“Fundamental Analysis of Steel Sector Companies”

Prepared by,DhavalPatel

MBA IISEM IV

K.S.M.C.S.

Content of the ProjectSr.

No. Content

1 Objective of Study

2 Executive Study

3 Research methodology

4 Stock Analysis

5 Technical Analysis

6 Weaknesses of Technical Analysis

7 Fundamental Analysis

8An Overview of Fundamental Analyses

9Approaches of Fundamental Analysis

10Weaknesses of Fundamental Analysis

11 Steps to fundamental Analysis

12 Economics Analysis

13 GDP:

14 Per capita income:

15 Inflation:

16 Industrial production

17 Infrastructure

18 Industry Analyses:

19 Brief History

20 Development of Steel Sector

21 Production Forecasting

22 Demand of Scenario

23 SWOT Analyses

24 Company Analysis:

25 SAIL

26 TATA STEEL LIMITED

27 JINDAL STEEL

28 ESSAR STEEL LTD.

29 Findings

30 Graphical Analyses

31 Conclusion

Objectives of Study

• Undertake the Fundamental Analysis to acquire the deep knowledge of the Steel Sector.

 • To find out how the judgment is taken by the analyst

on the basis of fundamental analysis of the company.

 • To study the demand of Steel sector particularly in

land-building, commercial purposes and Real Estate.

• Investors may use fundamental analysis to determine future growth rates.

Executive Summery

• Fundamental analysis is very helpful to the investor, which

is reflected in the investment purpose. Fundamental

analysis consist of three parts.

ECONOMIC ANALYSES: Economic analysis is a task to be studied as it

affects the company’s tax, and it will effect to the revenue of the

industry as a whole.

INDUSTRY ANALYSES: Industry analysis is a challenging factor for the

research of the fundamental analysis. All the sub-factors of the industry

analysis were taken up from the secondary source to analyses the each

factor within the industry.

COMPANY ANALYSES: An approach was made to understand the existing

company and its impact on company’s market share and its

performance.

Continue. . .

• Any investor, who goes to systematic investment, he/she

would like to know, the complete scenario of the industry. It

is interesting to know how the fundamental analysis helps

to forecast the price of equity.

• All the factors are involved in this analysis are determined

and studied carefully to identify the factors in the existing

environment. The data or information collected is based on

the information published in websites of the company.

Research Methodology

• Research methodology is a way to systematically solve the research problem.

The research methodology used for finding out the solution of the research

problem is analytical research methodology and some extend descriptive

research methodology.

• Primary Data

To solve the problems on fundamental analysis on steel sector:-

– Primary data collect by discussing with my guide and other staff member of the

company

– Observation

• Secondary Data:

– Company Annual Report

– Company Internal Data

– Internet-Websites

Stock Analyses• Sometimes it becomes very difficult for investors to predict the

share price of the particular company in this very volatile market. It

raises questions in investor’s mind that,

At what price I should buy? When to sell it... hold?

• now-a-days brokers and some analyst provide some future

predictions of stocks price movements. So now investment has

become somewhat easy for investors.

How they get it?

• This is done with a Stock Analysis getting the information about

company and its price movements on stock markets and try to

predict how would behave on stock markets.

Types of Stock Analysis• The methods used to analyze securities and make

investment decisions fall into two very broad categories:

1) TECHNICAL ANALYSIS

2) FUNDAMENTAL ANALYSIS

• Here I have selected a Fundamental analysis as a subject

of project so it will be done in detail with practical

analysis of companies. And we would get only some

flavor of technical analysis and then we would

understand about fundamental analysis.

Technical Analyses• “Technical analysis is a method of evaluating securities by analyzing the

statistics generated by market activity, such as past prices and volume.

Technical analysts do not attempt to measure a security's intrinsic value,

but instead use charts and other tools to identify patterns that can suggest

future activity.”

• Some rely on chart patterns; others use technical indicators and oscillators,

and most use some combination of the two. In any case, technical analysts'

exclusive use of historical price and volume data is what separates them

from their fundamental counterparts.

• The field of technical analysis is based on three assumptions:

1. The Market discounts everything.

2.     Price moves in trends.

3.     History tends to repeat itself.

Limitation of Technical Analyses

• Analyst Bias• Open to Interpretation• Too Late• Always another Level• Trader's Remorse

Fundamental Analysis• Fundamental analysis is the examination of the underlying forces that

affect the well being of the economy, industry groups, and companies.

As with most analysis, the goal is to derive a forecast and profit from

future price movements.

– At the company level, fundamental analysis may involve

examination of financial data, management, business concept and

competition.

– At the industry level, there might be an examination of supply and

demand forces for the products offered.

– For the national economy, fundamental analysis might focus on

economic data to assess the present and future growth of the

economy.

Overview• “Fundamental analysis is the study of economic, industry, and company

conditions in an effort to determine the value of a company's stock.

• The main principle of fundamental analysis is to find profitable companies

to invest in by comparing revenues, sales, management, etc.

Fundamentals include earnings report, dividends, sales, inventories, profit

margins, P/E ratio, market share, etc.

• The basic idea is if you put a rupee into the business (in the form of buying

the stock) how much of a return can you expect. How much yield you will

likely see and / or how much growth you will experience based on the

operation, markets, competitors and costs of the business. Obviously, not

all aspects of these fundamentals can be quantified.

• The analysis of a company's fundamentals involves getting deep into its

financials, rather than day-to-day movement in its share price. Equity

researchers normally do fundamental analysis in order to calculate the

intrinsic value of a company's stock.

Approaches of Fundamental Analysis

Investors can use either a Top-down or Bottom-up approach:

• The top-down investor starts his analysis with global economics,

including both international and national economic indicators, such as

GDP growth rates, inflation, interest rates, exchange rates, productivity,

and energy prices. He narrows his search down to regional/industry

analysis of total sales, price levels, the effects of competing products,

foreign competition, and entry or exit from the industry. Only then does

he narrow his search to the best business in that area.

• The bottom-up investor starts with specific businesses, regardless of

their industry/region.

Limitations of Fundamental Study

• Time Constraints

• Industry/Company Specific

• Subjectivity

Steps to fundamental Analysis

The most common way that fundamental analysis can be done is “Three Step Process”:

Economic Analysis:-

The first step to this type of analysis includes looking at the macroeconomic situation.

This includes GDP, growth rates, inflation, interest rates, exchange rates, productivity

and energy prices.

Industry Analysis: -

The next step taken in analysis in this category is looking at the industry as a whole. This

includes total sales, price levels, competition and their effects, foreign competition as

well as any entrances or exits from the industry.

Company Analysis:-

Last in this process of studying the fundamentals includes looking at the company

individually. This includes looking at unit sales, prices, new products, earnings and any

chance of debt or equity occurring.

Economic Analyses• The purpose of analyze economic condition of the country in fundamental

analysis to asses the general economic situation both within the country

and inter nationally.

• The economy is like the tide and the various industry groups and individual

companies are like boats. When economy expands most industry groups

and companies benefits and grows. When the economy declines, most of

the sectors and companies usually suffer. The stock market does not

operate in a vacuum it is an integral part of ht whole economy of a country,

more so in a free economy that of United States and to some extent in

mixed economy like ours.

• To gain an insight into the complexities of stock market, one needs to

develop a sound economic understanding and be able to interpret the

impact of important economic indicators on stock markets.

Continue. . .

The following are some important factors which should be taken into

account while doing fundamental analysis:

• Economic Growth

• Per capita income

• Industrial Production

• Inflation

• Interest Rates

• Foreign Exchange Reserves

• Budgetary Deficit

• Tax Rates

• Infrastructure

• Political Situation

GDP• According to some experts, the share of the US in

world GDP is expected to fall (from 21 per cent to 18 per cent) and that of India GDP to rise (from 6 per cent to 11 per cent in 2025), and hence the latter will emerge as the third pole in the global economy after the US and China.

GDP Growth

4.30%

8.30%

6.20%

8.40%9.20% 9.00%

7.40%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2003 2004 2005 2006 2007 2008 2009

Years

Gro

wth

Rate

Per Capita Income

• In 2002-03 the Per Capita Income in India was Rs

19040.

• In2003-04 the Per Capita Income in India was Rs

20989.

• In2004-05   the Per Capita Income in India was Rs

23241.

• In2008-2009 the Per Capita Income in India was

Rs 37490.

Inflation

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 16.22                      

2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.97

2008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.70

2007 6.72 7.56 6.72 6.67 6.61 5.69 6.45 7.26 6.40 5.51 5.51 5.51

Industrial Production

Major Group Weight

June April-June

Variations

Over Month Over the Year Fiscal Year

2008 2007 08-09 07-08 07-08 06-07

General Index 100.00 269.10 255.30 269.10 255.30 269.70 256.40

Mining 10.50 163.20 158.60 163.20 158.60 170.20 162.60

Manufacturing 79.40 289.80 273.60 289.80 273.60 289.00 273.70

Electricity 10.20 217.10 211.70 217.10 211.70 221.80 217.50

Note: Index for June 2008 is quick estimates. Index for the Month of March and May 2008 incorporate updated Production Data.

InfrastructureINDEX OF SIX CORE INFRASTRUCTURE INDUSTRIES MAY 2009

Sector-wise growth rate (%) in production

SectorWeight inIIP (%)

May2008

May2009

Apr-May2008-09

Apr-May2009-10

Crude Oil 4.2 3.2 -4.3 2.1 -3.7

Petroleum Refinery Products

2.00 0.1 -4.3 2.1 -4.4

Coal 3.2 8.8 10.2 9.5 11.8

Electricity 10.2 2.0 3.3 1.7 5.1

Cement 2.0 3.8 11.6 5.4 11.7

Finished steel (carbon) 5.1 3.3 1.4 1.4 2.1

Overall 26.7 3.1 2.8 2.7 3.9

Industry Analyses“It is often said that a weak stock in a strong industry is preferable to a

strong stock in a weak industry.”

The followings are some important factors which should be considered in Fundamental

Analysis

• Growth: A growing industry gives room for profitability.

• Profitability: Average profitability of the industry should be attractive.

• Demand-Supply: the wider demand supply gap, the better is the industry’s fortune in

the future.

• Entry barrier

• Competition and Market share:

• Technology trends

• Government Policy

• Capacity Utilization

• Bargaining power of buyers

Brief History• The history of steel-making in India can be traced back to 400 BC

when the Greek emperors used to recruit Indian archers for their

army who used arrows tipped with steel. Many more evidences are

there of Indians’ perfect knowledge of steel-making long before

the advent of Christ. Archaeological finds in Mesopotamia and

Egypt testify to the fact that use of iron and steel was known to

mankind for more than six thousand years and that some of the

best products were made in India.

• Steel Role plays a vital role in the development of any modern

economy. The per capita consumption of steel is generally

accepted as a yardstick to measure the level of socio-economic

development and living standards of the people. As such, no

developing country can afford to ignore the steel industry.

DEVELOPMENT OF INDIAN STEEL SECTOR SINCE 1991

PRODUCTION OF FINISHED CARBON STEEL  (In million tonnes)

YearMain

ProducersSecondaryProducers

GrandTotal

% of share ofSecondary Producers

1997-98 10.44 12.93 23.37 55.32 %

1998-99 9.86 13.24 23.82 57.32 %

1999-00 11.20 15.51 26.71 58.07 %

2000-01 12.51 17.19 29.7 57.88 %

2001-02 13.05 17.58 30.63 57.40 %

2002-03 14.39 19.28 33.67 57.27 %

2003-04 15.19 21.00 36.19 58.03 %

2004-05 15.61 24.44 40.05 61.02 %

2005-06 (Prov.) 16.236 26.400 42.636 61.92 %

2006-07 17.390 32.000 49.390 64.79 %

07-08 (Apr-Aug 07) 6.901 15.600 20.501 76.09 %

Production Forecasting

Demand Scenario

37.6

212.7

268.6

280.2

382.1

468.7

648.5

0 100 200 300 400 500 600 700

India

U.K.

China

France

U.S.

Germany

J apan

Steel Consumption per capita (Kg)

As demand is very less as compare to others in India so there is a huge opportunity for the manufacturers of India to capture the more market share by increasing capacity.

SWOT ANALYSISOpportunities

• 1. Unexplored rural market

• 2. Growing domestic demand

• 3. Exports

• 4. Consolidation

Threats

• 1. China becoming net exporter

• 2. Protectionism in the West

• 3. Dumping by competitors

•  

Strengths

• 1. Availability of iron ore and coal

• 2. Low labors wage rates

• 3. Abundance of quality manpower

• 4. Mature production base

Weaknesses

• 1. Unscientific mining

• 2. Low productivity

• 3. Coking coal import dependence

• 4. Low R&D investments

• 5. High cost of debt

• 6. Inadequate infrastructure

Company Analysis• The purpose of company analysis to analyze the

financial and non-financial aspects of a company to

determine whether to buy, sells, or holds onto the

shares of a particular company.

• After determining the economic and industry

conditions, the company itself is analyzed to

determine its financial health. This is usually done

by studying the company's financial statements.

From these statements a number of useful ratios

can be calculated. These are quantitative factors.

Continue. . . Company Analyses

There are also some qualitative factors which should be considered.

• Find out as much as possible about the company and their products.

• Do they have any “core competency” or “fundamental strength” that

puts them ahead of all the other competing firms?

• What advantage do they have over their competing firms?

• Do they have a strong market presence and market share? Or do they

constantly have to employ a large part of their profits and resources in

marketing and finding new customers and fighting for market share?

So fundamental analysts use different tools and ratios to compare all sorts

of companies no matter what business they are in or what they do!

SAILYear end Mar 09 Mar 08 Mar 07 Mar 06 Mar 05

EPS(Rs) 14.95 18.24 14.54 9.44 16.06

Book value(Rs) 67.75 55.84 41.92 30.51 24.95

NPM(%) 13.40 18.116 15.71 12.28 21.29

ROCE(%) 27.61 44.03 51.28 38.03 68.77

RONW(%) 22.06 32.76 41.47 35.04 88.85

Debt/equity 0.26 0.13 0.28 0.44 0.94

P/E 6.45 10.13 7.85 8.82 3.92

Here from the above information it can be seen that the EPS, Book

value, Net Profit Margin are increased continuously till 2008 as

compared to 2006 and 2005 but it decreased in 2009. SAIL should

concentrate on PE Ratio because it has decreased in 2007. The debt-

equity ratio is increased which is not good sign. The investor of this

SAIL should take hold position for the long period to get good

dividends and good market price in future.

TATA SteelYear end Mar 09 Mar 08 Mar 07 Mar 06 Mar 05

EPS(Rs) 71.18 64.14 69.95 61.51 60.91

Book value(Rs) 331.68 298.78 240.22 176.19 127.51

NPM(%) 21.09 23.43 21.37 20.46 21.89

ROCE(%) 15.01 17.11 36.79 50.13 63.79

RONW(%) 21.10 21.52 35.62 41.70 60.02

Debt/equity 1.34 1.08 0.51 0.31 0.53

P/E 2.89 10.81 6.43 8.72 6.58

Here from the above information it can be found that the Sales, EPS,

Book value, Net Profit Ratio are increased continuously in 2009 as

compared to 2006 and 2005 but TATA should concentrate on PE Ratio

because it has decreased in 2009 tremendously. The investor of this

company should buy and hold the shares of this company for long

period because this company can give good dividend and investor

can get arbitrage profit for short period of time. These shares are for

long term investment purpose.

Jindal SteelYear end Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

EPS (Rs) 99.38 80.32 225.36 183.92 165.38

Book value (Rs) 350.16 243.98 804.35 596.97 428.05

N.P Margin (%) 19.50 22.79 18.03 19.91 21.07

P/E 2.02 4.29 10.55 10.32 6.33

ROCE (%) 23.16 24.95 21.15 22.43 32.51

RONW (%) 28.38 32.95 32.58 36.30 47.45

Debt/equity 0.91 1.03 1.45 1.34 1.16

Here from the above information, It can be found that the Sales, EPS,

Book value, PE Ratio has decreased in 2008 as compared to 2006 and

2005 but Net Profit margin of Jindal has increased in 2008 and 2009.

The debt-equity ratio is decreased which is a good sign. Hence, this

company is under control which is good sign. The current position

shows company is becoming fundamentally strong. Investment in

Jindal would give good result.

Findings

Attribute Date JSW SAIL TATA

PE ratio 12/3/2010 6.81 15.66 8.55

EPS (Rs) Mar, 09 99.38 14.95 71.18

Sales (Rs crore) Dec, 09 1,769.38 9,878.68 6,374.88

Face Value (Rs) --- 1.00 10.00 10.00

Net profit margin (%) Mar, 09 19.50 13.40 21.09

Last bonus 29/07/09 5:01 --- 1:02

Last dividend (%) 27/05/09 550 16 160

Return on average equity

Mar, 09 28.38 22.06 21.10

Comparative Ratio of Three Companies

Graphical Comparison

28.38

22.06 21.10

0

10

20

30

JSW SAIL TATA

Return on average equity

6.81

15.66

8.55

0

2

4

6

8

10

12

14

16

JSW SAIL TATA

PE ratio

550

16

160

0

200

400

600

JSW SAIL TATA

Last dividend (%)

99.38

14.95

71.18

0

20

40

60

80

100

JSW SAIL TATA

EPS (Rs)

Continue. . .

1,769.38

9,878.68

6,374.88

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

JSW SAIL TATA

Sales (Rs crore)

1.00

10.00 10.00

0.00

2.00

4.00

6.00

8.00

10.00

JSW SAIL TATA

Face Value (Rs)

19.50

13.40

21.09

0.00

5.00

10.00

15.00

20.00

25.00

JSW SAIL TATA

Net profit margin (%)

5:01

1:02

0:00

1:12

2:24

3:36

4:48

6:00

JSW SAIL TATA

Last bonus

Conclusion

• As we can see from the graphs of three companies as the initial stage of the SAIL it

were met the very low ratio due to loses and the Jindal steel was quite in struggle

stage and its gone towards the down size as year ahead but now-a-days it is the

most profitable company as it is growing very rapidly, and The Tata steel has

maintained its productivity and performance consistently. Comparative study of all

the three companies shows that Jindal Saw Ltd. is quite preferable for the selection of

the investment.

• The stock of TATA Steel should be at HOLD rating as its P/E has decreased and

earning per share had increased significantly.

•  BUY rating for the stock of Jindal as its EPS shows increase, Debt/Equity shows

decrease and Book Value had also increased.

•  The stock of SAIL should be kept at HOLD position as its Book value had increased

but the other ratios had not shown any significant movement.

Thank You