FRA

Project on:

THE STEEL INDUSTRY

*Phase I Submission

By:
Group 6:
Vedavathy S Kamath (32004)
Shubham Goyal (32027)
Neena Singh (32028)
Archish Mazumdar (32026)
Kabeer Ravi (32014)


1. Introduction & Justifications

The Steel Industry
Industry Overview

India is at present the fourth largest producer of steel behind only China, Japan and the US. The
continuously increasing domestic demand for steel in industries such as infrastructure, real estate
and automobiles has essentially been the reason for the rise and rise of the Indian steel industry.
Further recent domestic policies such as Make in India, Foreign Direct Investment (FDI) and the
import of foreign technology into the country seem to augur well for the industry at large. The GOI
too has mooted a prospective plan to further boost domestic steel capacity to approximately 300mt
(million tonnes), thus providing a platform for the Indian steel industry to set itself on a fast track
growth path with a stable economic outlook in the future.

The industry though has not been completely immune to the effects of the global slowdown with a
steady decline in the utilization rate of steel in the county. There still seems signs of a rebound bout
to take place in the near future with emerging trends as:

• Automotive sales growth rebounding strongly

• Moderated rate of inflation and interest rate cuts
• Recovering GDP and Industrial rate of production

Global factors at Play

The following global factors, industry experts believe will play a major role in the shaping of the
Indian steel landscape:
Sizeable steel scrap surplus in China by 2025

China currently plays a critical part in absorbing excess supply of scrap from the rest of the world. By
2025, there is expected to be a surplus of steel scrap in China which will result in a decrease in
demand and also simultaneously push-down the prices of other raw materials, such as coking coal
and iron ore.

Global iron ore prices under pressure

Most new mines and expansion sites are coming up in Australia and Brazil, with these two countries
being touted as the suppliers of close to 90% of seaborne iron ore by 2020. This increased supply
and moderation in demand will continue to suppress iron ore prices.

Emergence of shale gas as cheaper fuel source

Countries like Iran, Saudi Arabia and Mexico are presently using natural gas and iron ore to make
Direct Reduced Iron (DRI) which is added to scrap, in order to make steel. DRI is essentially a more
economical method of producing steel and thus the increased availability of cheap natural/shale gas
could prove to be a major disadvantage to India’s steel industry.

Stricter environmental regulation impacting feasibility and locations of new capacity

The industry has been under strict scrutiny with respect to environmental regulations to limit its
carbon footprint and reduce emissions. Steel plants, particularly in developing countries, have been
the slowest to adopt latest technologies and conform to the most recent environmental regulations.
This development can essentially be looked at as both a risk and relative opportunity to India’s steel
industry.

Capital availability and allocation

Increased volatility in financial markets over the last few years has turned investors more risk averse
and understandably so. Shareholders are looking for early returns on short term investments. The
major issue facing Indian steel industry is its inability to attract huge amounts of “risk-capital”.

Flattening global cost curve and shifting manufacturing competitiveness

The global steel sector has a flat marginal cost curve. Therefore there is less comfort in being at the
low end of the cost curve. This means factors such as changes in state subsidies, operating
efficiencies, changes in cost capital among others may all become major factors pushing a particular
steelmaker’s competitiveness from one end of the spectrum to another. Hence, from an industry
perspective the future landscape and growth of the steel industry will be majorly dependent upon
the aforementioned parameters.


Tata Steel

The primary reason for choosing Tata Steel as one of the companies to be considered was effectively
based on its performance in the sector overall. Tata continues to lead the sector both on production
as well as on financial terms. The company recorded deliveries of 25.92mt for the year 2016 and
6.94mt for the fourth quarter ending March 2016. Turnover was ₹ 117, 152 crore for the year and ₹
29,508 crore for the quarter.

Tata Steel performance highlights

• Production for the quarter higher by 2% compared to December 2015 quarter and 7% over
December 2014 quarter.
• Sales volume up by 16% compared to December 2015 quarter and 13 percent over December
2014 quarter.
• Underlying EBITDA at ₹ 2,188 crore is 43% higher compared to December 2015 quarter.
• EBITDA margin increase over sequential quarter by 400 bps.
• Underlying pre-exceptional profit before tax higher by 92 percent over previous quarter
• Underlying pre-exceptional profit after tax higher by 105 percent over previous quarter

• Exceptional charges primarily relate to the Voluntary Employee Separation Scheme accepted by
608 people during the quarter
• Despite muted market environment, Tata Steel India operations recorded strong growth in the
quarter and grew by 16 percent on the back of surge in volumes in high value segments like auto
(19 percent q-o-q growth) and Branded products (19 percent q-o-q growth).
• For FY16, India deliveries increased by 9 percent with best ever sales of 9.54MT far in excess of
the market which grew at 4.5 percent over the period. This growth was achieved despite
heightened competition as India saw an increase in net imports by over 200 percent in this
period and a reduction in the share of domestic players to 84 percent. Domestic steel prices in
 India declined compared to previous quarter and the impact of the MIP did not reflect in the
market prices.
• Tata Steel India saw strong growth across segments. Automotive and special products sales
reached highest ever sales of 1.43MT and contributed 15 percent of total sales. Branded
products and retail sales surged to 3.35MT and contributed around 35 percent of total sales. Our
largest brand ‘Tiscon’ registered highest ever sales of 2.51MT for FY16, a growth of 13 percent.
Our retail customers increased to around 30 lakh households across India.

All figures in ₹ crores unless otherwise specified

FY16 FY15 Q4FY16 Q3FY16 Q2FY16

9.54 8.75 Steel Deliveries (MT) 2.72 2.35 2.41
38,210 41,785 Turnover 10,522 9,064 10,635
10,986 10,102 EBITDA 2,188 1,525 1,661
7,388 10,102 EBITDA Underlying* 2,188 1,523 1,661
1,933 1,998 Depreciation 493 491 572
1,460 1,976 Finance Costs 383 350 532
(1,583) 1,891 Exceptional Items (327) (40) (44)
6,127 8,509 PBT 1,087 700 599
4,901 6,439 PAT 677 453 814
48.67 64.49 Basic and Diluted Earnings per Share 6.52 4.21 7.94

*excludes profit on sale of quoted investments

Start of commercial production at Kalinganagar steel plant

Tata Steel today announced the start of commercial production at the 3MTPA Kalinganagar steel
plant. The stabilisation process is currently underway. The facility will produce flat steel for high end
applications enabling the company to expand its product portfolio in the ship building, defence
equipment, energy and power, infrastructure, and aviation sectors. It will also consolidate Tata
Steel's leadership position in the domestic automotive segment.

2. Macro-Economic variables
affecting the industry

GDP/Economic Growth:
India’s economic growth is dependent upon the growth of the Indian steel industry. Consumption
of steel is considered as an indicator of economic development. While steel continues to have an
iron grip in traditional sectors such as construction, housing and ground transportation, it is also
increasingly used in engineering industries such as power generation, petrochemicals and
fertilizers. Whenever Government plans to boost economic growth it injects funds into these
sectors which drive the growth of steel industry.
India occupies a vital position on the global steel map, with the establishment of new steel mills,
acquisition of global scale capacities by players, continuous modernization and upgradation of
older plants, improving energy efficiency and backward integration into global raw material
sources.

Inflation:

High inflation severely affects the Steel Industry and causes slowdown in the sector. Automobile
industry and construction industry are the major consumers of steel commodities. Slowdown in
these industries further hits the steel industry adversely.

Government Policies/Liberalization:

Before 1990 Steel industry in India was controlled solely by Public sector Tata being the only
exception. The liberalization policies of 1991 made the Steel industry undergo huge changes.
Some of these policies included Exemption from licensing system, Abolition of price controls,
Liberalizing conditions of FDI, Liberalization of imports and exports, lowering tariff level. The
industry further changed with the entering of Private players using world class technologies and
thus capabilities have further improved post liberalization era.

Environmental Concerns:

Major environmental concerns related to steel industry include selection of plant site side effect
on neighbourhood and ecology, solid waste disposal, water treatment, capital equipment and
measures used for pollution reduction etc.

Growth of complementary sectors:

Growth in complementary sectors directly results in growth of the steel industry. The major
growth of steel industry as a whole in recent times is contributed to increasing growth seen in
sectors like Construction and Automobile.

Availability of raw materials:

This industry needs an efficient raw material base, a mature supply chain and supportive
infrastructure. India has an advantage over the world in case of raw materials but lacks the
technology to make use of it to a larger extent.
Major raw materials to be considered are:
• Iron ore
• Coking Coal
• Non-coking coal
• Raw Materials for Ferro-alloy Industry
• Power
• Labour
• Capital costs
• Infrastructure

Flow of money and tax measures:

Flow of money include forms of investment, imports, exports and all kind of other cash flows.
Import and Export taxes also affect the availability of steel for domestic consumption.

Labour skillfulness and availability:

Steel sector is highly dependent on skilled labours and their availability and wages affect the steel
industry to a great extent. Moreover getting these labours near the plant site is a very important
consideration. FDI/FII in Indian Steel Industry: Promotion of foreign direct investment is a major
reason for economic growth by way of infusion of capital, technology and modern management
practices. The Department of steel has put in a place a liberal and transparent foreign investment
scheme in recent times.

 3. Industry Characteristics

Current Scenario
The health and performance of the steel industry is a strong indicator of the growth of an
economy. Most industrial economies of the world are characterized by a strong and growing
steel industry.
India is currently the 3rd largest producer of steel and is expected to be the 2nd largest
producer by the year 2020. The steel industry contributes to about 2% of India’s GDP, 16%
of the industrial sector and employs more than 600,000 people. (Ministry of Steel,
Government of India, 2015)
Driven by rising infrastructure development and growing demand for automobiles, steel
consumption is expected to reach 104 MT by 2017. It is expected that consumption per
capita would increase supported by rapid growth in the industrial sector, and rising infra
expenditure projects in railways, roads & highways, etc. For FY15, per capita consumption of
steel in India was 60 kg against the world average of 222 kg.

Figure 1 Indian Steel Market Volume (Source: marketline)
 Industry Structure
The starting point of the growth of the Indian Steel Industry can be traced back to the
setting up of the Tata Iron and Steel Company (TISCO) in 1907. Over the next two decades,
several other private sector companies started production of steel within the country. The
main producers- SAIL, TISCO, and JSW, have a combined capacity of more than 50% of
India’s total steel production. Large integrated steel plants have been set up in several
locations across India- Jamshedpur, Bokaro, Bhilai, Salem etc.

Figure 2 Major Steel Plants in India (Source: www.mapsofindia.com)

The iron and steel industry in India is organised into three categories- main producers, other
major producers and the secondary producers. In 2004-05, the main producers i.e. SAIL,
TISCO and JSW had a combined capacity of around 40% of India’s total steel production
capacity and production.
Industry Players
Industry is characterized by both private and public sector companies including SAIL, TATA
Steel, Essar Steel and JSW. In 2015, JSW overtook SAIL to become the largest manufacturer
of steel in the country.

Company Owned By Founding Year CEO

Steel Authority of India Government of India 1954 Prakash Kumar Singh
TATA Steel TATA Group 1907 T V Narendran
JSW Steel Ltd. JSW Group 1982 Sajjan Jindal
Rashtriya Ispat Nigam Limited Government of India 1982 Ponnapalli Madhusudan
ESSAR Steel ESSAR Group 1998 Prashant Ruia
VISA Steel VISA Group 2003 Pankaj Gautam
Figure 3 Information regarding Major Steel Producers


Market Share in 2014(% Volume)

14.60%

10.00%

59.90%
15.50%

Tata Steel JSW Steel Ltd. Steel Authority of India Others

Figure 4 Market Share of Major Producers (Source: marketline)

1. JSW Steel Ltd.:
Established in 1982 by the JSW Group, they are the leading producers of steel in the
country. They have 6 plants located across the country- Vijayanagar, Salem etc. They
are a pioneer in development of in-house technology and R&D.
2. TATA Steel
Setup in 1907, TATA Steel has manufacturing units across 26 countries.
Headquartered in Mumbai, they have their major manufacturing unit located in
Jamshedpur and employ more than 80,000 personnel globally.
3. Steel Authority of India (SAIL)
SAIL, a publically owned enterprise, is the 2nd largest producer of steel in the
country. It was founded in the year 1954 and has more than 8 integrated steel plants
located across the country.
4. ESSAR Steel
Founded by the ESSAR Group in 1998, they have their manufacturing units across 4
countries- India, USA, Canada and Indonesia. All of their facilities are ISO Certified
and are located across the country at Pune, Vizag etc.
5. VISA Group
This steel company is privately owned by the giant VISA group. The corporate office
is located at Kolkatta and have three manufacturing plants located across the
country in Orissa and Chattisgarh.
Five Forces Analysis
The industry is being analyzed with the following key stakeholders:
1. Buyers- End users from various industries including automobile and infrastructure
industries
2. Players – Steel Producers – large and small, public and private

Forces Driving Competition in the Steel Industry

Buyer Power
4
3.5
3
2.5
2
1.5
Threat of New Entrants Supplier Power
1
0.5
0

Degree of Rivalry Threat of Substitutes

Buying Power
Steel is the most widely used metals, and the steel industry is one of the largest industries in
the world. Steel finds its applications in many industries including large sized ones like
automobile, construction, and oil-gas industries. High-volume customers end up purchasing
directly while low-volume consumers buy from service centers or individual stock holders.
Because the buyers are large-sized industries, they can negotiate lower input prices and
purchase the material from steel manufacturers at a desirable price. Especially in the case of
the automobile industry, the highly competitive nature forces car manufacturers to push for
lower steel and raw material prices. This, in turn, leads to lower profit margins in the steel
industry. This is however not true of small retail buyers and requires a large investment on
their part to search for alternate, cheaper materials. Since steel is commoditized, the lack of
a unique product or value-adding services tends to strengthen buyers’ power.

Supplier Power
Suppliers have low bargaining power in this industry as they own most of the mines.
Manufacturers are extremely sensitive to shifts in their cost base, particularly during
economic recovery. Recent demand increases are not enough for companies to be able to
push through any price increases. A significant increase in costs could also put further strain
on companies' cash flow positions and finance requirements, which already pose a risk to a
strong upturn. It is still very much an oligopolistic model.
Although the new system creates the opportunity for buyers to engage in hedging tactics,
supply will remain largely in the hands of just three firms. Thus, it is unlikely that quarterly
pricing and a swaps market will create fair conditions in a clearly oligopolistic market.

New Entrants
It is quite common for companies in this industry to go for mergers and acquisitions, extend
their supply chains. There are a variety of reasons why steel companies pursue integration,
e.g. achieving economies of scale, increasing negotiating power with customers and
vendors, competing successfully against incumbents, and entering new markets. Smaller
companies with a fixed cost structure are at risk of being acquired by larger companies. This
lowers the risk of entry of newcomers. Also, the capital required for new entrants is quite
high and also requires a well-integrated supply chain that supports the delivery of services.
Consequently, these factors make new companies less likely to enter, and the overall threat
is thus assessed to be moderate.

Threat of Substitutes
Steel is widely used commodity and in addition to that is recyclable. It is also popular for its
quality, adaptability and cost competitiveness. There are potential substitutes for steel- less
expensive non-metallic materials or with more expensive materials known for their
performance (Aluminum and plastic in the automobile industry).
The ability of end-users to adopt substitutes means that steelmakers cannot increase their
prices indefinitely; at some point, the substitutes will be more cost-effective. However,
using these would require substantial re-tooling of an assembly line. It is likely that certain
kinds of large buildings or civil engineering projects would become very difficult to construct
without using materials, such as reinforced concrete, which gains its structural strength
from steel. Thus, although the price of the alternatives may be favorable in some market
conditions, switching costs are likely to be very high. Overall, the threat of substitutes is
moderate.

Degree of Rivalry
40% of steel production in India is dominated by large players including SAIL, TATA and JSW
and they offer mostly similar services. Although it is difficult to diversify, some of these
companies cater to specific needs of customers by delivering different specifications of
steel. This helps to increase specialization, reduce competition but also reduces the size of
the potential market. Another recent tactic has been to diversify mine locations to try to
diminish the impact of regional market forces. The benefits of this are that different regions
have different regulations and conditions affecting the market. Exit barriers are high,
because many of the major tangible assets are highly specific to the market, and thus harder
to divest. In this situation, players are strongly motivated to remain in the market even
when conditions are difficult, thus boosting the rivalry. As the steel market is cyclical and
highly affected by macroeconomic conditions, rivalry tends to increase, particularly in a
declining market that is hard to exit. The Indian market saw a healthy increase in volume in
2014, which despite the decreasing price, resulted in moderate value growth. Overall, the
rivalry is assessed to be strong.

Issues faced by the industry

Competitiveness and Trade
There has been a global slowdown in demand for steel, and the supply of steel exceeds the
demand. India is losing export competitiveness due to relatively high cost of production –
labor, capital, and raw materials. There is also a huge influx of imports from China and other
countries into the Indian Domestic market. The government recognizes the problem, but
the government machinery for remedial actions is slow.
It is important to the cut the costs of labor, capital and raw materials for export
competitiveness. The Government should also look out for unfair trade practices and come
up with policies to protect the interests of domestic producers

Financial Viability and Resilience
Players in the steel industry require long-term finance and capital with the ability to
withstand cyclical volatility of profits. With 1991 reforms, state ownership, as well as
support through development finance institutions (DFIs) declined and other sources of
finance such as banks, External Commercial Borrowing (ECB) and capital markets, took over.
But these sources were not equipped for the long-term finance that the steel industry
requires.
There were high and volatile debt-equity ratio and interest coverage ratio for many steel
companies.
It is, therefore, important to improve procedures for debt restructuring of financially
distressed companies and develop long-term finance institutions backed by long-term
savings (Pension funds and long-term bonds).

Skilled Manpower and R&D
With the development of the service sector, geology, mining, and metallurgy are losing out
and this has aggravated the issue of not having enough skilled labor in the industry. The
country needs an additional 43,000 engineers and 15,000 metallurgists in the industry by
2025.
These numbers are not available. The industry should upgrade in-house training facilities for
employees and potential employees on various technical/ non-technical aspects, e.g., L&T
and Maruti. It is also important that industries increase R&D investments to 1–2 per cent of
turnover by companies.

Supply of Logistical Facilities
The steel industry requires an efficient and cost-effective transport system, but transport
and infrastructure in India are very inefficient. Railway rates are extortionist and even
charge more for the same ore over the same distance if it is meant for export, which
misclassifies the movement as domestic.
Roadways suffer from congestion and high transit times and emit more pollution. Indian
ports lack adequate road and railway connectivity, which leads to the slow movement of
cargo.
Tripling steel production by 2025 will require at least a tripling of transport facilities. This
requires creating the necessary additional infrastructure (including railway electrification)
and removing
system bottlenecks in the existing rail, road, and port sectors to reduce the turnaround time
of railway wagons, trucks, and ships.

Managing Environment

Steel in potentially 100 percent recyclable. With upcoming constraints on greenhouse gas
(GHG) emissions, the required expansion in the steel industry will not be possible unless the
GHG intensity of steel production in India is reduced substantially below its present levels.
CO2 emission levels must be brought down to at least the global average, particularly for
new plants. The Indian steel industry should look into the Life Cycle Approach (LCA) because
steel

4. Accounting Policies

General Accounting Policies in the Industry-

Institutional Design Introduction Steel was under a fairly strict framework of regulation till 1992
and the erstwhile policy was to allocate scarce investment and infrastructure resources for
optimum and planned development of the industry and to make available this scarce industrial
intermediate to the users at a reasonable price.

The basic purpose of the past policy was to manage a scarcity driven market towards an
announced objective of establishing a fair and equitable distribution of this product and to keep it
affordable as far as possible. The pre-reform steel market in India was controlled in all relevant
areas. Competition was limited in this shortage-infested market that had no real role to play in the
growth of the individual companies or their performance and the allocative efficiency of investible
resources. The prices set by the government were more on political consideration and not strictly
on the basis of costs of production or markets demand and supply balance. In the absence of an
elaborate and an efficient distribution mechanism, one can expect such a system of controlled
prices to be favourable to the consumers.

However, the trading intermediaries, with whatever role they were allowed to play, gobbled up
the margin between the market and the administered prices, with little benefits left to the vast
number of small consumers. This was natural given that supply was limited, and higher demand
required an allocation mechanism between the many competing consumers. And the
intermediaries used price as a means of allocation. In free market such price ‘controls’ only lead to
rents for those not facing the controls. In this particular case this would have only adversely
affected the willingness of those facing the controls to invest in increasing production or
improving technology.

Following the reforms ushered in the nineties this regulatory regime was dismantled. The steel
market and the industry currently are free from all regulations in trade, production and
investment. Till some time ago, steel was included in the list of essential commodities. After it has
been removed, the government’s scope for direct policy backed intervention has reduced
considerably.

The chapter is organized as follows, Section I describes the policies governing the industry,
section II discusses the role of Government and section 3 discusses the specific role of
Government in promoting competition in the Industry. Policy regime for the Steel sector in India
Under the new industrial policy, iron and steel has been made one of the high priority industries.
Price and distribution controls have been removed as well as foreign direct investment up to
100% (under automatic route) has been permitted. The Trade Policy has also been liberalized and
import and export of iron and steel is freely allowed with no quantitative restrictions on import of
iron and steel items. Tariffs on various items of iron and steel have drastically come down since
1991-92 levels and the government is committed to bring them down to the international levels.

With the abolishing of price regulation of iron and steel in 92, the steel prices are market
determined. The Government announced the National Steel policy in 2005. The policy targets
indigenous production of 110 million tonnes (MT) by 2019-20 from the 2004-05 level of 38 MT at
a compounded annual growth of 7.3 percent per annum. Similarly targeted consumption is 90 MT
by 2019-20 from the 2004-05 level of 36 MT, implying a CAGR of 6.90 percent.

The policy devises a multi-pronged strategy to achieve these targets with following focus areas -
removal of supply constraints especially availability of critical inputs like iron ore; improve cost
competitiveness by expanding and strengthening the infrastructure in roads, railways, ports and
11 Although on paper, the steel prices were to be based on an elaborate model developed by the
Bureau of Industrial Costs and Prices, in practice, the same was rarely followed. 16 power;
increase exports; 12 meet the additional capital requirements by mobilizing financial resources;
promote investments by removing procedural delays.

In addition the policy also addresses challenges arising out of environmental concerns, human
resource requirements, R&D, volatile steel prices and the secondary sector.

 Tata Steel: Some basic accounting Policies-
*Sources are various Annual reports of Tata Steel

• Basis for accounting was the accrual basis under historical cost convention in
accordance with GAAP (changes with the introduction of I-AS 2)
• Revenue recognition from goods is: net of rebates and discounts on transfer of
significant risks and rewards of ownership to the buyer.
• Revenue recognition from services is on pro-rata basis in proportion to the stage of
completion of the related transaction.

Revenue statement:
FY11: 1,18,753 (in Rs. Crores)
FY12: 1,32,899
FY13: 1,34,712
FY 14: 1,48,613
FY 15: 1,39,503

• Tangible assets are stated at cost less accumulated depreciation and net of
impairments, if any. Pre-operation expenses including trial run expenses (net of
revenue) are capitalised. Borrowing costs during the period of construction is added
to the cost of eligible tangible assets. (Valued at Rs. 55,249 Crores in FY13)
• Intangible assets are stated at cost less accumulated amortisation and net of
impairments, if any. An intangible asset is recognised if it is probable that the
expected future economic benefits that are attributable to the asset will flow to the
Company and its cost can be measured reliably. Intangible assets having finite useful
lives are amortised on a straight-line basis over their estimated useful lives. (Valued
at Rs. 3908 Crores in FY13)
• For depreciation, policy differs for assets owned by the Company and those which
are not. Assets whose ownership does not vest with the company are depreciated
over their estimated useful life or five years, whichever is lesser. In respect of other
assets, depreciation is provided on a straight line basis applying the rates speci ed in
Schedule XIV to the Companies Act, 1956 or rates based on estimated useful life
whichever is higher. The estimated useful life as taken are:

(a) Buildings and Roads — 30 to 62 years

(b) Plant and Machinery — 3 to 30 years
(c) Railway Sidings/Lines — 21 years
(d) Vehicles and Aircraft — 5 to 18 years
(e) Furniture, Fixtures and Office Equipment — 5 years

(f) Intangibles (Computer Software) — 5 to 10 years

(g) Development of property for development of mines and collieries are
depreciated over the useful life of the mine or lease period whichever is less, subject
to maximum of 10 years.

(h) Blast Furnace relining is depreciated over a period of 10 years (average expected
life).

(i) Freehold land is not depreciated.

(j) Leasehold land and other leasehold assets are ammortised over the life of the
lease.

 CASH FLOW & GROWTH ANALYSIS
In this report we have performed an analysis of the cash flow statements of three major players
in the steel industry in India- TATA Steel, Steel Authority of India and, JSW Steel.

TATA Steel
Tata Steel’s Annual Reports show its Cash Flow Statements and Profit and Loss Accounts for
the year 2011-16.

Tata Steel Ltd.

INR Crores

Particulars 2016/03 2015/03 2014/03 2013/03 2012/03

Net Profit/Loss Before Extraordinary

Items And Tax 6126.52 8508.89 9713.5 7836.6 9857.35

Net CashFlow From Operating Activities 7567.68 4851.89 12432.8 11068.67 10256.47

Net Cash Used In Investing Activities -5405.22 -2382.1 -9837.42 -8522.4 -2859.11

Net Cash Used From Financing Activities -1631.04 -2957.21 -3825.98 -4281.59 -7599.35

Foreign Exchange Gains / Losses -0.12 0.02 0 0 0

Net Inc/Dec In Cash And Cash

Equivalents 531.3 -487.4 -1230.6 -1735.32 -201.99

Cash And Cash Equivalents Begin of Year 421.93 909.33 2139.93 3900.53 4102.52

Cash And Cash Equivalents End Of Year 953.23 421.93 909.33 2165.21 3900.53
Figure 1: Source (TATA Steel Annual Reports)

2
 Cash Flow Activity Trends over FY11-15
CFO CFI CFF

15000
12432.8
10256.47 11068.67
10000
7567.68
5000 4851.89

0 -2382.1 -1631.04
-3825.98
2012 2013 2014 2015 2016
-2859.11
-5000 -2957.21 -5405.22
-4281.59
-7599.35
-10000
-8522.4
-9837.42
-15000

Cash from Operating activities – CFO

2011-14
Net Cash Flow from Operating Activities increases from 11068 Crores to 12432.8 Crores.
This shows that there had been a steady increase in the operational performance of the
Company for the year. The overall Steel Industry in India too showed a good boost of growth to
11.5% from just 4.1% in 2012-14 while the growth in Sales for TATA Steel for 2013-14 was
8.68%
2014-15
The Financial Year 2014-15 showed a slump in the growth of Steel. The annual growth fell down
to 4.7%. The reasons for the slowed growth were several. This report from
www.equitymaster.com highlights some of them:
“Indian Steel Industry faced several challenges during the year. On the other hand the finished
steel imports surged by 70% especially from the surplus economies of China, Korea, Japan and
Russia. Korea and Japan enjoyed the reduced import tariffs under the Free Trade Agreement
(FTA) with India. At the same time finished steel exports from India also decreased by 8.1%
YOY to 5.5 MT. Resultant steel trade dynamics, subdued demand and declining raw material
prices have driven global steel prices have driven global steel prices lower and impacted
profitability of steel companies.”

Following the global trend, Tata Steel too saw a downturn in profits, CFO and sales. Though the
sales figure showed a drop of only 0.3%, and the reported profits showed an increase, the Cash

3
Flow from operating activities had reduced by a mammoth 61%. The profit figure before tax was
also a huge reduction from the previous year’s 9713 Crores to 8508 Crores.
The discrepancy in the final figure of Profits was adjusted by a gain from MAT credit.
(Minimum-Alternate-Tax) This MAT is a credit which can be set off against regular taxes.
www.caclubindia.com defines the credit as “the tax credit earned shall be an amount
which is the difference between the amount payable under MAT and the regular tax.”
Cash Flow from Investing Activities - CFI
The Net cash flow from Investing activities (CFI) had also been steadily increasing on a
YoY basis from FY 2011-12 till FY 203-14, after which CFI took a downturn mirroring the
growth slump in the steel industry. With reduced profitability making its way to the company,
the company had to put its investing activities on hold, opting to consolidate in times
of distress. The reduction of close to 75.7% on CFI brings into focus the extent of the slump
faced by the industry at the time. The CFI increased the following year (though not quite
reaching the previous highs), indicating the improvement in conditions for the industry
at large and the company in particular.
Cash Flow from Financing Activities - CFF
The bulk of the Cash outflow in financing activities had taken place due to payment of
borrowings. The payments reduced by a reasonable amount during the financial year. Even the
dividends paid to the shareholders showed a decrease from 1165.46 Crores in FY2013 to 776.97
Crores.
The financing outflow was more or less the same. It is interesting to note that the dividends paid
to the shareholders showed a significant increase at the end of the year. The figure was 971
Crores from the previous years’ 776 Crores, even though there was a huge slump in the entire
steel industry. This could have been a deliberate move on the part of the management to not let
the shareholders feel any of the hit the industry had taken.

4
Steel Authority of India (SAIL)

Figure 1 SAIL(Source: Annual Report 2015)

Net Profitability
Over the FY 2014-15 SAIL registered a reduction in profitability of 4.05% YoY and a loss of
over INR 7000 crore. This can be attributed to the reduced amounts of Steel produced due to
adverse market conditions, lower sales realization and due to contribution to the District Mineral
Foundation and National Mineral Exploration Trust, increased use of imported coal, higher
salary and wages, higher interest charges and reduction in interest earning on term deposits and
higher depreciation due to capitalization of new facilities.

Cash Flow Activities over FY11-15

8000
6000
4000
2000
0
-2000 2011-12 2012- 13 2013-14 2014-15 2015-16

-4000
-6000
-8000
-10000

Net Profit CFO CFI CFF

Cash Flow from Operating Activities

Starting with a net loss, SAIL has a net inflow of cash from operating activities. This deviation
can be accounted to the following:
1. Increased Depreciation
There was a 18% increase in depreciation expenses over FY14-15 due to capitalization of
new facilities. SAIL follows a straight line method of depreciation of assets.

5
 2. Higher Interest & Finance Expenses
An increase in finance expenses was observed because of higher borrowings to meet the
expenditures of the year. This was necessary because SAIL’s profits had declines
considerably over the year.
3. Loss on Sale of Fixed Assets
The company incurred a loss of INR 25.18 Cr. as compared to a profit of INR 11.40 Cr.
4. Decrease in Inventory
Although there was a decrease in sales realization, SAIL had a net increase in sales. This
was able to offset the increase in expenses over the year. The inventories decreased
mainly on account of decrease in raw materials inventory, finished/semi-finished
products inventory and stores & spares inventory.
5. Decrease in Debtors
There was a large decrease in this field due to repayment of loans. As per the cash flow
statement there was 83.29% decrease in the opening and closing balance.
6. Increase in Current Liabilities
Owing to the bad performance of SAIL over the FY, the company had to increase its
short term and long term debts resulting in increase of current liabilities by over
INR1800 Cr.
Despite a net loss, SAIL had a net inflow of cash in operating activities which suggests
healthy sales and operating activities.
Cash Flow from Investing Activities
There has been a slight decrease in cash outflow in investing activities. This can be attributed to
the following:
1. Decrease in Term Deposits
SAIL reduced the amount of term deposits to fund its activities and operations because it
had registered a net loss
2. Decrease in Interest Received
There was net decrease in the interest received on loans due to the decrease in the
amount of sundry debtors
Cash Flow from Financing Activities
Net cash from financing activities has almost halved over the year. This is largely because of the
following factors:
1. Increase in Interest and Finance charges paid
Owing to increased borrowings, the cash outflow to meet interest expense increased over
the year by INR360 Cr.
2. Lower Dividends
Owing to poor profits for the Company, the dividend it was able to pay to the investors
reduced considerably from over INR722.84 Cr. to just above INR102.22 Cr.
3. Lower Taxes
The company has accumulated a loss over this year. Measures are being taken by the
Company and the Government for the general upliftment of the Steel industry and to
boost demand for steel. These include steps taken to reduce cost and improve efficiency
and productivity. SAIL therefore is hoping to earn enough profits in the future to meet
its commitments. Therefore, SAIL has recognized increased deferred tax liability of
INR707.85 Cr.

6
 Figure 2 Source: SAIL Annual Report

JSW Steel Ltd.

INR Crores

Particulars 1603 1503 1403 1303 1203

Months 12 12 12 12 12
FaceValue 10 10 10 10 10

Net Profit/Loss Before Extraordinary

Items And Tax -2374.81 2539.11 1308.05 1999.34 1993.35

Net CashFlow From Operating Activities 6703.53 6902.53 2593.52 5844.21 3512.4
Net Cash Used In Investing Activities -4280.13 -6396.9 -5671.26 -5433.44 -4100.56
Net Cash Used From Financing Activities -2775.21 -169.09 3300.46 -790.89 697.77
Foreign Exchange Gains / Losses 5.83 0 0 0 0
Adjustments On Amalgamation / Merger /
Demerger And Others 0 0 50.5 0 0

Net Inc/Dec In Cash And Cash

Equivalents -345.98 336.54 273.22 -380.12 109.61
Cash And Cash Equivalents Begin of Year 912.91 576.37 302.38 682.5 572.89
Cash And Cash Equivalents End Of Year 566.93 912.91 575.6 302.38 682.5

7
 CFO
CFO CFI CFF

8000
6902.53 6703.53
6000 5844.21
4000
3512.4 3300.46
2593.52
2000
697.77
0 -169.09
2012 -790.89
2013 2014 2015 2016
-2000
-2775.21
-4000 -4100.56 -4280.13
-5433.44 -5671.26
-6000 -6396.9
-8000

And the

Cash Flow from Operating Activities

Book losses have increased over the year from Rs 2094.56 Cr in 2012 to Rs -5066.53 in 2016 and there is
no consistency in the net profit of the company. However there are no cash losses that the company is
facing since the operating cash inflow is positive over 5 years

Cash flow from Investing activities - CFI

The company is significantly investing in its capital assets as net cash outflow from investing activities is
increasing from Rs -4168.95 Cr to Rs 5030.42 from 2015 to 2016. There is a rise in the share capital or
the company has raise the amount by issuing of debentures in 2012 and 2013 which indicates that they
are taking money from the market. After that the net cash from financing activities is negative which
means that there has been either significant dividend pay-out or buyback of shares. Since there is a huge
difference in the net cash flow between 2015 and 2016, we can guess that it is a heavy buy back of shares
or there can also be repayment of debt obligation of the past.

Cash flow from Financial activities - CFF

Over all there is a Rs 35.99 Crs net increase in cash over 5 years from Rs 426.87 Crs at the beginning of
2012 to Rs 462.86 Crs at the end of 2016. The company consistently obtain its cash flow from Operating
activities and uses in investing and financing activities – A typical profile for a mature company. The
companies operating cash flow exceeded net profit/loss every year- A desirable profile for a mature
company and it has succeeded in it.

8
Accentuation of Matter
As is evident from the cash flow statement in the recent past the investing activities of the
company has increased and the cash dip thus evident is not a major cause of worry since the
investing activities are as a part of expansion and is thus is a sign of a good and efficient
company.

9
THE STEEL INDUSTRY

FINANCIAL RATIO
Group 6:
ANALYSIS Vedavathy S Kamath (32004)
Kabeer Ravi (32014)
Shubham Goyal (32027)
Neena Singh (32028)
Archish Mazumdar (32026)
LIQUIDITY RATIOS
Liquidity ratios give a measure of the firm’s ability to meet its short term obligations and is a measure of
the firm’s financial health.

Current Ratio
Current Assets
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities
(debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current
ratio, the more capable the company is of paying its obligations.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW 0.58 0.74 0.6 0.63 0.61
SAIL 0.58 0.83 0.95 1.23 1.51
TATA Steel 0.93 1.17 0.9 1.04 1.2
Industry 0.95 0.85 0.99 1.12 1.27

Current Ratio Trend

1.4

1.2

0.8

0.6

0.4

0.2

0
Mar-16 Mar-15 Mar-14 Mar-13

JSW SAIL TATA Steel Industry

The current ratio gives a sense of the efficiency of a company's operating cycle or its ability to

turn its product into cash.

The formula for calculating the current ratio, then, is:

Analysis
For Steel sector, JSW and SAIL have a current ratio much lower than the Industry standard of 0.95.
SAIL’s current ratio has decreased considerably throughout the 5 years from 2012 to 2016. All of the
companies have struggled to maintain a current ratio of more than 1.
Acid Test Ratio

𝐶𝑎𝑠ℎ + 𝐶𝑎𝑠ℎ 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 + 𝑆ℎ𝑜𝑟𝑡 𝑇𝑒𝑟𝑚 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 + 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

The quick ratio determines a company’s ability to meet its short term obligations with its most
liquid assets. The ratio excludes inventories from current assets. Higher the quick ratio, better is
the company’s liquid positions.
Also, if the quick ratio is much lower than the current ratio, it means that there is heavy
dependence on inventory. Retail stores are examples of this type of business.
Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12
JSW 0.25 0.3 0.28 0.34 0.33
SAIL 0.19 0.31 0.42 0.52 0.78
TATA Steel 0.53 0.62 0.48 0.57 0.65
Industry 0.45 0.43 0.51 0.62 0.78

Quick Ratio Trend

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
Mar-16 Mar-15 Mar-14 Mar-13 Mar-12

JSW SAIL TATA Steel Industry

Analysis:
A quick ratio of 1.00 means that the most liquid assets of a business are equal to its total debts and the
business will just manage to repay all its debts by using its cash, marketable securities and accounts
receivable. A quick ratio of more than one indicates that the most liquid assets of a business exceed its
total debts. On the opposite side, a quick ratio of less than one indicates that a business would not be
able to repay all its debts by using its most liquid assets.
Thus, a higher quick ratio is generally preferable because it means greater liquidity. However, a quick
ratio which is quite high, say 4.00, is not favorable to a business because this means that the business
has idle current assets which could have been used to create additional projects thus increasing profits.
In other words, very high value of quick ratio may indicate inefficiency.

SOLVENCY RATIOS
These ratios are used to measure a company’s ability to deal with its long term financial obligations
while increasing assets for future use.

Debt to Equity Ratio

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
A debt to equity ratio is used to measure a company's financial leverage. It is calculated by dividing a
company’s total liabilities by its stockholders' equity. The D/E ratio indicates how much debt a company
is using to finance its assets relative to the amount of value represented in shareholders’ equity.

If the debt part of financing is contributing to a greater earnings (as compared to if there was no debt
and only equity financing) than the debt interest, it means that the shareholders are earning more due
to the debt financing. However, a very large amount of debt may eventually cripple the company due to
the increasing burden of financing the debt cost.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW 1.68 1.56 1.49 1.12 0.86
SAIL 0.81 0.65 0.57 0.53 0.42
TATA Steel 2.94 2.21 1.69 1.61 1.17
Industry 1.44 1.26 1.09 0.87 0.99

Debt/Equity Ratio Trend

3.5

2.5

1.5

0.5

0
Mar-16 Mar-15 Mar-14 Mar-13 Mar-12

JSW SAIL TATA Steel Industry

Analysis:
The debt equity ratios for all three companies are consistent with the industry trend. They are all
increasing over the period from 2012-16. Only TATA Steel shows are relatively sharper increase in 2016
to a ratio of almost 3.

Interest Coverage Ratio

𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠 𝑜𝑟 𝐸𝐵𝐼𝑇
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
Interest Coverage ratio measures a company’s capacity to pay its current interests with its

available earnings. It is an important aspect as seen from a shareholders’ perspective.

Lower Interest Coverage Ratios indicate the company’s incapability of generating revenues to

pay off the interest.

Higher Interest Coverage Ratios (2.5 being a warning sign) indicate that the company is

generating sufficient revenues to pay off its interests.

0 Interest Coverage Ratio indicates that the company has no interests to be paid or that the

company has taken any debt.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW 0.92 1.74 1.99 2.2 2.97
SAIL -2.41 2.66 3.13 5.31 8.14
TATA Steel 1.56 1.52 2.56 1.82 2.23
Industry 1.67 2.34 2.28 3.01 4.28

Interest Coverage Ratio Trend

10

0
Mar-16 Mar-15 Mar-14 Mar-13 Mar-12
-2

-4

JSW SAIL TATA Steel Industry

Analysis:
The interest coverage ratio for the industry shows a declining trend over the years. This shows weak
signs for the industry as a whole as more interest piles up and there is not enough income to pay for the
interest. SAIL shows the maximum volatility, which had seemingly low interest to pay for in 2012, but
more interest than income (because it is at loss) in 2016. Even JSW’s interest payments exceed its
income in 2016, which is not a healthy sign for the company. TATA Steel is a par with the industry, but
its coverage is still low as compared to safe standards.

EFFICIENCY RATIOS
Efficiency ratios measure how well companies utilize their assets to generate income.

Efficiency ratios measures how effectively the companies utilize their assets to generate income. These
ratios help management to improve the company. Also it gives idea about companies’ performance to
outside investors and creditors.

Inventory Turnover Ratio

COGS
𝐼𝑛ventory
The inventory turnover ratio measures effectively inventory is "turned" or sold during a period by comparing
cost of goods sold with average inventory for a period.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW 4.98 4.81 6.28 6.95 5.94
SAIL 2.57 2.56 3.07 2.79 3.36
TATA Steel 5.76 5.55 5.53 5.59 5.19
Industry 4.37 4.85 4.74 4.71 4.67
 Inventory Turnover Trend
8

0
Mar-16 Mar-15 Mar-14 Mar-13 Mar-12

JSW SAIL TATA Steel Industry

Analysis:

Inventory turnover for SAIL has been the lowest, as is evident from the graph above. This is a bad sign as
compared to the rest of the industry which shows a turnover of at least greater than 4.5 times a year.
TATA Steel shows the strongest ratios here, with a consistent performance just above the average
industry ratio. JSW has shown a sharp decline in the ratio over the years, from around 7 to 4.5. But that
could also mean that it has efficiently updated its stock of inventory to reach a comfortable ratio which
is at par with the industry.

Debtor’s Turnover
Net Receivable Sales
Average Accounts Receivable

The debtor’s turnover ratio (also known as receivable turnover ratio), indicates the velocity of a
company's debt collection, the number of times average receivables are turned over during a year.
This ratio determines how quickly a company collects outstanding cash balances from its customers
during an accounting period. It is an important indicator of a company's financial and operational
performance and can be used to determine if a company is having difficulties collecting sales made
on credit.
Debtor’s turnover ratio indicates how many times, on average, account receivables are collected
during a year (sales divided by the average of accounts receivables).

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

 JSW 16.18 21.71 22.20 22.02 29.12
SAIL 12.97 10.54 9.43 9.71 10.39
TATA Steel 67.97 66.21 53.21 44.91 51.10

Debtor's Turnaround Ratio

80

70

60

50

40

30

20

10

0
Mar-16 Mar-15 Mar-14 Mar-13 Mar-12

JSW SAIL TATA Steel

Analysis:

The Debtor’s turnover ratio is highest for TATA Steel, and much higher than its competitors. This shows
great operating efficiency and it is also a sign of a good and strong rapport in the market. SAIL has the
lowest DTR among the three, which shows its poor quality of debtors. JSW is the only company the DTR
of which has decreased in 2016. This should be taken as fair warning to adjust some financial operations
of the company.

Fixed Assets Turnover Ratio

Net Receivable Sales
Fixed Assets
A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability
to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) -
net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective
in using the investment in fixed assets to generate revenues.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW 0.61 0.86 0.91 0.95 0.91
SAIL 0.53 0.72 0.89 1.09 1.16
TATA Steel 0.88 1.00 1.07 1.01 1.48
 Fixed Assets Turnover
1.6

1.4

1.2

0.8

0.6

0.4

0.2

0
Mar-16 Mar-15 Mar-14 Mar-13 Mar-12

JSW SAIL TATA Steel

Analysis:

As the business grows larger, the fixed assets increases. But as shown by the ratio, the sales have not
increased proportionately for the companies. This has led to a lower Asset Turnover Ratio over the
years. The declining trend shows the declining effectiveness of added fixed assets. Moreover, the recent
years have been very volatile for the steel industry, which could also be a strong reason for such
statistics.

Return on Owners’ Equity

Net Income
Shareholder’s Equity

The amount of net income returned as percentage of shareholder’s equity. Return on equity
measures a corporation’s profitability by revealing how much profit a company generates with the
money shareholders have invested.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW (%) 3.3 5.6 2.1 8.1 -3.4
SAIL (%) 8.9 5.6 6.1 4.6 -10.8
TATA Steel (%) 12.6 -20.7 8.9 -12.5 -10.7
Analysis:

TATA Steel shows a slump in its return in 2015, which is a mirror for the difficult year the industry had.
But the same thing is not mirrored for either JSW or SAIL. This is suspicious as the industry did not do
well over the year. TATA Steel has bounced back with its strongest return in 2016. JSW’s return has
declined. Over the years, the companies have done well, seeing as how each started with a loss in 2012.
This had been a good sign for shareholders.
PROFITABILITY RATIOS
Gross Margin
Gross Profit * 100
Sales
It is a company's total sales revenue minus its cost of goods sold, divided by the total sales revenue,
expressed as a percentage. The gross margin represents the percent of total sales revenue that the
company retains after incurring the direct costs associated with producing the goods and services sold
by a company.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW (%) 8.63 13.20 13.37 12.21 12.09
SAIL (%) -14.62 6.30 4.71 7.20 9.66
TATA Steel (%) 13.81 19.17 26.10 24.83 30.60

Gross Margin (%)

30

25

20

15

10

0
Jan-14 Jan-15 Jan-16
-5

-10

-15

-20

JSW (%) SAIL (%) TATA Steel (%)

Analysis:

Here TATA Steel shows a clear outperformance in returns when compared to its two closest
competitors. JSW maintains a considerably stable flow of returns indicating a close correlation with
industry numbers. SAIL though continues to be highly volatile culminating in losses as indicated by its
March ’16 numbers.
Net Profit Margin
Gross Profit * 100
Sales

Net profit margin measures how much of each dollar earned by the company is translated into
profits. Profit Margin measures overall efficiency of a company and shows its ability to withstand
competition as well as defend against adverse conditions such as rising costs, falling prices, decline
in sales or management distress. Profit margin tells investors how well the company executes on its
overall pricing strategies as well as how effective the company in controlling its costs. In a nutshell,
profit margin indicator shows the amount of money the company makes from total sales or
revenue. It can provide a good insight into companies in the same sector, as well as help to identify
trends of a company from year to year.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW (%) -2.03 3.24 0.75 3.11 4.34
SAIL (%) -11.17 4.69 5.62 5.16 7.7
TATA Steel (%) -2.71 -2.83 2.46 -5.46 3.72
Industry -0.28 2.60 -1.81 4.55 8.11

Net Profit Margin (%)

10

0
Mar-16 Mar-15 Mar-14 Mar-13 Mar-12

-5

-10

-15

JSW (%) SAIL (%) TATA Steel (%) Industry

Analysis:

On comparison with industry numbers, we realize that TATA Steel and JSW have been performing
very close to the industry benchmark in a sense that we can use their numbers as industry proxies.
Sail on the other hand has been continually moving sideways from the industry standard,
sometimes beating the market as well as losing out in other times. This indicates a more volatile
performance on part of SAIL and it is thus a riskier investment as compared to TATA Steel or JSW.

Return on Capital Employed

Earnings Before Interest and Tax (EBIT)
Capital Employed
A financial ratio that measures a company's profitability and the efficiency with which its capital is
employed. Return on Capital Employed (ROCE) is calculated as:

ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed

“Capital Employed” as shown in the denominator is the sum of shareholders' equity and debt liabilities;
it can be simplified as (Total Assets – Current Liabilities). Instead of using capital employed at an
arbitrary point in time, analysts and investors often calculate ROCE based on “Average Capital
Employed,” which takes the average of opening and closing capital employed for the time period. A
higher ROCE indicates more efficient use of capital. ROCE should be higher than the company’s capital
cost; otherwise it indicates that the company is not employing its capital effectively and is not
generating shareholder value.

Mar- 16 Mar – 15 Mar - 14 Mar - 13 Mar- 12

JSW (%) 8.4 11.0 9.2 10.9 1.9
SAIL (%) 11.5 7.7 7.7 6.5 -9.1
TATA Steel (%) 9.03 9.25 13.37 12.80 14.77

Return on Capital Employed

20

15

10

0
Mar-16 Mar-15 Mar-14 Mar-13 Mar-12
-5

-10

-15

JSW (%) SAIL (%) TATA Steel (%)

Analysis:

A high ROCE indicates the more efficient use of capital by a company. By extension of this logic, all three
companies show a positive or an increasing trend in ROCE numbers on a y-o-y basis. From a shrewd
investor point of view, we see that TATA Steel shows positive yet diminishing ROCE numbers though
they seem stable. JSW and SAIL on the other hand show much more volatility in their respective
numbers. Thus it is safe to recommend that TATA Steel should be more preferred over JSW or SAIL as its
ROCE numbers are much more stable in comparison.

Earnings Per Share

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per
share serves as an indicator of a company's profitability.
EPS = PAT / No. of Shares
When calculating, it is more accurate to use a weighted average number of shares outstanding over the
reporting term, because the number of shares outstanding can change over time. However, data
sources sometimes simplify the calculation by using the number of shares outstanding at the end of the
period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding
in the outstanding shares number.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW (%) 8.7 5.6 6.4 4.9 -10.4
SAIL (%) 14.4 14.3 8.8 18.1 -5.4
TATA Steel (%) 55.5 -72.7 37.0 -40.4 -31.4

Analysis:

In layman terms, a high EPS generally indicates higher returns and vice versa. From that perspective, we
can clearly see that TATA Steel puts in high returns for its shareholders and is thus generally more
profitable as compared to JSW and SAIL. Again by the same comparison SAIL appears to be more
profitable as against JSW.

An interesting point to note here though is that in the time period considered TATA Steel has shown
significant volatility but still in absolute terms continues to churn out higher returns when compared to
its competitors.

VALUATION RATIOS
A valuation ratio is a measure of how cheap or expensive a security (or business) is, compared to some
measure of profit or value. A valuation ratio is calculated by dividing a measure of price by a measure of
value, or vice-versa. The point of a valuation ratio is to compare the cost of a security (or a company, or
a business) to the benefits of owning it. The most widely used valuation ratio is the PE ratio which
compares the cost of a share to the profits made for shareholders per share. Other valuation ratios used
are PB ratio, EV/EBITDA etc.
Price to Equity
The price-to-equity ratio, or P/E ratio, is the most commonly used financial ratio used to compare a
company's current market price to its EPS. It is also sometimes known as a Market-to-Equity ratio. It is
calculated by dividing the closing price of the stock by the latest quarter’s earnings per share. A high P/E
multiple compared to the industry or peers represents that the company is overvalued and would result
in a sell recommendation.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW (%) 30.7 16.9 40.1 15.1 -34.0
SAIL (%) 14.4 14.3 8.8 18.1 -5.4
TATA Steel (%) 9.03 9.25 13.37 12.80 14.77

Analysis:

In essence, a high P/E ratio generally indicates expectations of higher earnings in future from an investor
point of view. A low P/E value similarly indicates that a company might be undervalued or is performing
better than its past trends indicate.

JSW numbers are highest when compared to TATA and SAIL as can be seen from the table which leads
us to the inference that JSW appears overvalued as compared to the rest of the pack. TATA Steel and Sail
effectively indicate a stable P/E eliciting a hold to buy recommendation for investors.
EV / EBITDA
The enterprise value to EBITDA ratio, or EV/EBITDA ratio, is a financial ratio used to compare a
company's current value (debt + equity) to its earnings. It is calculated by dividing the latest market
capitalization of the stock and the market value of the debt obligations by the Earnings before Interest,
Tax, Depreciation and Amortization. EBITDA is used since the ratio is to be computed for the debt
holders and hence interest would not be deducted. A high EV/EBITDA multiple compared to the industry
or peers represents that the company is overvalued and would result in a sell recommendation.

Mar- 16 Mar - 15 Mar - 14 Mar - 13 Mar- 12

JSW (%) 11.85 6.44 6.83 5.62 5.21
SAIL (%) -16.41 9.11 9.95 7.28 6.13
TATA Steel (%) 9.53 6.98 5.89 6.02 6.14

Analysis:

As a general guideline an EV/EBITDA value less than 10% is considered by analysts as an indication of the
good health of the company in question. Here we see that that for JSW on a y-o-y basis the company
starts off well below the 10% benchmark but gradually increases eventually crossing said benchmark
indicating a slight drop with respect to company performance.

In the same light, SAIL too starts off on a similar track but its March’16 numbers indicates a negative
EBITDA value which in subsequence implies negative earnings of the company.
TATA Steel on the other hand continues to maintain a healthy performance ratio under 10% throughout
the time period considered and thus in a relative scale outperforms both JSW and SAIL, cementing its
position as the market leader.