in US and a service centre in UK and Joint Venture in Georgia and also Japan by tying up with JFE Steel Corp for manufacturing of high quality automotive steel.

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Financial Feasibility Assessment Model (maximum 2 pages) Inputs & Assumption Discussions
Product Portfolio to remain same as that of JSW Steel

o Company is expected to set up a new plant in West Bengal project and expected capital outlay of approximate Rs.16,000 cr. o Start of construction on 1-Jul-12 and the plant is expected to start its commercial operation from 2-Jul-15 o Debt Equity Ratio will be 1.5times

The production capacity of the new plant is 4.5mtpa

o Upfront Equity is 50% o Repayments of Term Loan starting from 31-Mar-17 for 24 Qtrs ending on 31-Mar-23 with 9.5% as the interest rate and 0.5% as financial charges.

Project Cost Discussions

Expenditure is done in a phased manner

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Assumption Snapshot
Figure 1 Average Sales Realization Table

Production of various products and average sales realization in cr per tonnes

Figure 2 Production of different products as reported in AR2010-11

Installed capacity in thousands and % that each product contributes in accordance with total production

Figure 3 Production of different products as reported in AR2010-11

Production of product portfolio of the new plant is assumed to be in line with JSW Steel capacity

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Figure 4 Average Cost per tonne of each Raw Materials

Figure 5 Amount to invested for each items in every quauter

Figure 6 % of Depreciation charged under SLM Method and IT WDV Method

IT WDV method used to find the actual income to be taxed

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Figure 7 Tax Assumption Table

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Profit & Loss Statement Project Finance Model

Revenue is increasing in initial years and then growing by a steady rate

o Revenue has increased tremendously by 60% for the 2nd yr of operation, whereas later the revenues are increasing by approximately 5% annually. o Further it is expected to grow at the grow rate of approximately 5% annually.

Gross Profit is constant as compared with the net sales

Gross Margin EBITDA, EBIT discussions o The Gross Profit Margin is constant at 47% throughout. o EBITDA for the company is in increasing trend which shows that the sales are increasing at a higher rate than the cost of sales. o EBIT is also increasing which shows that sales is increasing at the higher rate than Expenses other than Interest and Tax.

EBITDA and EBIT in increasing continuously as compared with the net sales

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TAX CALCULATION

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Company is following Zero Dividend policy for newly setup plant

Balance Sheet Project Finance Model o All the net income of the company is transferred to reserves and surplus, as it has sufficient amount of reserves the company has so that shows that the company can finance any further requirement of funds from reserves and surplus.

Company has redeemed their long term loans in course of time

o The long term loan of the company is paid off gradually and which shows the company is in good position and is not much dependent on the external financing. o Since it is the new plant the company has invested in gross block

Company follows conservative approach as it is not involved in investing activities

in initial phases of construction and not expanding later. o The company has sufficient amount of working capital to meet their day to day operations of the plant. o The company has good amount of cash available at their disposal to meet their short term obligations.

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Capital Structure Discussions o The company is dependent on external funds to the extent of 60% which makes the debt/Equity ratio at 1.5 times which is

Dependency on debt funds reduced gradually

quiet acceptable. o The company has eventually paid off their debt thus making the company free from long term debts as still it is dependent for cash credit which is a short term liability for the company.

Chart showing the debt and equity with the company in any given FY in cr.

o As it is the new plant company is not in expansion mode so it is

not in need of funds i.e. either Equity or Debt as the profits earned by the company is transferred to reserves and surplus account.

Cash Flows Project Finance Model o The company has positive cash flow for all the years which is a good sign as the company has enough cash at their disposal to fund their outflows. o The company has raised Debt and Equity in the initial years and later on the company paid off their debt completely.

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Chart showing the cash inflow and cash outflow in every year in cr.

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Project Appraisal
DSCR
The Average DSCR and Minimum DSCR for the project are 3.5times and 1.67times which signify that the company has good amount of earnings to pay off the interest and the principal payments on debt.

DSCR Calculation Table

IRR
IRR is the rate of return where the present value of cash inflows are just equal to the present value of cash outflows, it is also the rate at which the project is expected to generate growth and here the company is expected to grow at around 19% which is a favourable growth rate.

IRR Calculation Table

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Project Finance Ratios

Current Ratio for the project is increasing which shows that company has adequate cash at their end to meet their short term obligations. Net Operating Profit is increasing continuously which shows that the Net Sales of the company is increasing at a higher rate than compared with operating expenses. Net Profit of the company is increasing continuously which shows that the Net Sales is increasing at higher rate than compared with the Cost of Goods Sold. ROCE is increasing initially as the PBDIT is increasing at a higher rate than Total Tangible Assets which shows that the efficiency and the profitability on the capital invested and it is because in the initial years the company had preliminary expenditure which reduced the total tangible assets of the company. The PBDIT/ Interest ratio is increasing as the interest of debt is reducing gradually.

Project Finance Ratio Calculations

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BEP & Cash BEP Calculations

The BEP is decreasing which shows the amount of Sales the company requires to meet the expenditure is also decreasing and it also signifies that the company is able to cover up the expenses and bring in sufficient profit. Even the Cash BEP of the company is decreasing which shows that the amount of sales required to cover up the cash expenses of the company.

Project Finance BEP & Cash BEP Calculations

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Final Conclusions & Sensivity Analysis

Conclusion
o As the company is able to generate sufficient profits and as the Net profits as the percentage of net sales is increasing constantly, it is feasible to continue with the project. o As the company has positive Cash Flows it shows that the company is self reliant to meet up its expenses/ Outflows and is not much dependent on external funds. o The BEP and the cash BEP of the company are decreasing continuously which shows that the company requires the minimum sales to cover up its expenses.

Sensitivity Analysis
Debt is reduced from 60% to 50% o The total project cost reduces to Rs.16,837.8cr from Rs.17,118.7cr. o As the debt has reduced, the IDC has also reduced from Rs.1471.23cr to Rs.1190.32cr and also the interest has reduced thus increasing the bottom-line. o There is also an improvement in the Avg. DSCR and Minimum DSCR from 3.5times and 1.67times to 4.25times and 2.02times respectively. o The IRR of the project is constant and the Avg. BEP and Cash BEP has also improved from 34.89% and 25.84% to 33.95% to 24.92% respectively which shows the amount of top line required has reduced to cover up the expenses. 0% Debt o The total project cost reduces to Rs.15,647.4cr from Rs.17,118.7cr.

o As 0% Debt there is no IDC and no Interest thus increasing the bottom-line considerably. o No DSCR o The IRR is approximately same and the BEP and Cash BEP has also improved from 34.89% and 25.84% to 29.74% and 20.73% respectively which shows the amount of top line required has reduced to cover up the expenses considerably.
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100% Debt o The total project cost increases from Rs.17,118.7cr to Rs.18,466.3cr. o As 100% Debt there is a sharp rise in IDC and Interest thus reducing the bottom-line considerably. o There is also a decline in the Avg. DSCR and Minimum DSCR from 3.5times and 1.67times to 1.99times and 0.98times respectively.

The IRR has increased slightly and the BEP and Cash BEP has also deteriorated from 34.89% and 25.84% to 39.38% and 30.02% respectively which shows the amount of top line required has increased to cover up the expenses considerably.

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Steel Going Solid

Reuters Bloomberg JSTL.RS JSTL.IN

After the incorporation of JSW Steel Ltd. 1982, the company has done well and now it is one of the lowest cost producer of steel in world and one of the largest manufacturer of India with the P/E Ratio of 6.32x as compared with the peer group and market capitalization of Rs.154,285mn. The company is expected to expand its operations and increase their production capacity by setting up Greenfield projects in Jharkhand and West Bengal. The company is planning to raise Rs.3,000cr through issue of debt for setting up plant in bellary and is expected to be operational from 2013 with the installed capacity of 2.3mtpa cold rolling mill to manufacture high quality steel for automobile sector.

Priced on 13th Jul 2012 India Sensex@ 17,213.7 12M hi/lo Rs.940/ Rs.464 Shareholding Pattern Promotors FIIs Others P/E Ratio 35.49% 20.17% 44.34% 6.32x

Market cap full/free float Rs.154,285mn Dividend P/O Ratio 75% Shares in Issue 223.12mn Price Target Target Set on 12 760 5 Jul
th

Top line vaguely flat; Bottom Line Improving

The Top line of the new plant that is expected to be operational from FY15-16 is improving initially at a higher rate but then later is growing at a steady rate of 5%. The bottom line of the company as compared with the top line of the company is growing at a faster rate which shows that the company is doing fair. As the company is not expected to invest more in the tangible assets, it is not in need of additional funds to meet their day to day expenses as the companys bottom line is transferred to the reserves and surplus as the company is following conservative approach

Comparative Analysis

Backing Project requirement

The company has planned to fund its expenses through debt and equity in the
Source: ET as of 13th Jul 12

ratio of 1.5x, and as the company is doing well operationally it has redeemed their debt and is not dependent on the debt funds to fund its operational requirements as it is covered up by the reserves of the company. Rating According to above model and various arguement, it is feasible to finance this project as the company has projected cash flows are positive and shows that the

Source: BSE

company can generate enough cash flows to fund its expansion plan in West Bengal.

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Spanshot of Financials of New Plant

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