A

Project report

On

(Fundamental Analysis on Indian Steel Sector)

for

(Tata Steel Ltd and JSW Steel Ltd.)

In partial fulfillment of the requirements of

Master of Management Studies

conducted by

University of Mumbai

through

Rizvi Institute of Management Studies & Research

under the guidance of

(Jamil Saudagar)

Submitted by

(Javed Abdul Wahab Sayyed)

MMS

Batch: 2013 2015.

CERTIFICATE

This is to certify that Mr. Javed Abdul Wahab Sayyed, a student of Rizvi Institute of Management Studies and Research, of MMS bearing Roll No. 42 and specializing in Finance has successfully completed the project titled

Fundamental Analysis on Indian Steel Sector.

under the guidance of Prof. Jamil Saudagar in partial fulfillment of the requirement of Masters of Management Studies by University of Mumbai for the academic year 2013 2015.

_______________

Prof. Jamil Saudagar

Project Guide

______________________________

Prof. Umar FarooqDr. Kalim Khan

Academic CoordinatorDirector

TABLE OF CONTENTS

Particulars

Page no.

Objectives of the Project

1

Introduction

5

Fundamental Analysis

8

Overview of Indian Steel Sector

13

Current Scenario of Indian Steel Sector

14

Major Factors for Steel Demand Growth

15

Steel Sector Analysis

16

SWOT Analysis on Indian Steel Sector

17

Government Rules on Steel, Import and Export of Steel

19

PEST Analysis on Indian Steel Sector

21

Michael Porters Five Forces Model

22

Company Analysis

23

TATA STEEL LTD.

JSW STEEL LTD.

Analysis of Top Steel Companies

27

Suggestions and Recommendations

28

Finding and Conclusion

29

Resources

30

OBJECTIVES OF THE PROJECT

To recommend increase/decrease of investment in a particular security.

The main objective of the project is to do fundamental analysis of Steel companies.

To study the present scenario of a steel industry which analyze the information collected on earning per share, market price etc.

To study the performance of Steel sector for a certain period.

To conclude about the fundamental position of the selected companies according to the findings of trend analysis.

PURPOSE OF THE PROJECT

Purpose of equity research is to study companies, analyze financials, and look at quantitative and qualitative aspects mainly for decision: Whether to invest or not.

To be able to value equity, we need to first understand how equity is to be analyzed.

Equity Share of any company can be analyzed through:

Fundamental Analysis

Introduction

Steel is an alloy of iron and carbon containing less than 2% carbon and 1% manganese and small amounts of silicon, phosphorus, sulphur and oxygen. Steel is the world's most important engineering and construction material. It is used in every aspect of our lives; in cars and construction products, refrigerators and washing machines, cargo ships and surgical scalpels.

Types of Steel:

World Steel Association defines, there are over 3,500 different grades ofsteel, encompassing unique physical, chemical and environmental properties.

In essence, steel is composed of iron and carbon, although it is the amount of carbon, as well as the level of impurities and additional alloying elements that determines the properties of each steel grade.

The carbon content in steel can range from 0.1-1.5%, but the most widely used grades of steel contain only 0.1-0.25% carbon. Elements such asmanganese, phosphorus and sulphur are found in all grades of steel, but, whereas manganese provides beneficial effects, phosphorus and sulphur are deleterious to steel's strength and durability.

Different types of steel are produced according to the properties required for their application, and various grading systems are used to distinguish steels based on these properties. According to the American Iron and Steel Institute(AISI), steels can be broadly categorized into four groups based on their chemical compositions:

1. Carbon Steels

2. Alloy Steels

3. Stainless Steels

4. Tool Steels

1)Carbon Steels:

Carbon steelscontain trace amounts of alloying elements and account for 90% of total steel production.Carbon steels can be further categorized into three groups depending on their carbon content:

Low Carbon Steels/Mild Steelscontain up to 0.3% carbon

Medium Carbon Steelscontain 0.3 0.6% carbon

High Carbon Steelscontain more than 0.6% carbon

2)Alloy Steels:

Alloy steels contain alloying elements (e.g. manganese, silicon,nickel,titanium,copper, chromiumandaluminum) in varying proportions in order to manipulate the steel's properties, such as itshardenability,corrosionresistance,strength,formability,weldabilityorductility. Applications for alloys steel include pipelines, auto parts, transformers, power generators and electric motors.

3)Stainless Steels:

Stainless steelsgenerally contain between 10-20% chromium as the main alloying element and are valued for high corrosion resistance. With over 11% chromium, steel is about 200 times more resistant to corrosion thanmild steel. These steels can be divided into three groups based on their crystalline structure:

Austenitic:Austenitic steels are non-magnetic and non heat-treatable, and generally contain 18% chromium, 8% nickel and less than 0.8% carbon. Austenitic steels form the largest portion of the global stainless steel market and are often used in food processing equipment, kitchen utensils and piping.

Ferritic:Ferritic steels contain trace amounts of nickel, 12-17% chromium, less than 0.1% carbon, along with other alloying elements, such asmolybdenum, aluminum or titanium. These magnetic steels cannot be hardened withheat treatment, but can be strengthened bycold works.

Martensitic:Martensitic steels contain 11-17% chromium, less than 0.4% nickel and up to 1.2% carbon. These magnetic and heat-treatable steels are used in knives, cutting tools, as well as dental and surgical equipment.

4)Tool Steels:

Tool steels containtungsten, molybdenum,cobaltand vanadium in varying quantities to increase heat resistance and durability, making them ideal for cutting and drilling equipment.

Steel products can also be divided by their shapes and related applications:

Long/Tubular Productsinclude bars and rods, rails, wires, angles, pipes, and shapes and sections. These products are commonly used in the automotive and construction sectors.

Flat Productsinclude plates, sheets, coils and strips. These materials are mainly used in automotive parts, appliances, packaging, shipbuilding, and construction.

Other Productsinclude valves, fittings, and flanges and are mainly used as piping materials.

Steel Making Process:

Most steel is made via one of two basic routes:

1. Integrated (blast furnace and basic oxygen furnace).

2. Electric arc furnace (EAF).

The integrated route uses raw materials (that is, iron ore, limestone and coke) and scrap to create steel. The EAF method uses scrap as its principal input.The EAF method is much easier and faster since it only requires scrap steel. Recycled steel is introduced into a furnace and re-melted along with some other additions to produce the end product.Steel can be produced by other methods such as open hearth. However, the amount of steel produced by these methods decreases every year.

Steel Production Yearly:

World crude steel production reached 1,414 million metric tons (mmt) in 2010. This is an increase of 15% compared to 2009 and is a new record for global crude steel production.

Indias economic growth is largely depend upon the growth of the Indian steel Industry. While Consumption of steel is taken to be an indicator of economic development. While steel continues to have a stronghold in traditional sectors such as construction, housing and ground transportation, special steels are increasingly used in engineering industries such as power generation, petrochemicals and fertilizers.

Steel production in India has increased by a compounded annual growth rate (CAGR) of 8 percent over the period 2002-03 to 2006-07. Going forward, growth in India is projected to be higher than the world average, as the per capita consumption of steel in India, at around 46 kg, is well below the world average (150 kg) and that of developed countries (400 kg). Indian demand is

projected to rise to 200 million tons by 2015.

Steel is manufactured as a globally tradable product with no major trade barriers across national boundaries to be seen currently. There is also no inherent resource related constraints which may significantly affect production of the same or its capacity creation to respond to demand increases in the global market. Even the government policy restrictions have been negligible

worldwide and even if there are any the same to respond to specific conditions in the market and have always been temporary. Therefore, the industry in general and at a global level is unlikely to throw up substantive competition issues in any national policy framework. Further, there are no natural monopoly characteristics in steel. Therefore, one may not expect complex competition

issues as those witnessed in industries like telecom, electricity, natural gas, oil, etc.

This, however, does not mean that there is no relevant or serious competition issue in the steel industry. The growing consolidation in the steel industry worldwide through mergers and acquisitions has already thrown up several significant concerns. The fact that internationally steel has always been an oligopolistic industry, sometimes has raised concerns about the anticompetitive

behaviors of large firms that dominate this industry. On the other hand the set of large firms that characterize the industry has been changing over time.

Fundamental Analysis

Fundamental analysis is a technique that attempts to determine a securitys value by focusing on underlying factors that affect a companys actual business and its future prospects. Fundamental analysts attempt to study everything that can affect the securitys value, including macroeconomic factors (like the overall economy and industry conditions) and company- specific factors (like financial condition and management).

Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages and its competitors and markets. Fundamental analysis is performed on historical and present data but with the goal of making financial forecasts. A fundamental analyst believes that analyzing strategy, management, product, financial stats and many other readily and not-so-readily quantifiable numbers will help choose stocks that will outperform the market.

There are several possible objectives:

To conduct a company stock valuation and predict its probable price evolution,

To make a projection on its business performance,

To evaluate its management and make internal business decisions,

To calculate its credit risk.

TYPES OF FUNDAMENTAL ANALYSIS:

Quantitative Factors

Qualitative Factors

The various fundamental factors can be grouped into two categories: quantitative and qualitative.

Qualitative- related to or based on the quality or character of something, often as opposed to its size or quantity.

Quantitative-capable of being measured or expressed in numerical terms.

QUALITATIVE FACTOR THE INDUSTRY

Each industry has differences in terms of its customer base, market share among firms, industry-wide growth, competition, regulation and business cycles. Learning about how the industry works will give an investor a deeper understanding of a companys financial health.

Customers

Some companies serve only a handful of customers, while others serve millions. In general, its negative if a business relies on a small number of customers for a large portion of its sales because the loss of each customer could dramatically affect revenues. For example, think of a military supplier who has 100% of its sales with the Indian government. One change in government policy could potentially wipe out all of its sales. For this reason, companies will always disclose in their annual report if any one customer accounts for a majority of revenues.

Market Share

Understanding a companys present market share can tell volumes about the companys business. The fact that a company possesses an 85% market share tells you that it is the largest player in its market by far. Furthermore, this could also suggest that the company possesses some sort of economic moat in other words, a competitive barrier serving to protect its current and further earnings, along with its market share. Market share is important because of economies of scale. When the firm is bigger than the rest of its rivals, it is in a better position to absorb the high fixed costs of a capital -intensive industry.

Industry Growth

One way of examining a companys growth potential is to first examine whether the amount of customers in the overall market will grow. This is crucial because without new customers, a company has to steal market in order to grow. In some markets, there is zero or negative growth, a factor demanding careful consideration. For example, a manufacturing company dedicated solely to creating audio compact cassettes might have been very successful in the 70s, 80s and early 90s. However that same company would probably have a rough time now due to the advent of newer technologies, such as CDs and MP3s. The current market for audio compact cassettes is only a fraction of what it was during the peak of its popularity.

Competition

Simply looking at the number of competitors goes a long way in understanding the competitive landscape of a company. Industries that have limited barriers to entry and a large number of competing firms create a difficult operating environment for firms. One of the biggest risk in a highly competitive industry is pricing power. This refers to the ability of supplier to increase prices and pass those costs on to customers. Companies operating in industries with few alternatives have the ability to pass on costs to customers. A great example of this is Wal-Mart. They are so dominant in the retailing business, that Wal-Mart practically sets the price for any of the suppliers wanting to do business with them. If you want to sell to Wal-Mart, you have little, if any, pricing power.

QUALITATIVE FACTOR THE COMPANY

Before diving into a companys financial statements, lets take a look at some of the qualitative aspects of a company.

Following are the qualitative factors of the company that investor should be aware of-

Business Model

One of the most important questions that should be asked is what exactly does the company do? This is referred to as a companys business model. Its how a company makes money? You can get a good overview of a companys business model by checking out its website or annual report.

Competitive Advantage

Another business consideration for investors is competitive advantage. A companys long-term success is driven largely by its ability to maintain a competitive advantage and keep it. Powerful competitive advantages, such as Reliances brand name and Microsofts domination of the personal computer operating system, create a moat around a business allowing it to keep competitors at bay and enjoy growth and profits. When a company can achieve competitive advantage, its shareholders can be well rewarded for decades.

Management

A company relies upon management to steer it towards financial success. Some believe that management is the most important aspect for investing in a company. It makes sense even the best business model is doomed if the leaders of the company fail to properly execute the plan. Every public company has a corporate information section on its website. Usually there will be a quick biography on each executive with their employment history, educational background and any applicable achievements. Dont expect to find anything useful here. Lets be honest: Were looking for dirt, and no company is going to put negative information on its corporate website.

Instead, here are a few ways for you to get a feel for management:

1. Management Discussion and Analysis (MD&A)

The Management Discussion and Analysis is found at the beginning of the annual report. In theory, the MD&A is supposed to be frank commentary on the managements outlook. Sometimes the content is worthwhile, other items its boilerplate. One tip is to compare what management said in past years with what they are saying now. Is it the same material rehashed? Have strategies actually been implemented? If Possible, sit down and read the last five years of MD&As.

2. Past Performance

Another good way to get a feel for management capability is to check and see how executives have done at other companies in the past. You can normally find biographies of top executives on company websites. Identify the companies they worked at in the past and do a search on those companies and their performance.

QUANTITATIVE FACTOR

Now as we know the qualitative factor of fundamental analysis, lets proceed to the quantitative factor of the fundamental analysis. Quantitative factor include analysis of financial statement of the company.

RATIO ANALYSIS

Financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and appraising financial and management performance. In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently, these are:

Working capital ratios

Liquidity ratios

Solvency ratios

These 4 financial ratios allow a good financial analyst to quickly and efficiently address the following questions or concerns:

Working capital ratios

How quickly are debts paid?

How many times is inventory turned?

Liquidity ratios

Can the company continue to pay its liabilities and debts?

Solvency ratios (Longer term)

What is the level of debt in relation to other assets and to equity?

Is the level of interest payable out of profits?

Earnings per share

Earnings per share is calculated by dividing the net profit( after interest, tax and preference dividend) by the number of equity shares.

Earnings per share = Net profit after Interest, Tax and Preference Dividend/ No. of Equity shares

Price/Earnings Ratio

This ratio is calculated to find out the possibility of capital appreciation in future.

Price earnings ratio = Market price per Equity share/ Earning per share.

OVERVIEW OF INDIAN STEEL SECTOR:

Introduction

India has become the second best in terms of growth amongst the top ten steel producing countries in the world and a net exporter of steel during 201314. Steel production in India recorded a growth rate of 4.8 per cent in February 2014 over February 2013. The cumulative growth during AprilFebruary, 201314 stood at 4.2 per cent over the corresponding period of the previous year.

Steel contributes to nearly two per cent of the gross domestic product (GDP) and employs over 500,000 people. The total market value of the Indian steel sector stood at US$ 57.8 billion in 2011 and is expected to touch US$ 95.3 billion by 2016. The infrastructure sector is Indias largest steel consumer, thereby attracting investments from several global players. Owing to this connection with core infrastructure segments of the economy, the steel industry is of high priority right now. Also, steel demand is derived from other sectors like automobiles, consumer durables and infrastructure; therefore, its fortune is dependent on the growth of these user industries.

The liberalization of the industrial policy and other government initiatives have given a definite impetus for entry, participation and growth of the private sector in the steel industry. Allowing foreign direct investment (FDI) has been a positive step since India is heavily dependent on foreign technologies. These foreign technologies generally add life to the plant and production units, which ultimately lead to the countrys economic growth.

CURRENT SCENARIO OF INDIAN STEEL SECTOR:

The Indian steel industry has entered into a new development stage from 2007-08, riding high on the resurgent economy and rising demand for steel.

Rapid rise in production has resulted in India becoming the 4th largest producer of crude steel and the largest producer of sponge iron or DRI in the world.

As per the report of the Working Group on Steel for the 12th Plan, there exist many factors which carry the potential of raising the per capita steel consumption in the country, currently estimated at 55 kg (provisional). These include among others, an estimated infrastructure investment of nearly a trillion dollars, a projected growth of manufacturing from current 8% to 11-12%, increase in urban population to 600 million by 2030 from the current level of 400 million, emergence of the rural market for steel currently consuming around 10 kg per annum buoyed by projects like Bharat Nirman, Pradhan Mantri Gram Sadak Yojana, Rajiv Gandhi Awaas Yojana among others.

At the time of its release, the National Steel Policy 2005 had envisaged steel production to reach 110 million tons by 2019-20. However, based on the assessment of the current ongoing projects, both in Greenfield and Brownfield, the Working Group on Steel for the 12th Plan has projected that the crude steel capacity in the county is likely to be 140 mt by 2016-17 and has the potential to reach 149 mt if all requirements are adequately met.

COMPETITIVENESS OF THE INDIAN STEEL INDUSTRY

Abundance of raw materials, iron ore and cheap workforce makes Indian steel industry competitive. However dependence on imported coking coal, low production efficiency, inadequate infrastructure & technology and delays in regulatory clearances & approvals are major hindrance to growth of Indian steel industry.

LEADING STEEL PRODUCERS IN INDIA

Steel making in India is concentrated along mineral rich belt of India, as vicinity to supply of raw materials like iron ore and coal provides considerable economic advantage. Most of the large scale steel making facilities is concentrated in state of Jharkhand, Orissa, West Bengal, Chhattisgarh and Karnataka. Steel production in India is leaded by SAIL, Tata Steel, JSW and others, while SAIL continues to be the largest steel producer in India.

PRIME GROWTH DRIVERS OF STEEL DEMAND IN INDIA

Steel demand has been proportionate with the GDP growth of the country. Housing & real estate, construction & infrastructure and manufacturing segment are the prime consumers and drivers of steel demand in India.

Major Factors for Steel Demand Growth

Economic growth

Industrial, construction & manufacturing growth

Growth in population

Rising middle class population and per capita steel consumption

Growth in rural steel consumption

Infrastructure Development

STEEL SECTOR ANALYSIS

The total market value of the Indian steel sector stood at US$ 57.8 billion in 2011 and is expected to touch US$ 95.3 billion by 2016.

(Worldsteel.org)

Sector-wise steel consumption in India

Infrastructure is Indias largest steel consumer

Market Size

Indias real consumption of total finished steel grew by 0.6 per cent year-on-year in AprilMarch 2013-14 to 73.93 million tons (MT), according to Joint Plant Committee (JPC), Ministry of Steel. Construction sector accounts for around 60 per cent of the country's total steel demand while the automobile industry consumes 15 per cent.

India became net steel exporter in 201314 and is likely to maintain the momentum in 2014-15 as producers are looking to dock more overseas shipment to tide over subdued domestic consumption. Total steel exports by India during 201314 stood at 5.59 MT, as against imports of 5.44 MT. During the period, Steel Authority of India (SAIL) clocked a 30 per cent growth in exports and aims to more than double the shipments to 1 MT in 201415. Rashtriya Ispat Nigam Ltd (RINL), which exported 1 lakh tone steel last fiscal, aims to treble that in the current fiscal.

GROWTH

The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new steel plants have also come up in different parts of the country based on modern, cost effective, state of-the-art technologies. In the last few years, the rapid and stable growth of the demand side has also prompted domestic entrepreneurs to set up fresh Greenfield projects in different states of the country.

Crude steel capacity was 89 mt in 2011-12 and India, the 4th largest producer of crude steel in the world, has to its credit, the capability to produce a variety of grades and that too, of international quality standards. The country is expected to become the 2nd largest producer of crude steel in the world by 2015-16, provided all requirements for creation of fresh capacity are adequately met.

Indian Steel Sector SWOT Analysis

Strength

India has rich mineral resources. It has abundance of iron ore, coal and many other raw materials required for iron and steel making. It has the fourth largest iron ore reserves (10.3 billion tons) after Russia, Brazil, and Australia. Therefore, many raw materials are available at comparatively lower costs. It has the third largest pool of technical manpower, next to United States and the erstwhile USSR, capable of understanding and assimilating new technologies. Considering quality of workforce, Indian steel industry has low unit labour cost, commensurate with skill. This gets reflected in the lower production cost of steel in India compared to many advanced countries. With such strength of resources, along with vast domestic untapped market, Indian steel industry has the potential to face challenges successfully. The major Strengths can be summarized as:

Abundant resources of iron ore

Low cost and efficient labour force

Strong managerial capability

Strongly globalized industry and emerging global competitiveness

Modern new plants & modernized old plants

Strong DRI production base

Regionally dispersed merchant rolling mills

Weaknesses

This are inherent in the quality and availability of some of the essential raw materials available in India, e.g., high ash content of indigenous coking coal adversely affecting the productive efficiency of iron-making and is generally imported. Also, Steel is a capital intensive industry; steel companies in India are charged an interest rate of around 14% on capital as compared to 2.4% in Japan and 6.4% in USA. In India the advantages of cheap labour get offset by low labour productivity; e.g., at comparable capacities labour productivity of SAIL and TISCO is 75 t/man year and 100 t/man years, for POSCO, Korea and NIPPON, Japan the values are 1345 t/man year and 980 t/man year. High administered price of essential inputs like electricity puts Indian steel industry at a disadvantage; about 45% of the input costs can be attributed to the administered costs of coal, fuel and electricity. The major Weaknesses can be summarized as:

High cost of energy higher duties and taxes

High cost of capital

Quality of coking coal

Labour laws

Dependence on imports for steel manufacturing equipment & technology

Slow statutory clearances for development of mines

Opportunities

The biggest opportunity before Indian steel sector is that there is enormous scope for increasing consumption of steel in almost all sectors in India. The Indian rural sector remains fairly unexposed to their Multi-faceted use of steel. The usage of steel in cost Effective manner is possible in the area of housing, fencing, structures and other possible applications where steel can substitute other materials which not only could bring about Advantages to users but is also desirable for conservation of forest resources. Excellent potential exist for enhancing steel consumption in other sectors such as automobiles, packaging, engineering industries, irrigation and water supply in India. The key areas of Opportunities can be summarized as:

Huge Infrastructure demand

Rapid urbanization

Increasing demand for consumer durables

Untapped rural demand

Increasing interest of foreign steel producers in India

Threats

The linkage between the economic growth of a country and the growth of its steel industry is strong. The growth of the domestic steel industry between 1970 and 1990 was similar to the growth of the economy, which as a whole was sluggish. This strong relation in todays environment where the growth of the industry has become stagnant owing to the overall slowdown has resulted in enhanced rivalry among existing firms. As the industry is not growing the only other way to grow is by increasing ones market share. The Indian steel industry has witnessed spurts of price wars and heavy trade discounts, which has impacted the Indian Steel Industry.

Government Rules and Regulations on Indian Steel Sector

In the new Industrial Policy announced in July, 1991 Iron and Steel industry, among others, was removed from the list of industries reserved for the public sector and also exempted from the provisions of compulsory licensing under the Industries (Development and Regulation) Act, 1951.

With effect from 24.5.92, Iron and Steel industry has been included in the list of `high priority' industries for automatic approval for foreign equity investment up to 51%. This limit has been recently increased to 100%.

Price and distribution of steel were deregulated from January 1992. At the same time, it was ensured that priority continued to be accorded for meeting the requirements of small scale industries, exporters of engineering goods and North Eastern Region of the country, besides strategic sectors such as Defense and Railways.

The trade policy has been liberalized and import and export of iron and steel is freely allowed. There are no quantitative restrictions on import of iron and steel items, covered under Chapter No. 72 of the ITC(HS) Code. The only mechanism regulating the imports is the tariff mechanism. 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. In Chapter 72 there are two items viz. 72042110 and 72042910, which fall in the restricted list of imports.

Iron & Steel are freely importable as per the Extant Policy.

Iron & Steel are freely exportable.

Advance Licensing Scheme allows duty free import of raw materials for exports.

The floor price for seconds and defectives continues till date.

Imports of seconds and defectives of steel are allowed only through three designated ports of Mumbai, Calcutta and Chennai.

Mandatory pre inspection certificate by a reputed international agency for every import consignment of seconds and defectives.

In the union Budget the import duty on seconds and defective has been further reduced from 20% to 10%

Exports of Steel in India

Exports

Iron & steel are freely exportable.

Advance Licensing Scheme allows duty free import of raw materials for exports. Duty Entitlement Pass Book Scheme (DEPB) was introduced to facilitate exports. Under this scheme exporters on the basis of notified entitlement rates, are granted due credits which would entitle them to import duty free goods. The DEPB benefit on export of various categories of steel items scheme is currently applicable for steel exports.

Last five years export of total finished steel (alloy + non alloy) is given below:-

Indian steel industry : Exports (in million tonnes)

Category

2007-08

2008-09

2009-10

2010-11

2011-12*

Total Finished Steel (alloy + non alloy)

5.08

4.44

3.25

3.64

4.04

Source: Joint Plant Committee of Steel

Imports of Steel In India

Iron & steel are freely importable as per the extant policy.

Last five years import of total finished steel (alloy + non alloy) is given below:-

Indian steel industry : Imports (in million tonnes)

Category

2007-08

2008-09

2009-10

2010-11

2011-12*

Total Finished Steel (alloy + non alloy)

7.03

5.84

7.38

6.66

6.83

Source: Joint Plant Committee of Steel

Fundamental analysis includes PEST FACTOR:

PEST Analysis of steel sector:

PEST analysis of any industry sector investigates the important factors that are affecting the industry and influencing the companies operating in that sector. PEST is an acronym for political, economic, social and technological analysis.

Political factors include government policies relating to the industry, tax policies, laws and regulations, trade restrictions and tariffs etc.

Economic factors relate to changes in the wider economy such as economic growth, interest rates, exchange rates and inflation rate, etc.

Social factors often look at the cultural aspects and include health consciousness, population growth rate, age distribution, changes in tastes and buying patterns, etc.

Technological factors relate to the application of new inventions and ideas such as R&D activity, automation, technology incentives and the rate of technological change.

Michael Porters Five Forces Model:

Key Points

Supply

With trade barriers having been lowered over the years, imports play an important role in the domestic markets. Currently India is net importer of steel.

Demand

The demand is derived from sectors that include infrastructure, consumer durables and automobiles.

Barriers to entry

High capital costs, technology, economies of scale, government policy

Bargaining power of suppliers

Low for fully integrated players who have their own mines for raw materials. High, for non integrated players who have to depend on outside suppliers for sourcing raw materials.

Bargaining power of customers

High, presence of a large number of suppliers and access to global markets.

Competition

High, presence of a large number of players in the unorganized sector.

Company Analysis

Top two players in steel industry out of the analysis done

Tata Steel Ltd.

Tata Steel Limited(formerly Tata Iron and Steel Company Limited (TISCO)) is anIndianmultinationalsteel-making company. It was the12th largest steel producing company in the worldin 2012, with an annualcrude steelcapacity of 23.8 million tons, and the second largest private-sector steel company in India (measured by domestic production) with an annual capacity of 9.7 million tons afterSAIL

Tata Steel has manufacturing operations in 26 countries, including Australia, China, India, the Netherlands, Singapore, Thailand and the United Kingdom, and employs around 80,500 people.Its largest plant is located inJamshedpur,Jharkhand. In 2007 Tata Steel acquired the UK-based steel maker Corus which was the largest international acquisition by an Indian company till that date.It was ranked 471st in the 2013Fortune Global 500ranking of the world's biggest corporations.It was the seventh most valuable Indian brand of 2013 as perBrand Finance.

On February 12, 2012 Tata Steel completed 100 years of steel making in India. Tata Steel has set a target of achieving an annual production capacity of 100 million tons by 2015; it is planning for capacity expansion to be balanced roughly 50:50 between Greenfield developments and acquisitions.

ONE YEAR PRICE TREND

On analyzing Tata steel over a year we observe that there is increasing trend of share prices of Tata steel. At the end of August 2013 this counter was trading around 200s but recently i.e. after a year it is trading around 600 mark. Which indicate this counter, positive performance.

JSW Steel Ltd.

JSW Steel Ltd is an Indian steel company owned by the JSW Group. JSW Steel, after merger of ISPAT steel, has become India's largest private sector steel company.JSW Steel is the largest private sector steel manufacturer in terms of installed capacity. The company offers the entire gamut of steel products - Hot Rolled, Cold Rolled, Galvanized, Galvalume, Pre-painted Galvanised, Pre-painted Galvalume, TMT Rebars, Wire Rods & Special Steel Bars, Rounds & Blooms. They have manufacturing facilities at Toranagallu in Karnataka, Vasind & Tarapur in Maharashtra and Salem in Tamil Nadu. The company is part of US $15 billion O.P.Jindal Group. JSW Steel Ltd was originally incorporated as Jindal Vijayanagar Steel Ltd on March 15, 1994. By 2025, JSW Steel is aiming to produce 40 million tons of steel annually with Greenfield integrated steel plants coming up in West Bengal and Jharkhand, while adding further capacities at the Vijayanagar and Salem plants

JSW Steel has also formed a joint venture for setting up a steel plant in Georgia. The Company has also tied up with JFE Steel Corp, Japan for manufacturing the high grade automotive steel. The Company has also acquired mining assets in Chile and USA.

ONE YEAR PRICE TREND

On short run JSW steel has shown a positive trend on share market. Although other steel counterparts were trading highly volatile but this company had a consistent positive trend.

Companys P/E ratio is also low as compared to average industry p/e ratio which makes this counter more desirable to be a part of investors portfolio.

ANALYSIS OF TOP STEEL COMPANIES

Companys name

Price

P/E

EPS

Target Price

Difference between target price and market price

Tata Steel Ltd.

540.50

14.7

36.77

656.34

115.84

JSW Steel Ltd.

1285.05

13.38

96.04

1714.31

429.26

SAIL

96.80

23.90

4.05

72.29

Jindal Steel Ltd.

329.95

19.42

16.99

303.27

Bhushan Steel Ltd.

400.50

146.05

2.74

44.08

Sector P/E

17.85

Here we can see that out of five steel company there are two companies with undervalued sector P/E ratio like Tata Steel Ltd. and JSW Steel Ltd. And with the calculated target price we can make out that it is better to purchase shares from companies like Tata Steel Ltd. and JSW Steel Ltd.

How to calculate the Earnings Per Share (EPS), Sector P/E and Long Term Price Target (LTPT)?

Earnings Per Share (EPS) = Market Price / P/E Ratio

Sector P/E = Average of P/E Ratios

Long Term Price Target (LTPT) = Sector P/E * EPS

SUGGESTION AND RECOMMENDATION

According to recent developments and its performance an investor should select the sector to invest.

Instead of relying on newspaper and news channel recommendation an investor should invest after doing thorough study of the firm.

It is recommended to increase the investments in the companies:-

STOCK

P/E RATIO

TATA STEEL LTD.

14.7

JSW STEEL LTD.

13.38

FINDINGS AND CONCLUSION

After analyzing top steel companies, Tata Steel Ltd. and JSW Steel Ltd. emerged the top performing companies in the list.

The market price of various steel companies was taken along with the P/E Ratio (profit earnings ratio).Then the EPS (earning per share) was calculated with the help of market price and P/E ratio and then the sector P/E was calculated. Finally, the target price was calculated by multiplying the values of sector P/E and EPS.

STOCK

TARGET PRICE (Rs)

RECOMMENDATION

TATA STEEL LTD.

656.34

BUY

JSW STEEL LTD.

1714.31

BUY

The chosen stocks i.e. Tata Steel Ltd. and JSW Steel Ltd. are going to perform well, with the huge potential of earnings for equity holders.

Resources

The Economic Times

www.money.rediff.com

www.bseindia.com

www.tatasteel.com

www.jsw.in

www.worldsteel.org