Liza D’Souza

Assignment 1
PROJECT FINANCE OF JSW (STEEL).
INDUSTRY ANALYSIS AND RATIO ANALYSIS

1

Contents

About the Company ...................................................................................................................................... 2
JSW Group ................................................................................................................................................. 2
JSW Steel Ltd. ............................................................................................................................................ 2
Product Profile .............................................................................................................................................. 3
Company Information ................................................................................................................................... 3
Industry Analysis .......................................................................................................................................... 4
Demand and Supply .................................................................................................................................. 4
Market Size, Percentage of GDP ............................................................................................................... 5
Future of the sector .................................................................................................................................. 6
Interest Rates and Inflation and its impact ............................................................................................... 7
Foreign Investment ................................................................................................................................... 7
SWOT Analysis........................................................................................................................................... 8
Financial Statement Analysis ...................................................................................................................... 10
Income Statement .................................................................................................................................. 10
Balance Sheet .......................................................................................................................................... 11
Ratio Analysis .............................................................................................................................................. 12
Solvency Ratio’s ...................................................................................................................................... 12
Operating Efficiency Ratio....................................................................................................................... 13
Operating Profitability Ratio ................................................................................................................... 14
Financial Risk Ratio ................................................................................................................................. 14
Working Capital Management .................................................................................................................... 15


2

About the Company

JSW Group


JSW Group also known as the Jindal Group is one of India's largest business conglomerates. The
company was founded by O. P. Jindal Group and is now led by Sajjan Jindal. It has diversified
its operations in steel, infrastructure and logistics, energy, cement and information technology,
minerals and mining of mainly iron ore and aluminium.
The Jindal Group has at least 25 subsidiaries under the name of JSW Steel Ltd, JSW Energy,
JSW Infrastructure and ISPAT industries Ltd.
After acquiring ISPAT Industries at a value of $3 billion JSW Steel has emerged as India's
largest steel manufacturer in terms of capacity installed which is 14.3 million tonnes per annum.


JSW Steel Ltd.

JSW Steel Ltd. is an Indian steel company owned by the JSW Group based in Mumbai, India.
JSW Steel, after merger of ISPAT steel, has become India's largest private sector steel company
with an installed capacity of 14.3 MTPA.
It was formed by the merger of JISCO and JVSL in 2005 to form JSW Steel Ltd. The company
has tied up with many foreign companies in the world for manufacturing steel as well as
conducting mining operations in the various parts of the world.
JSW believes in manufacturing high grade steel and therefore takes tremendous efforts in
introduction the latest technologies for producing quality products, JSW now has a huge profile
of products that it manufactures and it also deals in the manufacture of customized steel products
like colour coated steel products, wire rods etc. JSW has established its presence throughout the
globe and therefore has a wide product portfolio to cater to this huge demand.
They have 4 manufacturing units in India located at Vijayanagar- Karnataka, Salem- Tamilnadu,
Vasind- Maharashtra and Tarapur- Maharashtra.
3

Product Profile

 Hot Rolled Steel Strips/Sheets and Plates
 MS Cold Rolled Coils/Steel
 MS Galvanized Plain/Corrugated/ Colour coated coils/ sheets
 Steel Billet
 Bars and Wire Rods
 Power

Other details of the Company are given below:
Company Information
Registered Office

Village: Vasind, Taluka: Shahapur
District: Thane-421 604
Tel. 022-23513000
Fax 022 - 2351 5294
Website http://www.jsw.in
Director Name Mr. I. Qureshi, Mr. Atul Desai, Dr. S. K. Gupta,
Mr. N. K. Jain, Mr. K. N. Patel, Mr. Sajjan
Jindal
Chief Executive Name K. N. Patel ( Jt. Managing Director & CEO)
Business Group Name JSW Group
Industry Name Steel
Type Public Company deals in Manufacturing Steel
Revenue Rs. 2939.69 lacs ( 31.3.2013)
Employees 9522 ( Part Time + Full Time)
Listed on BSE: 532642, NSE: JINDALSWHL, DSE: 9658
Number of Share 1,15,00,000
Current Market Price Rs. 1,155

4

Industry Analysis
Demand and Supply

India is up on becoming the second largest producer of steel by 2015. The demand for steel is
likely to grow at a CAGR of 11 – 12% in the next 2 years. India’s per capita steel consumption is
on an average 60 kg which is very less as compared to the average steel consumption of the
world which is 216.9 kg and the average steel consumption of developed countries which is 324
kg according to the Ministry of Steel, India.

The demand for steel in India itself is estimated to increase by 3.3 % due to the rising middle
class population, alongside rapid urbanization according to the Global Steel reports, 2013. The
Indian Railway expansion, the growth in the automobile industry, the investment planned in the
road sector, power sector and manufacturing sector along with the increase in the rural demand
are some of the many factors which will positively influence the demand for steel in India, the
demand due to these factors is estimated to increase by 40 million tonnes per annum from 2013
to 2016.

Crude steel production grew at a CAGR of 6.6% that is 70 million tonnes whereas the finished
steel production grew at a rate of 4.2% along the last few years. The Ministry of Steel has
forecasted production boost in steel resulting to 115.3 MT in 2017. According to the reports
published by Ernst and Young the supply of steel will continue to continue to exceed demand
leading to reduction in prices the margin will remain tight along with underutilization of capacity
mostly below 80%. However, there is estimated to be a modest improvement in the demand for
steel which lead to increase in capacity utilization and steel prices.
5




Market Size, Percentage of GDP

The major players in the steel industry are from the private sector which controls 75% of the
crude steel production. SAIL is a leading player in 2012 who accounted for 18.7% of the crude
steel production in India which belongs to the public sector, followed by Tata Steel an RINL
which accounted for 9.9% and 4.3% respectively.

JSW after its merger with ISPAT has emerged as a leading player with a share of 8.23% of the
steel production in the private sector. JSW has been ranked 33
rd
in the world for the steel
production which is around 8.5 million tonnes in 2012.

A study conducted in 2006 by Tata Services found out that the demand elasticity of steel with
respect to the GDP of the country is found out to be 0.95. The iron and steel industry contributes
to 2% of the Indian GDP so also the growth of GDP is directly proportional to the growth of the
Steel Industry of India. The Indian Steel industry has grown from being just a negligible
influence on the GDP to one of the core influencer to GDP.
Packaging
5% White Goods
5%
Capital
Goods
12%
Auto & Auto
Components
10%
Construction and
Infrastructure
62%
Others
6%
Demand Drivers for Steel in India 2012
6



Crude steel Market Share (Production 2011- 2012)




Future of the sector

Taking into consideration the stable recovery of the global economy the Indian Steel industry
remains the fourth largest producer of crude steel in the world. It has been estimated by the
World Steel Association that the usage of steel around the world will increase by 3.1% i.e. 1,527
million tonnes in 2014, followed by a growth of 3.3 per cent i.e. 1,576 million tonnes. The
demand for Steel in China is also expected to decelerate in the coming year which puts India in a
very good position.

India needs an Investment of $210 billion in order to achieve a steel producing capacity of 300
million tonnes per annum from its current capacity of 90 million tonnes p.a. India has
emphasized on the importance of investment in infrastructure to boost economic growth. This
along with supportive government measures will tremendously boost the industry. There is also a
very profitable estimation of the demand of steel from the automobile industry. Investors are
SAIL
14%
Tata Steel
7%
RINL
4%
JSW
8%
ESSAR
4% JSPL
2%
Others
61%
Leading Players in the Steel Industry
7

considered to improve in the coming financial year due to the stable economy which would
result in an increase in dividend payout in the fourth coming years. Other sectors which can
improve the demand of steel like the construction and manufacturing sector are also showing
favorable signs although this is subjected to inflation other problems.

Interest Rates and Inflation and its impact

As inflation has hit the construction and the auto mobile industry largely its impact is also felt by
the steel industry. The slowdown in these sectors is caused due to high Inflationary rates, these
sectors are the demand drivers of steel in the country and thus inflation has had a negative impact
on the country.

Builders are finding it difficult to raise funds for construction due to the hike in Interest rates on
Housing Loans people are looking for ready to occupy flats rather than those under construction.
According to an expert in the automobile industry the competition in this industry is rising, this
coupled with high interest rates and hike in fuel prices will decrease the demand for automobiles
the country. These two sectors which are crucial to the steel Industry are facing several problems
which could have a tremendous impact on the steel industry.
The global recession had a huge impact on the steel industry with the investment sector being
reluctant to invest in the industry, but this sector has shown a tremendous improvement in the
last year.

Foreign Investment

India permits 100% FDI in the steel sector, the government has initiated various programmers to
promote the steel sector of the country. The 12
th
plan has also seen some very large initiatives
taken by the Government in the steel sector like Pradhan Mantri Gram Sadak Yojana, Bharat
Nirman, Rajiv Gandhi Awaas Yojana etc. In 2012 the FDI in steel has seen a growth of 60.73%,
that is Rs 8, 24,242 crore.

8

The FDI investment in the steel sector in the last few years has observed to be low due to the global
recession.
Due to the stabilization of the economy some major investments are proposed in India. Some of the
investments by foreign investors in the steel sector are as below

Proposals to set up steel plants in India
Producer Proposed State Proposed Annual
Capacity
Proposed Investment(Rs cr)
Posco Orissa 12 mtpa 52,000
Posco Karnataka 6 mtpa 32,000
Arcelor-Mittal Orissa 12 mtpa 40,000
Arcelor-Mittal Jharkhand 12 mtpa 50,000
Arcelor-Mittal Karnataka 6 mtpa 30,000
NMDC-Severstal Karnataka 5 mtpa Both will jointly invest Rs
9,000crore
Tata Steel-Nippon Steel Jharkhand 60,000 tonnes 2300


SWOT Analysis

STRENGTHS
 JSW believes in vertical integration, most of its plants have the capacity to incorporate
the entire process of production right from extraction of raw material/ minerals, refining
the material till the production of finished goods.
 JSW Steel lays important emphasis on using the best technology which helps it increase
its productivity while maintaining international quality standards.
9

 It is currently India’s largest private steel maker in terms of production capacity.
 The company was the first to launch Galvanized steel in India which was a great
revolution in the steel industry
 The labour, manufacturing and energy cost per tonne of steel of JSW is the lowest in the
domestic as well as international industry.
 JSW Steels labour productivity are comparable to international standards.

WEAKNESS
 Even though the company’s focus on Research and Development and Technological
Advancements is appreciable it is not even a fraction of what international companies
invest.
 The company is not able to utilize100% capacity.
 It incurs a lot of cost as it does not owe mines of its own.
 Investors don not have a strong belief in the management and of its ability to sustain
growth.

OPPURTUNITIES
 As India is set to become one second largest producer of steel in the world it would be a
great opportunity for JSW being the top producer of Steel in India.
 Demand for Steel is predicted to rise in the next 2 years considering increase in Domestic
demand and International demand
 Greenfield investments in the foreign countries will also help the company grow.

THREATS
 Arcelor Mittal’s entry into India can pose a major threat to the company.
 FDI flow in the economy will lead to major multinationals entering into India.
 JSW holds major investments in the equity of steel companies. Due to the cyclic nature of
fluctuation in prices of the steel industry, a downward movement in the steel prices could
cost the company a fortune

10

Financial Statement Analysis

2011 2012 2013 2014
Book Value Per Share 578.97 603.13 622.74 811.51
Market Price Per Share 937.90 746.30 403.35 1177
Earnings Per Share (Diluted ) 18.65 24.04 19.54 45.75
Market Capitalization (Rs. in lacs) 104,103.38 82,836.50 44,770.34 28,448.27

Income Statement

The year 2011 has been an important year in the history for JSW Steel, the events of significant
importance were the acqisiton of Coking Coal Assets in USA, Technological Collaborations with
Japan steel maker( JFE) and the acquisition of ISPAT Industries.

The company has being seen making a profit for all 3 years. The profit is however seen to have
decreased to a large extent in 2012 even though the Net Revenue of the company was seen to
increase to 42% in the year 2012 this revenue was due to increase increased sales of Investee
companies.

The company has also experienced a significant decrease in the Cost of Production which has
increased by only 8% in 2013 as compared to 45% in 2012. This is due to the decrease in cost of
raw material due to the increase in the production of in-house manufactured coke. So also direct
expenses of the company has also reduced to a large extent in the year 2013 this is due the
stabilization of the company investments after the investment in ISPAT Industries, as after the
acquisition of ISPAT the company incurred a lot of expenses in its capacity addition program.
Thus the increase in Gross Profit by a marginal 15% than the previous rate of 38%.

The profit for the year is seen to increase by 80% from 2012 to 2013 which shows that JSW is
recovering its investment made in ISPAT industries and other technological improvements made,
11

it can be also due to the stabilization of the economy as the demand for steel in 2011 and 2012
was very low.

Balance Sheet

The Net worth of the company in the year 2013 as per the Annual Reports is Rs. 691.21 crore.
The total equity is seen to increase by 4% mainly due better performance of the company’s
equity shares in the market. The fall in Total equity in the year 2012 can be attributed to its
investment of Rs. 2157 crore in the buying its stake in ISPAT Industries out of which 147 crore
was raised from infusion of its equity capital and the rest from its investment in Mutual funds.

The company’s noncurrent liabilities is seen to increase by 31%, on the other hand noncurrent
assets have shown an increase of 3%. The current liabilities of the company has decreased by 10
% whereas the current assets has seen a decrease of only 5% as compared to the previous year’s
decrease of 85%.



12

Ratio Analysis

Solvency Ratio’s



The current ratio of a company specifies the financial stability of the company since it shows the
extent of the working capital by which the current assets exceeds the current liabilities. The
current Ratio of the company is seen to be increasing over the years. The figures state that the
firm is not being able to meet its short term obligations/ liabilities. The current liabilities is seen
to increase to a large proportion in the year 2012 this is mainly due to the expansion project
undertaken by the company i.e. the taking over of ISPAT.
The quick ratio of the company is seen to experience a marginal increase over the past years. The
idle quick ratio is considered to be 1. Even though the quick ratio is marginally increasing over
the years it is way below the idle ratio to be maintained. A huge chuck of the current assets is
seen to be Inventories, and if the company is not able to sell this inventory it will not be able to
meet its short term obligations.

The cash ratio of the company is seen to have drastically decreased during the last financial year.
The creditors of the company would be reluctant to lend to the company as the capacity of the
company to pay off its debt by using its most liquid assets that is cash and bank balances is very
low.
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
2011 2012 2013
Solvency Ratio's
Current ratio Quick ratio Cash ratio
13


Overall taking into consideration all the solvency ratios we can see that the company
should be looked at with extreme caution, but this circumstance is said to be arising due to
the takeover of ISPAT, at present the company cannot pay off its current liabilities without
selling its inventory and recovering the credit given to customers. As per the recent trends
and predicted future scenario the company is expected to face a huge demand in the
domestic as well as international market which will help the company stabilize over the
next 3 years.

Operating Efficiency Ratio



The Total Asset Turnover of the company is seen to be increasing over the years which shows
that the company efficiently using its assets to generate revenue. The asset turnover ratio if
compared to the other companies in the industry like Tata Steel etc. is seen to be appropriate.
The asset turnover ratio for the year 2013 has jumped to a very large extent as compared to the
asset turnover ratio of Tata Steel being 77.84% in that year. So also the company’s Equity
turnover ratio is seen to be improving over the years. Therefore we can safely say that the
company is getting efficient enough in making appropriate use of its resources to generate
revenues
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011 2012 2013
Operating Efficiency Ratio
Total asset turnover Equity turnover
14



Operating Profitability Ratio


The operating profit margin and the Net profit margin are seen to be decreasing over the years,
whereas the gross profit Margin is slightly improving this is mainly due to the reduction in the
steel prices in the past year due to low demand from international as well as domestic players.
The same trend is observed in the other companies in the industry as well.

Financial Risk Ratio

The debt to equity ratio of the company is seen to be increasing over time which means the
company is using more of debt financing in its financial structure in order to finance its assets.
As compared to other industries in the sector the debt financing used by JSW Steel is very high.
So also the company’s interest coverage ratio is decreasing which is another bad sign to the
company as it questions the company’s ability to pay off its interest accumulated on the debt.

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Operating Profitability Ratio
2013 2012 2011
15

Working Capital Management

Working capital management is efficiently financing the operational need of the business. It also
ensures that the company has sufficient funds to meet its short term obligations. It also helps
analyze the policies adopted by the company for recovery of its debts and payment to suppliers
and creditors.
Below, I have calculated the working capital cycle, i.e. the time period between the payments to
the suppliers and collecting the cash from debtors. The more the number of cycles the company
can accommodate in a year the better it is for the company as cash is generated at the end of each
cycle.
Note:
 Receivables collection period for the year 2011 is found out from the Annual reports of
2010-2011. So is the Inventory processing period for the year 2011
 Thereby the receivables turnover ratio and the inventory turnover ratio is derived from
the respective figures of Recievables Collection Period and Inventory Collection Period
obtained in the balance sheet.
 COGS is calculated as COGS =Net Sales – Gross Profit

Working Capital = Current Assets – Current Liabilities
Working Capital for JSW Steel in the year 2013 is calculated to be - 67,314.80 million. Here we
can see that JSW has a negative working capital.
The following are the calculated figures of the Cash Collection Cycle
2012 2013
Receivables collection period 53 16
Inventory processing period 407 87
Payment period 574 150
Cash Collection Cycle (114) (50)

16

We can note from the above table that JSW Steel works on a negative working capital cycle.
JSW Steel maintains an efficient Debtors collection policy and is seen to have taken considerable
less time in 2013 in Inventory processing than the previous year which shows that the company
is efficient enough in the management of its working capital. But it is also noticed that the
company takes almost more than a year to pay of its suppliers and other creditors. As far as the
credit ratings of the company is concerned, JSW Steel is rated as CARE AA and A+ ratings in
their Long term Bank facilities and Short Term Bank facilities.