of 72
8/8/2019 Investment Opportunities in Indian Steel Sector
1/72
!
8/8/2019 Investment Opportunities in Indian Steel Sector
2/72
Preface
Projects are an indispensable part of any kind of formal education. They help us to have a
practical exposure as well as better outlook of the subject, which we are studying.
I did my summer project in Reliance Mutual Fund, Pune. My project topic was to find out
Investment Opportunities in Indian Steel Sector. This project is to study the Indian Steel Industry
and the various factors that affect its performance. The objective is to find out intrinsic value of
the selected companies from Indian Steel Industry. While investing money in any company
people consider the performance of the company. But there are various factors that affect
companys performance. Theses factors are analyzed at three levels.
1st Economic factor: - These are the factors that influence the economy and the company as well.
The effect of these factors is less on company performance.
2nd Industry factors:- These factor effects the whole industry as well as the company like-
industry growth, competition etc
3rd
Company factors: - These are the factors which are inside the company. They affect the
company most. Like- Sales, Net profit, EPS etc
I will be satisfied if the organization gets benefit from the study and the findings.
8/8/2019 Investment Opportunities in Indian Steel Sector
3/72
"
TABLE OF CONTENT
Sr. No. Content Page No.
1. Acknowledgement 5
2. Self declaration 6
3. Company Certificate 7
4. Company Profile 8
5. Project Introduction 11
6. Objective and Limitation of research 12
7. Research Methodology 13
8. World Steel Industry Overview 14
9. Indian Economic Analysis 17
10. Indian Steel Industry Analysis 22
11. Company Analysis 27
11.1 Tata Steel Limited Financial Statement Analysis
Projected Profit & Loss A/c
Intrinsic value calculation of TATA shares
33
36
37
11.2 SAIL- Financial Statement Analysis
Projected Profit & Loss A/c
Intrinsic value calculation of SAIL shares
41
44
45
8/8/2019 Investment Opportunities in Indian Steel Sector
4/72
#
11.3 Bhushan Steel Limited- Financial Statement Analysis
Projected Profit & Loss A/c
Intrinsic value calculation of Bhushan Steel shares
48
51
52
11.4 Jindal Steel & Power Limited- Financial Statement Analysis
Projected Profit & Loss A/c
Intrinsic value calculation of Jindal Steel & Power Ltd. shares
55
58
59
11.5 ISPAT Industries Limited- Financial Statement Analysis
Projected Profit & Loss A/c
Intrinsic value calculation of ISPAT Industries Ltd. shares
62
65
66
12. Finding and Conclusions 69
13. References 71
8/8/2019 Investment Opportunities in Indian Steel Sector
5/72
$
ACKNOWLEDGEMENT
!"#"# #$%$&'((")&"!''!"#(((")*!#$%*++)!"$
," "- ./# ," )# # $&!"%0 #""# #$ +"%"#
1#!-
,&'$)*'/"1"#$+*""&$""('',#',"&",!2"##$'
"%*""&!!(&'!+'"#("!",&'$#"%)#)'-
"(''0,&'$'/"1+*($""&$#$#!"#/"-33
'"# # ( 0 ( %'&)'"+ #$ $&!"% &$#!-
!#"#"&"#$!"!'!'$+/"!"+)!"%-&"%",
'*#-",#$(&'1#!,/#," ,!
"'(%'-
,&'$ ' '/ " "/ " ""* " "#/
#$ !"- --"& ( %$# + " ""*" &" " ""!'
#&""$""#""&""!"!-'('#(""&$",$(-#"%#0
+*#"#'!"&$,"/#'#""#"("!"-
8/8/2019 Investment Opportunities in Indian Steel Sector
6/72
%
Self declaration
This is to certify that the dissertation / project report entitled INVESTMENT
OPPORTUNITY IN INDIAN STEEL SECTOR with special reference to
RELIANCE MUTUAL FUND is done by me in an authentic work carried out
for the partial fulfillment of the requirement for the award of the degree of PGDM.
The matter embodied in this project work has not been submitted earlier for award
of any degree or diploma to the best of my knowledge and belief.
DEEPAK
Roll No. 9218
8/8/2019 Investment Opportunities in Indian Steel Sector
7/72
&
8/8/2019 Investment Opportunities in Indian Steel Sector
8/72
'
Company profile
Reliance Mutual Fund
Reliance Mutual Fund, a part of the Reliance - Anil Dhirubhai Ambani Group, is one of the fastest
growing mutual funds in the country.Reliance Mutual Fund (RMF) is one of Indias leading Mutual
Funds, with Average Assets Under Management (AAUM) of Rs. 1,02,179 Crores and an investor count
of over 73 Lakh folios. (AAUM and investor count as of July 2010).RMF offers investors a well-rounded
portfolio of products to meet varying investor requirements and has presence in 159 cities across the
country.It is an ISO 9001:2000 certified company, which offers innovative mutual fund products to a
wide pool of customers.
Details of Reliance Mutual Fund:
The schemes of Reliance Mutual Fund are being managed by Reliance Capital Asset
Management Ltd, which is a subsidiary of Reliance Capital Limited.
Reliance Capital Ltd holds 93.37% of the paid-up capital of the Reliance Capital Asset
Management Ltd.
Reliance Mutual Fund continues to be the largest fund house in terms of average assets with an
AAUM of Rs 1, 02,179 crore in July 2010.
Reliance Mutual Fund has over 14 years of extensive market experience, 47 schemes (as
on July 31, 2010) combined with a strong performance track record.
8/8/2019 Investment Opportunities in Indian Steel Sector
9/72
Different types of mutual fund offered by the Reliance Mutual Fund:
Equity / Growth based products- The main objective of investing in such scheme is to provide
capital appreciation over the medium to long- term range. Generally, in such schemes a major
portion of the accumulated sum is invested in equities.
Debt / Income based products- the main objective of investing in such scheme is to provide
regular and steady income to the investors of such funds. Generally, in such schemes a major
portion of the accumulated sum is invested in fixed income securities.
Sector Specific products - The main objective of investing in such funds is to gain leverage out of
the fast growing sectors. Generally, in such schemes all the sum accumulated is invested in
securities of a particular type of sector.
AMC (Assets Management Company)
AMC:- A company that invests its clients' pooled fund into securities that match its declared
financial objectives. Asset management companies provide investors with more diversification
and investing options than they would have by themselves.
Mutual funds, hedge funds and pension plans are all run by asset management companies. These
companies earn income by charging service fees to their clients.
Reliance Mutual Funds capital are managed by Reliance Capital Assets Management
Company (RCAM), which is a subsidiary of Reliance Capital Limited.
This is an '"$Public Limited Company incorporated under the Companies Act, 1956 on
February 24, 1995.RCAM is authorized to act as Investment Manager of the Mutual Fund.
8/8/2019 Investment Opportunities in Indian Steel Sector
10/72
Management pillars of reliance mutual fund
-
Board of Directors
Mr. Soumen Ghosh Mr. Kanu Doshi Mr. Manu Chadha Mr.Sushil Tripathi
Management Team
CEOMr. Sundeep Sikka
Head Equity InvestmentsMr. Madhusudan Kela
Head Fixed IncomeMr. Amitabh Mohanty
8/8/2019 Investment Opportunities in Indian Steel Sector
11/72
Project Introduction
Investment Opportunities In Indian Steel Sector:-In todays time people are more aware about
making good use of there money, specially saving. So they search the available options and invest in the
one, that is suitable to there requirement. Now the share market awareness is also increasing. So many
investors invest direct in the market. Many other options are there like:- Mutual Funds, Ulips ,Insurances.
So these companies also invest the money in the market. Before investment they should know the future
prospects, where they are going to invest. This project is to find out the investing opportunities in the
Indian steel sector for the investors. If somebody is going to invest in this area, this project can be a help
to that one (Person, Investment institute).
This project requires financial analysis of a Indian steel companies, opportunities or
threats to them in the economy. The competitive and management advantages of a company. Historical
and present data is used in this analysis, called as Fundamental Analysis, ultimate goal to make financial
forecast. So the basic analysis which is done in this project is done is Fundamental Analysis to find the
Investment opportunities in Indian steel sector. This analysis provides a pool of information to the
investors based on that he has to decide whether to invest or withdraw money from earlier investment.
8/8/2019 Investment Opportunities in Indian Steel Sector
12/72
Objective of research
Every research has its objective. So without objectives it is useless. The objective of my research is
following:-
To study the steel industry.
To find out the intrinsic value of selected five companies of the Indian steel sector.
Limitations
1 The research is based on historical data.
2Future predication is based on various external factors so the projection may not be true.
3 Indian steel sectors have many big companies, so to analyze every company is very difficult so I have
selected five companies.
4 As research is based on secondary data, the data may not provide right information. It may be
manipulated.
8/8/2019 Investment Opportunities in Indian Steel Sector
13/72
"
Research Methodology
Collection of data:- Secondary data is used in this research. The data is collected from internet,
newspaper as well as journals. The secondary data include mainly Balance Sheet and Profit & Loss A/c of
a company, various information related to the economy and industry.
Analysis of data: -$+#"' analysis is used to find out the results. It includes three analyses-
1 Economy analysis: - This is about to analyze all the trends in the Indian economy. Many economic
factors such as income level, demographic factors that can affect economy are taken to analyze.
2 Industry analysis: - In industry analysis the recent trends and many factors such asindustry growth,
competition level, demand and supply level etc. that can affect working in the industry are analyzed.
3 Company analysis: - in company analysis the financial statements are used for analysis. Ratio analysis
is used as a tool to analyze the company financial and fundamental position. Ratio includes Liquidity
ratio, Profitability ratio, Solvency ratio and Efficiency ratios.
8/8/2019 Investment Opportunities in Indian Steel Sector
14/72
#
World Steel Industry Overview
The world steel industry recorded a high growth rate in production as well as in consumption
over the past few years. The main reason is the soaring steel demand in automobile and in
construction sector before the recession and in recovery. The Asia-Pacific Region- especially
China and India is witnessing higher production and consumption of steel. That is due to per
capita consumption of steel in these countries reaching US/ Europe level. Chinas share in steel
production is larger than combined US, Europe, Russia and Japan. India follows China.
Production of steel in 2009-10:-
Total world production was 1,226.5 mmt in 2009, down from 1,329.0 mmt in 2008.
During 2000-2007 steel production grow by 59% from 843 million tons to 1346 million tons. But
in the recession during 2007-2009 its production reduced by 8.9% from 1346 million tons to
1226 million tons. But as the recovery goes on from recession there are expectations for growth
in the production as well as in demand of steel.
According to World Steel, the steel demand in US is
expected to increase by 26.5% in 2010, which was down 41.6% in 2009. China is expected to
remain largest consumer of steel in the world with 6.7% increase to579 million tons in 2010,
consuming around 48.4% in 2009. World steel forecasts that apparent steel use will increase by
10.7% to 1,241 mmt in 2010 after contracting by -6.7% in 2009and Global steel demand is
expected to improve further 5.3% to 1306 million tons in 2011, while 6.7% decline in 2009.
Indias steel demand maintained stable growth during the crisis and is expected to grow by
13.9% and 13.7% in 2010 and 2011 respectively, after 7.7% in 2009. In 2011, Indias apparent
steel use will reach 71.6 mmt.
8/8/2019 Investment Opportunities in Indian Steel Sector
15/72
$
Top 5 steel producing countries in 2009:-
1. China 567.8 mmt
2. Japan 87.5 mmt
3. India 62.8 mmt
4. Russia 60.0 mmt
5. United States 58.2 mmt.
The largest five world steel producing companies in 2009:-
1 ArcelorMittal 77.5 mmt
2. Baosteel 31.3 mmt
3. POSCO 31.1 mmt
4. Nippon Steel 26.5 mmt
5. JFE 25.8 mmt
8/8/2019 Investment Opportunities in Indian Steel Sector
16/72
%
Short range outlook for apparent steel use, finished steel (2009-2011)
Regions
ASU, mmt Growth Rates, %
2009 (e) 2010 (f) 2011 (f) 2009 (e) 2010 (f) 2011 (f)
European Union (27) 118.4 134.6 145.2 -35.2% 13.7% 7.9%
Other Europe 23.9 27.2 30.4 -12.5% 13.5% 11.9%
C.I.S. 35.8 39.8 43.0 -28.2% 11.0% 8.0%
N.A.F.T.A. 80.9 99.9 107.1 -37.4% 23.5% 7.2%
Central & South America 33.6 40.4 43.1 -24.1% 20.0% 6.7%
Africa 26.4 28.7 31.3 9.6% 8.6% 9.3%
Middle East 40.7 44.7 48.4 -8.0% 10.0% 8.2%
Asia & Oceania 761.5 825.7 857.7 8.7% 8.4% 3.9%
World 1,121.2 1,240.9 1,306.2 -6.7% 10.7% 5.3%
China 542.4 578.7 594.9 24.8% 6.7% 2.8%
BRIC 640.9 692.0 720.7 17.5% 8.0% 4.1%
MENA 57.5 62.9 68.2 0.8% 9.5% 8.4%
World excl. China 578.8 662.2 711.3 -24.5% 14.4% 7.4%
World excl. BRIC 480.3 548.9 585.6 -26.8% 14.3% 6.7%
e = Actual, f = Forecasted
8/8/2019 Investment Opportunities in Indian Steel Sector
17/72
&
Indian Economy Analysis
The Indian Economy is Eleventh largest economy in the world by nominal value and fourth
largest in purchasing power. Our GDP is worth $3.526 trillion. Our GDP is divided in three main
sectors - Service sector, Industry sector and Agricultural sector. Service sector contributes
62.5% to the GDP while industry sectors contribution is around 20%. Remaining 17.5%
contribution is done by Agriculture sector. Economy health indicators-
GDP growth:- The fiscal year 2009-10 began as a difficult one. There was a significant
slowdown in the growth rate in the second half of 2008-09, following the financial crisis that
began in the industrialized nations in 2007 and spread to across the world. The GDP growth rate
in 2008-09 was 6.7% with growth in last two quarters around 6%. But the real turnaround came
in the second quarter of 2009-10 when economy grow with 7-9% and the overall growth in
2009-10 fiscal was 7.4% more than expectation of 7.2%. Industrial sector grow with 8.2% and
service sector grow with 8.7% in 2009-10. Indian economy is the second fastest growing
economy after China.
Per capita income and expenditure:-
Income Per capita steel
consumption
Rs (%)
Growth
Kg
2004-05
2005-06
29,745
32,012 7.6
36.5
39.5
2007-08
2008-09
2009-10
37,328
38,695
40745
8.1
3.7
5.3
49.4
47.0
8/8/2019 Investment Opportunities in Indian Steel Sector
18/72
'
Population of India:- India occupies 2.4% of worlds land area. But have 17.5% of
worlds population. India is the second most populous country in the world and is projected to be
largest populated country in the world by 2025 surpassing China. Current population level is
1.15 billion people and growth rate is 1.55%. Indias population is growing so fast that it creates
new opportunities and demand. India has the highest number of youth in the world. It shows that
we have a large number of people earning for there family.
Age structure:
014 years: 30.8%, male: 188,208,196, female: 171,356,024
1564 years: 64.3%, male: 386,432,921, female: 364,215,759
65+ years: 4.9%, male: 27,258,259, female: 30,031,289
Population Projections (in millions)
Year Under 15 1564 65+ Total
2000 361 604 45 1010
2005 368 673 51 1093
2010 370 747 58 1175
2015 372 819 65 1256
2020 373 882 76 1331
Projections according to CSO
8/8/2019 Investment Opportunities in Indian Steel Sector
19/72
8/8/2019 Investment Opportunities in Indian Steel Sector
20/72
In FY 08, Construction sector contributed about 8.5% to the countrys GDP. Over past 3 years,
construction as a percentage of GDP has increased from 8.0% in FY 06 to 8.5% in FY 08. The 2010
Commonwealth Games in New Delhi throws a mega opportunities for building material companies,
construction equipments & technologies companies for this year. India has a large and growing middle
class population of 300 mn people, out of which a large section is need on new houses. So all these
factors are good for the infrastructure sector.
Indian Automobile sector:- The Automobile industry in India is the seventh largest in the world
with an annual production of over 2.6 million units in 2009. In 2009, India emerged as Asia's fourth
largest exporter of automobiles, behind Japan, South Korea and Thailand. India has emerged as one of the
Worlds largest manufacturers of small cars. According toNew York Times, India's strong engineering
base and expertise in the manufacturing of low-cost, fuel-efficient cars has resulted in the expansion of
manufacturing facilities of several automobile companies like Hyundai Motors, Nissan, Toyota,
Volkswagen and Suzuki. So the good growth in automobile sector is helpful to the steel industry.
8/8/2019 Investment Opportunities in Indian Steel Sector
21/72
()*)+,-./0+1/0)*
Indian economy
Year GDP-
2003 4.3
2004 8.3
2005 6.2
2006 8.4
2007 9.2
2008 9.0
2009 7.4
2010 6.5
2012 8.6*
2014 9.5*
*Estimated by trend analysis.
Indian economy is also expected to grow at a good pace.
8/8/2019 Investment Opportunities in Indian Steel Sector
22/72
Indian Steel Industry Analysis
Indias economic growth is contingent upon the growth of steel industry of India. Consumption
of steel is taken as the indicator of economic development. While steel continues to have a
stronghold in traditional sectors such as construction, housing, ground transporting specially in
engineering industries such as power generation, petrochemical and fertilizer etc. Steel industry
has been moving from strength to strength. India has emerged the third largest producer of steel
in the world and likely to become second largest producer of steel by 2015-16.
In 2009-10, steel production was 60 million tones that is expected to double to 124
million tones by 2012. The ministry of steel projected for the next five year the demand of steel
will grow at annual growth rate of 10%. The steel consumption rose 8% in the year ended at
March 2010. The steel consumption increase to 56.3 million tones in 2009-10 compared to 52.3
to previous year.
Govt. Policy For Steel Industry:- In 1991 reforms govt. change its policy to encourage
the steel production in the country and power up the growth of the economy and development of
the country. In new policy steel industry was included in the list of High Priority industries.
Price and distribution of steel were deregulated from January 1992. Import and export of iron
and steel was freely allowed. Foreign equity investment limit is increased up to 74%.
In 2005 Govt. formulated a National Steel Policy ( NSP ). This policy is formulated with a view
to accelerate the growth of steel industry and attain the vision of India becoming a developed
country by 2020.
8/8/2019 Investment Opportunities in Indian Steel Sector
23/72
"
Steel Industry Growth:-
Steel production grew at 3.18% in 2009-10 compared to 2008-09. Trends of the
steel production are following.
Year Production Growth
2000-01 29.7 ----
2001-02 30.63 3.13%
2002-03 33.67 9.92%
2003-04 36.19 7.48%
2004-05 40.05 10.66%
2005-06 42.63 6.44%
2006-07 55.16 29.39%
2007-08 58.23 5.56%
2008-09 63.44 8.94%
2009-10 65.46 3.18%
8/8/2019 Investment Opportunities in Indian Steel Sector
24/72
#
Consumption of Steel in India:-
The consumption for the last ten years is given below.
Apparent Consumption of Finished Steel
2000-2001 26.87
2001-2002 27.350 (3.1%)
2002-2003 28.897 (5.32%)
2003-2004 31.169 (7.88%)
2004-2005 34.389 (10.33%)
2005-2006 38.151 (10.9%)
2006-2007 49.777 (30.47%)
2007-2008 52.125 (4.7%)
2008-2009 52.351(0.4%)
2009-2010
(Prov.)
56.475 (7.9%)
8/8/2019 Investment Opportunities in Indian Steel Sector
25/72
$
The increase in the consumption is due to the increasing demand from infrastructure and
automobile sector. As the economy is on recovery and both these sector are recovering from
effect of recession so the demand is expected to increase more, so the consumption also.
Raw material & inputs for steel production:-
Key raw material inputs needed in steel making include iron ore, coal,
limestone and recycled steel. Two main steel producing routes and their inputs are:
o The integrated steel making route, based on the Blast Furnace (BF) and Basic Oxygen
Furnace (BOF), uses raw material including iron ore, coal, limestone and recycled steel.
On average this route uses 1725 kg of iron ore, 645 kg of coal, 150 kg of limestone and
138 kg of recycled steel to produce one tone of crude steel.
o The Electric Arc Furnace (EAF) route, based on the EAF, uses primarily recycled steel or
Direct Reduced Iron (DRI). On avg. it uses 1050 kg of recycled steel, 65 kg of coal and
43 kg of limestone to produce one tone of crude steel.
8/8/2019 Investment Opportunities in Indian Steel Sector
26/72
%
Indian Steel Industry Life Cycle Stage:-
Year Sales# Growth
2005 54211 -----
2006 53746 -0.8
2007 66662 24
2008 77524 16.3
2009 89075 14.9
2010* 96295.4 8.1
2011* 108914 13.1
2012* 118676.7 8.96
2013* 128740.3 8.47
2014* 138853.9 7.85
Various ups and downs happened in the Indian steel industry during last years. Based on the
graph we can say that our industry is presently in maturity stage.
*indicates that data is based on trend analysis.
#is the sale of the industry. This sale is the total of the five companys sale which is selected for financial analysis.
2=
6
=
96
9=
56
5=
;6
566< 566> 566? 5696 5695 569< 569>
23)4/5
,"
8/8/2019 Investment Opportunities in Indian Steel Sector
27/72
&
Company Analysis
Following companies would be analyzed from Indian Steel Sector.
1 Tata Steel
2 SAIL
3 Bhusan Steel
4 Jindal Steel
5 Ispat Industries
These selection criteria for selection of companies include following bases:-
1 Net Profit
2 Total Assets
3 EPS
4 Sales
5 Working Capital
Final accounts of these companies are analyzed with the help of RATIO ANALYSIS. Ratio Analysis is a
tool which is used to evaluate interpretation and provide information to the management about the
business. It takes the past performance of the business and finds the areas where improvement is required.
Theses ratios include:-
8/8/2019 Investment Opportunities in Indian Steel Sector
28/72
'
1Liquidity ratio: - Liquidity ratio shows the short term financial position of the company. It checks
ability of the company to meet the short term obligations. Whether the company has enough funds for
payment of the short term liabilities or the liabilities that can occurs during next year.
Current ratio: -It is calculated by the following formula:-
Current Ratio = Current Assets/ Current Liabilities
This ratio indicates the available current assets for the current liabilities. High current ratio shows more
money available for the current liability. A company having high current ratio is safe for investment. Acurrent ratio of 2:1 is considered satisfactory-But a highratio is also indicates that the funds are not
utilized properly.
2 Profitability ratios: -Various stakeholders are interested in this ratio. Because these ratios show the
profit earning capacity of the company. This ratio is calculated to know the profitability of the company.
o Gross Profit ratio:- The formula is-
Gross Profit Ratio= Gross Profit*100/Sales
A high ratio of gross profit is a sign of good management0it implies the cost of production is
relatively low. It also shows that may be prices are high or the cost of production is low.
o Net Profit ratio:-This ratio is the relation between net profit and sales.
Net Profit ratio= Net Profit*100/Sales
It indicates managements ability to operate business unit with sufficient success to recover
revenues and cost of borrowed funds. A high net profit ratio is good for a company because it
shows that company can survive if the prices would come down.
8/8/2019 Investment Opportunities in Indian Steel Sector
29/72
o Return on Assets:- This ratio is-
Return on Assets = Net Profit after Tax*100/Total Tangible Assets
The assets are purchased by this money invested by the investors. So the return on this
money also important if this ratio is higher it means the money is well utilized by the
management.
o Return on Capital Employed: - It provides a test of profitability related to the sources of
long term funds. Its comparison with related firms ratios throws light on how efficiently the long
term funds of owners and lenders are being used
Return on Capital Employed = EBIT*100/Capital Employed
o E P S: - It measures the profits available to the share holders on a per share basis. It measures the
profitability firm the point of view of owners.
E P S = Net Profit Available to Equity Shareholders/No. of Equity Shares
o Dividend per Share(D P S):- This ratio is the relation between dividend paid and no. of
shares.
D P S = Dividend Paid/ No. of Equity Shares
o Dividend Payout Ratio: - It is known as the payout ratio .It measures the relationship between
the earnings belonging to the ordinary shareholders and the dividend paid to them.
Dividend Payout Ratio = D P S*100/E P S
3 Activity ratios:-
o Working Capital Turnover ratio:- This ratio indicates how efficiently the working capital
has used in the production of the goods and services.
Working Capital Turnover ratio = Net Sales/Working Capital
8/8/2019 Investment Opportunities in Indian Steel Sector
30/72
"
o Total Assets Turnover ratio: - This ratio indicates the efficient use of total assets in these
goods production.
Total Assets Turnover ratio = Net Sales/Total Tangible Assets.
4 Leverage ratios:-
o Debt- Equity ratio:- It show s relationship between borrowed funds and owners capital. It is
the ratio of the amount invested by outsiders to the amount invested by the owners of the
business.
Debt equity ratio = Total debts / Shareholders equity
A high ratio shows large share of financing by the creditors of the firm, a low ratio shows a
smaller claim of creditors. It indicates the margin of safety for creditors.
o Preference Dividend Coverage ratio:- It measure s the ability of the firm to pay the
dividends on the preference shares.
Pr.Dividend Coverage Ratio = EAT / Preference Dividend
It reveals the safety margin available to the preference shareholders. As the rule, the higher the
coverage, the better it is from their point of view.
Interest Coverage ratio: - This measures the debt servicing capacity of the firm as fixed
interest on long term loan is concerned.
Interest Coverage Ratio = EBIT / Interest
8/8/2019 Investment Opportunities in Indian Steel Sector
31/72
"
From lenders view the larger the coverage, the greater is the ability of the firm to handle fixed charge
liabilities and more assured payments of interest. Lower the ratio shows the firm is using excessive debt
and then though is unable to give assured.
While calculating the various ratios some assumptions are taken into consideration. The various
assumptions are following-
Operating profit is considered as net sales of the company.
Financial expenses are considered as interest paid on Debts.
Preparation of Projected Profit & Loss A/c:-
Projected means forecasted. On the basis of the last five years
information next five years projection is done. For projection Compounded Annual Growth Rate (CAGR)
is calculated. The formula of CAGR is following:-
CAGR = Ending amount. Initial amount1/n -1
n= No. of years.
For making the projection various assumptions are taken. The assumptions are following
In first two years the companies are assumed to grow at the CAGR.
In next two years the economic growth rate is also adjusted in the CAGR. The CAGR is increased
by 9%, which is the Economic growth rate projection.
For last two years Economic growth rate (9.5%) is adjusted in the previous growth rate of
company and next two years projection is done on that rate.
Depreciation and Tax rate are taken in approximate figures of the last years.
8/8/2019 Investment Opportunities in Indian Steel Sector
32/72
"
Calculation of intrinsic value:-
Intrinsic value is the value of a security, justified by factors such as assets, dividends,
earnings, and management quality. Intrinsic value is at the core of fundamental analysis
since it is used in an attempt to calculate the value for an individual stock and then
compare it with the market price-The intrinsic value is what an asset is actually worth.
If investment period is 5 years than first the expected dividend has to be calculated.
1 Dn= (EPSn*D.P.R.)
EPS = Earning per Share.
D.P.R. = Dividend Payout Ratio
2 Intrinsic value = D1/ (1+Ke/100)1 + D2/ (1+Ke/100)
2 + D3/ (1+Ke/100)3 +Dn/ (1+Ke/100)
n
Ke= Cost of Capital
n = No. of Years
3 Expected Market Price = EPSn*Avg. P/E ratio
n= No. of Year.
4 Ke calculation= Rf + (Rm - Rf)
Rf = Risk free rate of return,
= beta of the company.
Rm= return from market.
Some assumptions taken during the calculation:-
1 Risk free return is assumed at 6%.
2 Dividend Payout Ratio is taken as the Avg. of the last five years.
3 Return of the market is assumed at 12%.
8/8/2019 Investment Opportunities in Indian Steel Sector
33/72
""
Tata Steel Limited
Profit & Loss a/c of Tata Steel Limited
Rs Crore
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
IncomeOperating income 24,348.32 19,654.41 17,452.66 15,132.09 14,489.70
ExpensesMaterial consumed 8,279.44 6,024.80 5,679.95 4,661.53 4,288.88
Manufacturing expenses 3,349.96 2,693.73 2,589.24 2,364.40 2,219.02
Personnel expenses 2,305.81 1,589.77 1,454.83 1,351.51 1,291.00
Selling expenses 61.49 52.53 64.71 80.75 86.18Administrative expenses 1,518.83 1,224.54 986.20 902.30 853.42
Expenses capitalized -343.65 -175.50 -236.02 -112.62 -204.82
Cost of sales 15,171.88 11,409.87 10,538.91 9,247.87 8,533.68
Operating profit 9,176.44 8,244.54 6,913.75 5,884.22 5,956.02
Other recurring income 305.36 347.28 485.14 256.95 156.55
Adjusted PBDIT 9,481.80 8,591.82 7,398.89 6,141.17 6,112.57
Financial expenses 1,489.50 929.03 251.25 168.44 228.80
Depreciation 973.40 834.61 819.29 775.10 618.78
Other write offs - - - - -
Adjusted PBT 7,018.90 6,828.18 6,328.35 5,197.63 5,264.99
Tax charges 2,114.87 2,380.28 2,040.47 1,734.38 1,823.82Adjusted PAT 4,904.03 4,447.90 4,287.88 3,463.25 3,441.17
Non recurring items 297.71 239.13 -123.02 -4.37 -47.80
Other non cash adjustments - - 57.29 47.50 80.79
Reported net profit 5,201.74 4,687.03 4,222.15 3,506.38 3,474.16
Earnings before appropriation 11,589.20 9,281.01 7,198.31 5,296.59 4,111.58
Equity dividend 1,168.95 1,168.93 943.91 719.51 719.51
Preference dividend 109.45 22.19 - - -
Dividend tax 214.10 202.43 160.42 100.92 101.86
Retained earnings 10,096.70 7,887.46 6,093.98 4,476.16 3,290.21
8/8/2019 Investment Opportunities in Indian Steel Sector
34/72
"#
Balance Sheet of Tata Steel Limited
Rs Crore
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Sources of fundsOwner's fund
Equity share capital 730.79 730.78 580.67 553.67 553.67
Share application money - - 147.06 - -
Preference share capital 5,472.66 5,472.52 - - -
Reserves & surplus 23,501.15 21,097.43 13,368.42 9,201.63 6,506.25
Loan fundsSecured loans 3,913.05 3,520.58 3,758.92 2,191.74 2,468.18
Unsecured loans 23,033.13 14,501.11 5,886.41 324.41 271.52
Total 56,650.78 45,322.42 23,741.48 12,271.45 9,799.62Uses of fundsFixed assets
Gross block 20,057.01 16,479.59 16,029.49 15,407.17 13,085.07
Less : revaluation reserve - - - - -
Less : accumulated depreciation 9,062.47 8,223.48 7,486.37 6,699.85 5,845.49
Net block 10,994.54 8,256.11 8,543.12 8,707.32 7,239.58
Capital work-in-progress 3,487.68 4,367.45 2,497.44 1,157.73 1,872.66
Investments 42,371.78 4,103.19 6,106.18 4,069.96 2,432.65
Net current assetsCurrent assets, loans & advances 11,591.66 38,196.34 14,671.91 4,997.00 4,935.90
Less : current liabilities &provisions
11,899.95 9,755.78 8,279.70 6,913.83 6,895.99
Total net current assets -308.29 28,440.56 6,392.21 -1,916.83 -1,960.09
Miscellaneous expenses not written 105.07 155.11 202.53 253.27 214.82
Total 56,650.78 45,322.42 23,741.48 12,271.45 9,799.62
Notes:Book value of unquotedinvestments
41,665.63 3,790.47 5,793.46 3,477.38 2,119.75
Market value of quoted investments 1,491.89 3,260.65 2,979.00 4,079.52 1,952.43
Contingent liabilities 12,188.55 9,250.08 7,185.93 3,872.34 2,983.05
Number of equity sharesoutstanding (Lacs.)
7305.92 7305.84 5804.73 5534.73 5534.73
8/8/2019 Investment Opportunities in Indian Steel Sector
35/72
"$
Various Ratios of Tata Steel Limited
Ratios/Years 2008-09 2007-08 2006-07 2005-06 2004-05
1 Current ratio 0.97 3.91 1.77 0.72 0.72
2 Gross Profit ratio 33.69% 37.70% 34.91% 33.76% 36.83%
3 Net Profit ratio 21.36% 23.84% 24.19% 23.17% 23.98%
4 Return on Assets 7.61% 8.53% 13.26% 18.52% 21.08%
5 Return on Capital Employed 12.39% 15.06% 26.66% 42.26% 53.73%
6 E. P. S. 69.70 63.85 72.74 63.35 62.77
7 D. P. S. 16.00 16.00 15.50 13.00 13.00
8 Dividend payout ratio 22.96% 25.05% 21.31% 20.52% 20.71%
9 Working Capital Turnover ratio --------- 0.61 3.37 ---------- ---------
10 Total Assets Turnover ratio 0.35 0.35 0.54 0.79 1.48
11 Debt-Equity ratio 1.31% 1.07% 0.67% 0.25% 0.37%
12Pr. Dividend Coverage ratio 44.81 200.45 ------- ------- -------
13 Interest Coverage ratio 5.71 8.34 26.18 31.85 24
14 P/E ratio 3.28 11.58 6.06 8.4 6.9
8/8/2019 Investment Opportunities in Indian Steel Sector
36/72
"%
Projected Profit & Loss A/c of TATA Steel Limited
Mar10 Mar11 Mar12 Mar13 Mar1IncomeOperating income 27,720.56 31,559.86 36,325.40 41,810.54 48,730.18
ExpensesMaterial consumed 9,757.32 11,499.00 13,735.60 16,407.17 19,900.25Manufacturingexpenses 3,711.76 4,112.63 4,597.90 5,425.52 6,126.49Personnel expenses 2,665.52 3,081.34 3,605.10 4,217.96 5,002.50Selling expenses 56.52 51.94 48.10 44.54 41.55Administrativeexpenses 1,754.25 2,026.12 2,368.53 2,768.81 3,281.03
Expenses capitalized -391.11 -445.12 -512.30 -589.65 -686.94Cost of sales 17,523.52 20,239.67 23,660.17 27,658.73 32,775.59Operating profit 10,197.04 11,320.19 12,665.23 14,151.81 15,954.59Other recurringincome 360.94 426.63 511.10 612.29 745.03Adjusted PBDIT 10,557.98 10,893.56 12,154.13 13,539.52 15,209.56Financial expenses 1,727.37 2,003.23 2,351.79 2,784.48 3,313.53Depreciation 948.49 993.3 1045.57 1095.71 1154.29Other write offs ------ ------Adjusted PBT 7,882.12 7,897.03 8,756.77 9,659.33 10,741.74
Tax charges 2,624.47 2,629.71 2,916.00 3,216.55 3,576.99Adjusted PAT 5,257.65 5,267.32 5,840.00 6,442.78 7,164.75Non recurring items 488.12 800.32 1,358.22 2,305.03 4,064.45Other non cashadjustments 0.00 0.00 0.00 0.00 0.00Reported net profit 5,745.77 6,067.64 7,198.22 8,747.81 11,229.20EPS* :?->-
8/8/2019 Investment Opportunities in Indian Steel Sector
37/72
"&
Intrinsic value of shares of Tata steel limited:-
Year EPS D.P.R Expected
Dividend
Cost of
Capital
d/(1+Ke/100)
201078.64
0.22 17.3 16.2% 14.88
201172.28
0.22 15.916.2% 11.77
201285.74
0.22 18.8616.2% 12.02
201390.69
0.22 19.9516.2% 10.94
2014116.42
0.22 26.5116.2% 12.51
=62.12
Now Expected market price in 2014=EPS (in 2014)*Avg. P/E ratio
= 116.72*7.2=840.38Rs.
Ke = Rf + (Rm - Rf)
= 6%+1.7(12%-6%) = 6%+1.7*6% =6%+10.2% =16.2%
Intrinsic value= 62.12+840.38/ (1+Ke/100)5
=62.82+396.84=459.66
8/8/2019 Investment Opportunities in Indian Steel Sector
38/72
"'
Interpretation
1 Current ratio: - There are many changes in the current ratio during last five years. In 2004-05 and
2005-06 it was 0.72. In 2006-07 it increased to 1.77 and in 2007-08 was 3.91. But in 2008-09 it also
decreased to 0.97. 2:1 is considered a satisfactory ratio. But the ratio is very low to this. So the short term
payment ability is not satisfactory of the company.
2 Gross Profit ratio: - Gross Profit ratio is in the range of 33-36% for the last five years. This is healthy
percentage of G.P. The G.P. is good though the sale is increasing of the company. The company have
good control on its cost.
3 Net Profit ratio: - Like Gross Profit the Net Profit is also moving in a short range of 21-23%. So the
company is earning and maintaining good net profit. This is good for the company.
4 Return on Assets: - The Return on Assets has decreased from 21% to 7.61% from 2004-05 to 2008-09.
Though the sale of the company has increased but the assets have increased more than sale. And the
utilization of assets is decreasing year on year which is not good for the company.
5 Return on Capital Employed: - This ratio indicates how efficiently the long term funds are being used in
the business. Return on Capital Employed has drastically in the last 5 years from 53% to 12%. The funds
have also increased 7 times that is the main reason for decrease in return. The extra capital is not used so
effectively that 5 years ago. Company should pay attention towards this. It is good until the company is
getting returns more than the capital charges.
6 Earning Per Share: - This shows the amount available to equity shareholders. The E P S is in the range
of 62-70%. In last year it was 69% more than the last year. This is satisfactory for the company as well as
investors.
8/8/2019 Investment Opportunities in Indian Steel Sector
39/72
"
7 Dividend Per Share (D P S):- This is the dividend paid to the customers. The dividend has increased
form 12% to 16% in the last 5 years. It shows that the company is paying constant returns to the investors,
which is satisfactory.
8 Dividend Payout ratio: - This ratio shows the payment made to the shareholders out of the total amount
belong to them. The Dividend Payout ratio is moving in the range of 20-25%. But it is going with a near
constant rate for the last 5 years. The dividend paid % is less but it is nearly constant. That is good.
9 Working Capital Turnover ratio: - this ratio shows the use of working capital in production of goods
and services. But the working capital condition of the company is not good. There are various changes in
the working capital in last 5 years. It is positive in two years but negative in 3 years. So working capital
condition is not satisfactory of the company.
10 Total Assets Turnover Ratio: - This ratio shows the efficient use of assets in production. The ratio is
decreasing in the last 5 years. And at the and of 2008-09 it was 0.35 from 1.48% in 2004-05. The sale has
increased to 1.7 times but the assets are also increased up to 6 times. Thats why the assets could not be
utilized efficiently.
11 Debt- Equity ratio: - Debt equity ratio is the relation between debt and equity. In 2004-05 it was 0.37%
which increased to 1.31% in 2008-09. It shows that the company is able to get funds but this ratio is not
satisfactory because it creates more fixed payment liability on company. So the risk increases if sometime
company is not able to pay interest than it would increase the interest burden also on the company.
12 Preferential Dividend Coverage ratio: - This ratio shows the companys ability to pay preferential
dividend. This ratio is available for only two years. As per the ratio it is 44.81 in 2008-09 which is good
but there is a sharp decrease in this ratio from previous year in which it was 200.45.but the inconsistency
in the payment of dividend is a worry.
8/8/2019 Investment Opportunities in Indian Steel Sector
40/72
#
13 Interest Coverage ratio: - This ratio shows the ability to pay the interest on its fixed rate liabilities.
This ratio has decreased to 5.71 from 24 in last 5 years, which is not good but still the ratio is satisfactory.
Intrinsic value:-
Market price on 24 Aug 2010=521
Intrinsic vale= 459.66
Now Intrinsic Value < Market Price
So the share can be sold.
8/8/2019 Investment Opportunities in Indian Steel Sector
41/72
#
Steel Authority of India Limited(SAIL)
Profit & Loss a/c of SAIL
Rs Crore
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Income
Operating income 43,798.58 39,958.67 34,328.77 28,200.48 28,714.30
Expenses
Material consumed 22,042.58 16,821.39 15,963.13 13,903.23 11,155.33
Manufacturing expenses 3,762.77 3,317.74 2,925.43 2,793.45 2,427.11
Personnel expenses 8,401.73 7,919.28 5,087.76 4,156.97 3,811.75Selling expenses 935.68 1,143.90 1,066.73 1,108.12 971.78
Administrative expenses 1,644.78 1,321.44 1,064.29 1,035.99 780.67
Expenses capitalized -1,930.40 -1,832.22 -1,423.08 -1,352.05 -921.71
Cost of sales 34,857.14 28,691.53 24,684.26 21,645.71 18,224.93
Operating profit 8,941.44 11,267.14 9,644.51 6,554.77 10,489.37
Other recurring income 2,279.89 1,539.69 1,354.96 892.30 676.55
Adjusted PBDIT 11,221.33 12,806.83 10,999.47 7,447.07 11,165.92
Financial expenses 253.24 250.94 332.13 467.76 605.05
Depreciation 1,285.12 1,235.48 1,211.48 1,207.30 1,126.95
Other write offs 128.02 75.49 128.59 181.44 184.89
Adjusted PBT 9,554.95 11,244.92 9,327.27 5,590.57 9,249.03
Tax charges 3,284.28 3,934.65 3,253.80 1,694.36 2,592.37
Adjusted PAT 6,270.67 7,310.27 6,073.47 3,896.21 6,656.66
Non recurring items -277.12 161.90 53.75 45.64 -14.35
Other non cash adjustments 181.26 64.61 60.57 71.12 174.66
Reported net profit 6,174.81 7,536.78 6,187.79 4,012.97 6,816.97
Earnings before appropriation 22,052.47 18,348.43 12,886.63 7,861.47 6,839.66
Equity dividend 1,073.90 1,528.25 1,280.42 826.08 1,363.03
Preference dividend - - - - -Dividend tax 181.26 258.91 197.98 115.86 185.24
Retained earnings 20,797.31 16,561.27 11,408.23 6,919.53 5,291.39
8/8/2019 Investment Opportunities in Indian Steel Sector
42/72
#
Balance Sheet of SAIL
Rs Crore
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Sources of funds
Owner's fund
Equity share capital 4,130.40 4,130.40 4,130.40 4,130.40 4,130.40
Share application money - - - - -
Preference share capital - - - - -
Reserves & surplus 23,853.70 18,933.17 13,182.75 8,471.01 6,176.25
Loan funds
Secured loans 1,473.60 925.31 1,556.39 1,122.16 1,603.98
Unsecured loans 6,065.19 2,119.93 2,624.13 3,175.46 4,165.81
Total 35,522.89 26,108.81 21,493.67 16,899.03 16,076.44
Uses of funds
Fixed assets
Gross block 32,728.69 30,922.73 29,912.71 29,360.46 28,043.48
Less : revaluation reserve - - - - -
Less : accumulated depreciation 20,459.86 19,351.42 18,315.00 17,198.32 15,558.41
Net block 12,268.83 11,571.31 11,597.71 12,162.14 12,485.07
Capital work-in-progress 6,544.24 2,389.55 1,236.04 757.94 366.48
Investments 652.70 538.20 513.79 292.00 606.71
Net current assets
Current assets, loans & advances 35,666.84 27,309.01 21,673.75 18,788.80 15,521.37
Less : current liabilities &
provisions
19,609.72 15,758.74 13,656.77 15,317.67 13,198.12
Total net current assets 16,057.12 11,550.27 8,016.98 3,471.13 2,323.25
Miscellaneous expenses not written - 59.48 129.15 215.82 294.93
Total 35,522.89 26,108.81 21,493.67 16,899.03 16,076.44
Notes:
Book value of unquotedinvestments
660.12 546.02 521.61 296.61 608.32
Market value of quoted investments 2.70 5.12 4.31 3.33 0.89
Contingent liabilities 32,193.13 17,143.54 5,605.90 5,541.62 4,566.72
Number of equity shares
outstanding (Laces.)
41304.01 41304.01 41304.01 41304.01 41304.01
8/8/2019 Investment Opportunities in Indian Steel Sector
43/72
#"
Various Ratios of SAIL
Ratios/Years 2008-09 2007-08 2006-07 2005-06 2004-05
1 Current ratio 1.82 1.73 1.59 1.23 1.18
2 Gross Profit ratio 17.48% 25.10% 24.56% 18.96% 32.60%
3 Net Profit ratio 13.40% 18.16% 17.38% 13.79% 23.19%
4 Return on Assets 11.19% 18.02% 17.66% 12.54% 23.52%
5 Return on Capital Employed 27.97 44.31 45.53 36.92 62.44
6 E. P. S. 14.95 18.25 15.02 9.72 16.50
7 D. P. S. 2.60 3.70 3.10 2.00 3.30
8 Dividend payout ratio 17.39% 20.27% 20.63% 20.57% 20%
9 Working capital Turnover ratio 2.73 3.46 4.28 8.12 12.36
10 Total Assets Turnover ratio 0.79 0.95 0.98 0,88 0.99
11 Debt-Equity ratio 0.23 0.12 0.22 0.30 0.51
12 Pr. Dividend Coverage ratio --------- --------- -------- --------- -------
13 Interest Coverage ratio 39.23 46.11 29.47 13.33 16.59
14 P/E ratio 6.43 10.46 8.08 10.12 6.45
8/8/2019 Investment Opportunities in Indian Steel Sector
44/72
##
Projected Profit & Loss A/c of SAIL
13(56 13(56 13(56 13(56" 13(56#
Income
Operating income 48,673.36 54,090.70 60,651.90 68,008.98 77,040.57
Expenses
Material consumed 26,133.68 30,984.09 37,252.17 44,788.28 54,708.88
Manufacturing expenses 4,198.49 4,684.67 5,275.87 5,941.68 6,762.23
Personnel expenses 9,283.90 10,258.70 11,432.29 12,740.14 14,335.20
Selling expenses 926.88 918.16 910.35 902.61 895.65
Administrative expenses 1,981.63 2,387.46 2,920.34 3,572.15 4,445.18
Expenses capitalized -2,322.07 -2,793.21 -3,410.78 -4,164.90 -5,173.22
Cost of sales 40,202.51 46,439.87 54,380.68 63,779.96 75,973.92
Operating profit 8,470.85 7,650.83 6,271.22 4,227.02 1,066.65
Other recurring income 3,088.79 4,184.69 5,802.91 8,046.89 11,453.94
Adjusted PBDIT 11,559.64 11,835.52 12,074.13 12,273.91 12,520.59
Financial expenses 252.75 252.26 251.83 251.40 251.00
Depreciation 1360.59 1414.07 1474.59 1537.68 1609.67
Other write offs 126.89 125.77 124.76 123.76 122.86
Adjusted PBT 9,819.41 10,043.42 10,161.29 10,361.07 10,537.06
Tax charges 3,338.59 3,414.76 3,454.83 3,522.76 3,582.60
Adjusted PAT 6,480.82 6,628.66 6,706.46 6,838.31 6,954.46
Non recurring items -580.92 24.94 54.74 54.74 126.36
Other non cash adjustments 183.07 184.90 186.93 188.98 191.19
Reported net profit 6,082.97 6,838.50 6,948.13 7,082.03 7,272.01
EPS* 14.72 16.56 16.82 17.15 17.6*as per the trends there is no increase in share capital during last five years so it is assumed that company is not going for new
issue of shares.
8/8/2019 Investment Opportunities in Indian Steel Sector
45/72
#$
Intrinsic value of shares of SAIL:-
Year EPS D.P.R Expected
Dividend
Cost of
Capital Dividend/(1+Ke/100)
2010 14.72 0.1977 2.91 14.52% 2.54
2011 16.56 0.1977 3.27 14.52% 2.49
2012 16.82 0.1977 3.33 14.52% 2.22
2013 17.15 0.1977 3.39 14.52% 1.97
2014 17.6 0.1977 3.48 14.52% 1.77
=10.99
Expected market price of shares of SAIL in 2014=EPS (2014)*Avg. P/E ratio
= 17.6*8.31=146.26
Ke = Rf + (Rm - Rf)
= 6%+1.42(12%-6%)
= 6%+1.42*6%
= 6%+8.52%
= 14.52%
Intrinsic value=10.99+146.26(1+14.52/100)5
=10.99+74.26=85.25
8/8/2019 Investment Opportunities in Indian Steel Sector
46/72
#%
Interpretation
1 Current ratio: - The current ratio of the company is increasing constantly in last five years, in 2008-09
end it was 1.82. This ratio is less than 2:1 but still it is acceptable. And good trends are followed in this
ratio.
2 Gross Profit ratio: - The gross profit in 2008-09 was 17.48 which is also not satisfactory and is very
low. Secondly it has been decreasing for the last 5 years continuously.
3 Net Profit ratio: - The net profit ratio is 13.40% in 20008-09. But it shows that the indirect expenses are
well managed. But this ratio is also decreasing. So it is a risky condition.
4 Return On Assets: - Return on assets ratio11.19 which is quite well. But the continuous decrease is a big
concern for the company.
5 Return on Capital Employed: - Return on capital employed is 27.97% in 2008-09 which is OK. But still
it is decreasing year on year for last five years. In 2004-05 it was 62.44% which was good. Due to sharp
increase in capital, it could not be efficiently utilized. But in future it can be properly used.
6 Earning Per Share (E P S):- is an instability in the E P S during 2004-05 to 2008-09. But this is
moving in the range of 14 to 18. That is due to the change in the profit margin. But still it is good.
7 Dividend per share (D P S):- The company is paying dividend every year. It also changes due to change
in profit and dividend paid. As there is consistency in dividend paid that is good for the company.
8 Dividend Payout ratio: - The company paid 17% of the income to the shareholders. This was 20% in
earlier years. But there is a consistency in the payment of dividend. This is a strong point to invest in the
company.
8/8/2019 Investment Opportunities in Indian Steel Sector
47/72
#&
9 Working Capital Turnover ratio: - This ratio is not sufficient because it has decreased from 12.36 to
2.73 in last five years. It shows that working capital is not efficiently utilized in the company. The
working capital has increased to 8 times while sales hardly doubled during this period.
10 Total Assets Turnover ratio: - Total Assets Turnover ratio is less than 1% in last five years. In 2004-05
it was 0.99 but at the end of 2008-09 it was 0.79 which is not satisfactory.
11 Debt-Equity ratio: - The long term fixed interest bearing capital is not so much introduced in the
company. It is 0.23% in 2008-09 and follow some unstable trends. In 2007-08 it was 0.12% while at the
end of 2004-05 it was 0.51%. So the company is reducing the burden of fixed cost payments but on the
other hand it increases the cost of capital.
12 Preferential Dividend Coverage ratio: - No data about Pr. Dividend is available.
13 Interest Coverage ratio: - The ability for paying interest is increasing constantly. It has increased to
39.23 to 16-59 in last five years. So this ratio is satisfactory.
14 Intrinsic value:-
Market price on 24th August 2010=191.55
Intrinsic value= 85.55
Intrinsic value is less than Market price.
So the shares can be sold.
8/8/2019 Investment Opportunities in Indian Steel Sector
48/72
#'
Bhushan Steel Limited
Profit & Loss a/c of Bhushan Steel Limited
Rs Crore
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Income
Operating income 4,985.72 4,180.23 3,829.60 2,793.99 2,674.99
Expenses
Material consumed 3,475.23 3,035.76 2,909.65 2,187.63 2,082.85
Manufacturing expenses 217.02 209.10 154.32 130.45 113.05
Personnel expenses 100.86 73.87 51.01 36.43 23.61Selling expenses 140.12 86.10 102.22 59.94 48.27
Administrative expenses 99.25 44.30 37.76 24.35 17.74
Expenses capitalized -140.13 -104.26 -53.46 -41.03 -15.85
Cost of sales 3,892.35 3,344.88 3,201.50 2,397.77 2,269.68
Operating profit 1,093.37 835.35 628.10 396.21 405.31
Other recurring income 17.22 16.76 18.01 12.17 6.57
Adjusted PBDIT 1,110.59 852.11 646.12 408.38 411.89
Financial expenses 117.27 107.80 85.82 75.38 79.39
Depreciation 234.41 211.41 208.92 165.76 164.72
Other write offs - - - - -
Adjusted PBT 758.92 532.89 351.38 167.24 167.78
Tax charges 139.48 115.20 59.11 5.21 12.30
Adjusted PAT 619.44 417.69 292.27 162.04 155.48
Non recurring items -198.13 6.04 20.99 -7.58 -2.12
Other non cash adjustments - - - -0.11 -
Reported net profit 421.30 423.73 313.26 154.34 153.35
Earnings before appropriation 605.35 441.22 349.30 194.27 279.12
Equity dividend 10.62 10.62 10.62 10.32 10.12
Preference dividend - - - - -Dividend tax 1.80 1.80 1.80 1.45 1.32
Retained earnings 592.93 428.80 336.88 182.50 267.68
8/8/2019 Investment Opportunities in Indian Steel Sector
49/72
#
Balance Sheet of Bhushan Steel Limited
Rs Crore
Mar ' 09 Mar '
08
Mar '
07
Mar '
06
Mar '
05
Sources of funds
Owner's fund
Equity share capital 42.47 42.47 42.47 41.27 40.47
Share application money 400.44 - - 3.60 -
Preference share capital - - - - -
Reserves & surplus 1,985.59 1,582.85 1,172.03 848.40 690.12
Loan funds
Secured loans 5,136.32 3,333.11 2,412.84 1,650.91 1,089.79Unsecured loans 2,929.93 2,385.02 829.14 385.27 227.68
Total 10,494.75 7,343.46 4,456.48 2,929.45 2,048.06
Uses of funds
Fixed assets
Gross block 3,281.86 2,927.09 2,693.73 1,795.91 1,657.81
Less : revaluation reserve - - - - -
Less : accumulated depreciation 1,395.89 1,168.07 970.27 775.83 610.81
Net block 1,885.97 1,759.02 1,723.46 1,020.08 1,047.01
Capital work-in-progress 7,400.13 4,567.97 1,892.11 1,295.22 385.70Investments 107.73 58.46 20.85 19.17 18.99
Net current assets
Current assets, loans & advances 2,746.40 2,420.14 1,763.88 1,202.51 1,069.44
Less : current liabilities & provisions 1,645.48 1,462.14 943.82 607.53 473.07
Total net current assets 1,100.92 958.01 820.06 594.98 596.36
Miscellaneous expenses not written - - - - -
Total 10,494.75 7,343.46 4,456.48 2,929.45 2,048.06
Notes:
Book value of unquoted investments 58.98 52.71 18.81 18.81 18.81Market value of quoted investments 0.56 1.25 1.94 0.39 0.19
Contingent liabilities 2,424.34 2,545.91 1,551.57 1,931.44 930.37
Number of equity shares outstanding
(Lacs.)
424.72 424.72 424.72 412.72 404.72
8/8/2019 Investment Opportunities in Indian Steel Sector
50/72
$
Various Ratios of Bhushan Steel Limited
Ratios/Years 2008-09 2007-08 2006-07 2005-06 2004-05
1 Current ratio 1.67 1.66 1.87 1.98 2.26
2 Gross Profit ratio 17.22% 14.92% 10.94% 8.24% 8.99%
3 Net Profit ratio 8.42% 10.09% 8.14% 5.50% 5.71%
4 Return on Assets 3.47% 4.81% 5.8% 4.36% 6.08%
5 Return on Capital Employed 8.34% 8.72% 9.81% 8.28% 12.06%
6 E. P. S. 99.20 99.77 73.76 37.42 37.89
7 D. P. S. 2.50 2.50 2.50 2.50 2.50
8 Dividend payout ratio 2.52% 2,51% 3.38% 6.68% 6.6%
9 Working Turnover ratio 4.53 4.36 4.67 4.7 4.49
10 Total Assets Turnover ratio 0.41 0.47 0.7 0.79 1.06
11 Debt-Equity ratio 3.75 2.84 2.15 1.75 1.10
12 Pr. Dividend Coverage ratio --------- ---------- ---------- ----------- ----------
13 Interest Coverage ratio 7.47 5.94 5.09 3.22 3.11
14 P/E ratio 4.02 6.64 7.78 4.93 4.24
8/8/2019 Investment Opportunities in Indian Steel Sector
51/72
$
Projected Profit & Loss A/c of Bhushan Steel Limited
13(56 13(56 13(56 13(56" 13(56#
Income
Operating income =0?5=-;9 >0?6>-57 ?06==-5 =:?-9?
Administrative
expenses 9=5->; 5;5 7>7-:;
Expenses capitalized 255 2->5 2:5 25;>>-77 >7;=-59
Operating profit 9;79--;? -95 -?5-6=
Adjusted PBDIT 9 9;;5->= 9?5:-6= 5==>-5 ;:76-9=
Tax charges 9?6->7 5;7-?: ;5?-?: 6-95 >?5-55
Adjusted PAT ?5;-9: 9675-:? 9-6? ;96:-7;
Other non cash
adjustments
Reported net profit ?5;-9: 9675-:? 9-6? ;96:-7;
EPS* 9?
8/8/2019 Investment Opportunities in Indian Steel Sector
52/72
$
Intrinsic value of the shares of Bhushan Steel limited:-
Year EPS D.P.R Expected
Dividend
Cost of
Capital
Avg. P/E ratio
2010 184.94 0.048 8.88 13.32% 7.83
2011 245.5 0.048 11.78 13.32% 9.17
2012 321.18 0.048 15.42 13.32% 10.58
2013 449.35 0.048 21.57 13.32% 13.03
2014 635.76 0.048 30.52 13.32% 16.26
=56.87
Expected market price of shares in 2014=EPS (2014)*Avg. P/E ratio
635.76*5.5=3496.68
Ke = Rf + (Rm - Rf)
=6%+1.22(12%-6%)
= 6%+1.22*6%
= 6%+7.32%
=13.32%
Intrinsic value=56.87+3496.68(1+13.32/100)5
=56.87+1862.98=1919.85
8/8/2019 Investment Opportunities in Indian Steel Sector
53/72
$"
Interpretation
1 Current ratio: - The current ratio is 1.6 In 2008-09which is lower than 2:1.while in 2004-05 it was 2.26.
So there is a constant decrease in current ratio. This is not good for the company. This ratio shows that the
company has a risky short term payment situation.
2 Gross Profit ratio: - The gross profit is increasing in the last five years. In 2004-05 it was 8.99%, in
2006-07 it was 10.94% and at the end of 2008-09 it was 17.22%. It means that companys management is
well controlling the production cost.
3 Net Profit ratio: - Net profit trends are not as gross profit trends. They are moving in 5 to 10% range. In
2004-05 it was 5.71% but then it went to 10.92% in 2007-08 and then decreased to 8.42% in 2008-09. It
shows that there is no good control over indirect expenses of the company.
4 Return on Assets: - This ratio has decreased from 6.08% in 2004-05 to 3.47% in 2008-09. It means the
utilization of the assets for the production is decreasing. It is not satisfactory.
5 Return on Capital Employed: - This ratio changed a bit in the last four years but decreased to the
comparison of fifth year. In 2004-05 it was 12.06% and in next year it was 8.28% and in 2008-09 in the
same range of 8, it was 8.34%.the consistency is good but the ratio is low that is not satisfactory.
6 Earning per Share: - Earning per share has increased during last five years especially in last 2007-08
and 2008-09. It is in 2008-09 is 99.20 than 37.89 in 2004-05. So now there is more profit available for the
equity shareholders.
7 Dividend per Share: - The dividend per share is constant per share at 2.50 in last five years. So the
company is paying a same rate of dividend whether profit increase or decrease. That is good for the
shareholders.
8/8/2019 Investment Opportunities in Indian Steel Sector
54/72
$#
8 Dividend Payout ratio: - Dividend payout ratio is decreasing. It shows that company is not transferring
the benefits of increase in profits to the shareholders. That is not a good policy of company.
9 Working Capital Turnover ratio: - Working capital turnover ratio is almost stable during the last five
years. It is 4.53at the end of 2008-09 and 4.49 in 2004-05. So that rate is good and satisfactory.
10 Total Assets Turnover ratio: - Total assets turnover ratio is decreasing in the five years. It was 1.06 in
2004-05, then 0.7 in 2006-07 and 0.41 in 2008-09. It means the company is adding assets but the returns
are increasing with slow rate. This is not satisfactory.
11 Debt-Equity ratio: - Debt- Equity ratio is increasing continuously in lat five years. In 2004-04 it was
1.10, in 2006-07 it was 2.15 and in 2008-09 it is 3.75. the company is highly levered. So much high debt-
equity ratio is a risky situation for any company. Because it increases the burden for payments of the
fixed rate interest on company.
12 Interest Coverage ratio: - Interest coverage ratio is increasing which is good for the shareholders. It is
more than doubled from 3.11 in 2004-05 to 7.47 in 2008-09. So the companys ability for interest is good.
12 Intrinsic value;-
Market price as on 24th August 2010=1863.5
Intrinsic value= 1919.85
Intrinsic value is more than Market price of shares.
The stock can be hold and purchased.
8/8/2019 Investment Opportunities in Indian Steel Sector
55/72
$$
Jindal Steel & Power Limited
Profit & Loss a/c of Jindal Steel & Power Limited
Rs Crore
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Income
Operating income 7,677.83 5,368.14 3,523.08 2,565.04 2,253.60
Expenses
Material consumed 3,419.42 1,727.40 1,068.50 536.71 528.20
Manufacturing expenses 773.84 670.87 510.96 545.44 514.13
Personnel expenses 181.46 132.20 90.14 79.74 50.85
Selling expenses 327.76 264.73 276.47 222.18 171.87
Administrative expenses 337.49 277.03 167.20 148.16 72.42
Expenses capitalized - - - - -
Cost of sales 5,039.97 3,072.23 2,113.27 1,532.23 1,337.46
Operating profit 2,637.86 2,295.91 1,409.81 1,032.81 916.15
Other recurring income 199.46 57.31 36.08 26.02 19.34
Adjusted PBDIT 2,837.32 2,353.22 1,445.89 1,058.83 935.49Financial expenses 267.89 243.02 173.19 108.02 92.51
Depreciation 433.03 451.51 336.47 219.17 152.48
Other write offs 0.20 0.27 0.27 0.27 0.31
Adjusted PBT 2,136.20 1,658.42 935.96 731.37 690.18
Tax charges 465.40 265.55 241.85 154.91 158.11
Adjusted PAT 1,670.80 1,392.87 694.11 576.46 532.08
Non recurring items -144.78 -144.57 7.78 -12.00 -12.48
Other non cash adjustments 10.46 -11.34 1.10 8.48 -3.90
Reported net profit 1,536.48 1,236.96 702.99 572.94 515.70Earnings before appropriation 4,584.28 3,239.54 2,136.05 1,528.77 1,057.60
Equity dividend 85.33 62.02 55.43 46.19 46.19
Preference dividend - - - - -
Dividend tax - 10.55 8.87 6.48 6.33
Retained earnings 4,498.95 3,166.97 2,071.75 1,476.10 1,005.08
8/8/2019 Investment Opportunities in Indian Steel Sector
56/72
$%
Balance Sheet of Jindal Steel & Power Limited
Rs Crore
Mar ' 09 Mar '
08
Mar '
07
Mar '
06
Mar '
05
Sources of funds
Owner's fund
Equity share capital 15.47 15.40 15.40 15.40 15.40
Share application money - - - - -
Preference share capital - - - - 1.00
Reserves & surplus 5,399.85 3,740.98 2,481.33 1,829.31 1,302.98
Loan funds
Secured loans 2,105.49 1,783.39 2,115.61 1,780.77 1,159.51
Unsecured loans 2,857.16 2,079.96 1,392.11 964.60 336.35
Total 10,377.97 7,619.73 6,004.45 4,590.08 2,815.24
Uses of funds
Fixed assets
Gross block 7,362.90 5,918.94 4,929.03 3,243.05 2,530.28
Less : revaluation reserve - - - - -
Less : accumulated depreciation 1,617.00 1,183.11 781.75 542.33 361.76Net block 5,745.90 4,735.83 4,147.28 2,700.72 2,168.53
Capital work-in-progress 2,318.01 660.48 937.84 1,146.27 345.70
Investments 1,233.40 1,036.19 709.82 430.30 33.38
Net current assets
Current assets, loans & advances 5,189.28 3,299.57 1,801.66 1,490.50 1,036.30
Less : current liabilities & provisions 4,111.64 2,115.48 1,595.39 1,178.45 769.67
Total net current assets 1,077.64 1,184.09 206.27 312.05 266.62
Miscellaneous expenses not written 3.02 3.14 3.24 0.74 1.01
Total 10,377.97 7,619.73 6,004.45 4,590.08 2,815.24Notes:
Book value of unquoted investments 1,233.40 1,036.19 709.82 430.30 30.55
Market value of quoted investments - - - - -
Contingent liabilities 4,967.08 5,476.85 3,029.51 1,008.24 899.21
Number of equity shares outstanding
(Lacs)
1546.53 1539.61 307.92 307.92 307.92
8/8/2019 Investment Opportunities in Indian Steel Sector
57/72
$&
Various Ratios of Jindal Steel & Power Limited
Ratios/Years 2008-09 2007-08 2006-07 2005-06 2004-05
1 Current ratio 1.26 1.56 1.13 1.26 1.35
2 Gross Profit ratio 28.71% 34.35% 30.46% 31.72% 33.88%
3 Net Profit ratio 19.50% 22.79% 19.75% 22.11% 22.68%
4 Return on Assets 10.6% 12.7% 9.25% 9.93% 14.38%
5 Return on Capital Employed 23.16% 24.95% 18.47% 18.29% 27.81%
6 E. P. S. 99.35 80.34 228.30 186.07 167.48
7 D. P. S. 5.50 4.00 18.00 15.00 15.00
8 Dividend payout ratio 5.53% 4.99% 7.88% 8.06% 8.95%
9 Working Capital Turnover ratio 7.12 4.53 17.07 8.21 8.45
10 Total Assets Turnover ratio 0.53 0.55 0.46 0.44 0.63
11 Debt-Equity ratio 0.77 0.90 1.06 1.21 1.03
12 Pr. Dividend Coverage ratio --------- --------- ---------- ----------- ----------
13 Interest Coverage ratio 8.97 7.85 6.41 7.77 8.46
14 P/E ratio 12.10 25.88 10.34 10.19 10.47
8/8/2019 Investment Opportunities in Indian Steel Sector
58/72
$'
Projected Profit & Loss A/c of Jindal Steel & Power Limited
*it is assumed that company issues new shares in every three years (As in the trends). The shares are issued at CAGR.
Income
Operating income 10,431.10 14,171.69 19,709.98 27,412.64
Expenses
Material consumed 4,325.90 5,472.69 7,401.75 9,540.11
Manufacturing expenses 857.1 949.32 1060.58 1184.87
Personnel expenses 249.39 342.76 482.6 679.5
Selling expenses 385.15 452.58 538.93 641.75
Administrative expenses 495.84 728.48 1101 1664
Expenses capitalized -- -- -- --
Cost of sales 6313.38 7975.83 10584. 86 13710.23
Operating profit 4117.72 6225.86 9125.12 13702.41
Other recurring income 259.81 338.42 450.77 599.43
Adjusted PBDIT 4377.53 6565.28 9575.89 14301.84
Financial expenses 349.43 455.79 606.97 808.3
Depreciation 625.08 816.44 1088.78 1451.99
Other write offs 0.18 0.16 0.14 0.12
Adjusted PBT 3402.84 5292.89 7880 12041.43
Tax charges 748.62 1164.43 1733.6 2649.11
Adjusted PAT 2654.22 4128.46 6146.4 9392.32
Non recurring items -267.19 -267.19 -513.4 -513.4
Other non cash
adjustments 15.38 22.62 25.27 28.23
Reported net profit 2402.41 6123.27 5658.27 8907.15
EPS* 9==-=; 5>
8/8/2019 Investment Opportunities in Indian Steel Sector
59/72
$
Intrinsic value of the shares of Jindal Steel & Power limited:-
Year EPS D.P.R Expected
Dividend
Cost of
Capital
Dividend/(1+Ke/100)
2010 155.53 0.0708 11.01 13.44% 9.71
2011 264.48 0.0708 18.74 13.44% 14.56
2012 244.4 0.0708 17.3 13.44% 11.85
2013 384.73 0.0708 27.24 13.44% 16.44
2014 390.77 0.0708 27.67 13.44% 14.73
=67.29
Expected market price of shares of Jindal Steel & Power Limited in 2014
=EPS (2014)*Avg. P/E ratio = 390.77*13.79=5388.71
Ke = 6%+1.24(12%-6%)
= 6%+7.44%
=13.44%
Intrinsic value=67.29+5388.71/(1+13.44/100)5
=67.29+2868.49=2935.78
8/8/2019 Investment Opportunities in Indian Steel Sector
60/72
%
Interpretation
1 Current ratio: - During last five years the current ratio is moving in the range of 1.25-1.50. In 2004-05 it
was 1.35 but in 2007-08 it increased to 1.56 and then decreased to 1.26 in 2008-09. But the current ratio
is not satisfactory. The companys short term payment ability is not good.
2 Gross Profit ratio:- Gross profit ratio is 28.71% in 2008-09 decreased from 34.35% in 2007-08, which
is the highest in the last five years. In 2004-05 it was 33.88%. The gross profit ratio is good but there is a
decrease in 2008-09, but if we see the last five years ratios there are ups and downs in the ratio. The only
worry is that it is the lowest in last five years. The main reason is the increase in the material cost.
3 Net Profit ratio: - The net profit ratio is also decreased during 2008-09 as the gross profit ratio. But it is
good to get a net profit of 19.50 on sales. The main reason of decrease in the net profit is the decrease in
the gross profit.
4 Return on Assets: - Return on assets is also good though there are fluctuations in the returns in the last
years. In 2004-05 it was 14.38% highest in five years. Then it decreased to 9.93% but after that it is
around 10% which is good.
5 Return on Capital Employed:- Return on capital are also good except 2005-06 and 2006-07, when it
decreased to the lowest level of five years 18.29%. In other years it is around 24% that is a healthy return.
6 E. P. S.:- Earning per share decreased from 167.48 in 2004-05 to 80.34 in 2007-08.bthen it increased to
99.35 in 2008-09. The profit available to shareholder is still good. The reason of that decrease is the
increase in the equity shares. Share no. went to 5 times in 2004-05.
7 D. P. S.:- The dividend per share also decreased in 2007-08, due to the rise in outstanding equity shares.
But it increased in 2008-09 with the increased shares that is good.
8/8/2019 Investment Opportunities in Indian Steel Sector
61/72
%
8 Dividend payout ratio: - The dividend payout ratio also decreased in last two years. It means the
company decreased the dividend out of the available profit. That is not good for the shareholders of the
company.
9 Working Capital Turnover ratio: - Working capital turnover ratio fluctuated during five years. In
2004-05 it was 8.45, and then it increased to 17.07 in 2006-07. Decreased in 2007-08 to 4.53 but
increased to 7.12 in 2008-09. But it is still good and shows that working capital is efficiently utilized in
the company.
10 Total Assets Turnover ratio: - Total al assets turnover ratio is low but almost stable between
0.45-0.60. But the assets are used with low efficiency in the company. That is not satisfactory.
11 Debt-Equity ratio: - Debt- Equity ratio is 0.77 in 2008-09. It was 1.03 in 2004-05. But in last years it
decreased but the present ratio is good. But the decrease is due to issue of new equity shares in 2007-08
and 2008-09.
12 Interest Coverage ratio: - I ntere.st coverage ratio is highest in 2008-09 at 8.97. This is a good ratio. It
shows that company can serve the interest very well.
14 intrinsic value
Market value as on 24th August 2010=708.35
Intrinsic value = 2935.78
Intrinsic value is more then Market price of shares.
The shares can be purchased and hold.
8/8/2019 Investment Opportunities in Indian Steel Sector
62/72
%
ISPAT Industries Limited
Profit & Loss a/c of ISPAT Industries Limited
Rs Crore
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Income
Operating income 8,264.01 8,362.19 7,527.76 5,053.87 6,078.08
Expenses
Material consumed 5,127.06 5,095.58 4,095.34 3,205.87 3,378.42
Manufacturing expenses 1,439.01 1,396.36 1,264.27 924.61 693.60
Personnel expenses 207.60 202.60 165.34 131.55 112.43Selling expenses 207.93 189.38 221.71 259.41 204.16
Administrative expenses 159.71 208.38 182.29 176.22 195.27
Expenses capitalized - - - - -
Cost of sales 7,141.31 7,092.30 5,928.95 4,697.66 4,583.88
Operating profit 1,122.70 1,269.89 1,598.81 356.21 1,494.20
Other recurring income 82.73 24.93 32.16 25.76 109.29
Adjusted PBDIT 1,205.43 1,294.82 1,630.97 381.97 1,603.49
Financial expenses 1,129.74 1,108.09 1,099.62 985.07 643.89
Depreciation 646.62 638.12 623.83 571.43 435.99
Other write offs 2.47 - - - 35.68
Adjusted PBT -573.40 -451.39 -92.48 -1,174.53 487.93
Tax charges -335.78 80.82 12.90 -384.18 200.13
Adjusted PAT -237.62 -532.21 -105.38 -790.35 287.80
Non recurring items -474.47 555.36 47.09 -532.97 397.34
Other non cash adjustments 23.98 11.65 38.55 10.34 10.92
Reported net profit -688.11 34.80 -19.74 -1,312.98 696.06
Earnings before appropriation -1,859.86 -1,071.35 -1,118.25 -1,098.51 214.47
Equity dividend - - - - -
Preference dividend - - - - -Dividend tax - - - - -
Retained earnings -1,859.86 -1,071.35 -1,118.25 -1,098.51 214.47
8/8/2019 Investment Opportunities in Indian Steel Sector
63/72
%"
Balance Sheet of ISPAT Industries Limited
Rs Crore
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar '
05
Sources of funds
Owner's fund
Equity share capital 1,221.65 1,221.58 1,218.40 1,218.38 685.80
Share application money 51.98 - - - 588.84
Preference share capital 1,050.86 1,072.45 1,070.34 1,070.32 451.10
Reserves & surplus -1,363.05 -544.34 -587.07 -567.38 745.56
Loan funds
Secured loans 7,150.81 6,940.05 7,849.07 8,241.06 5,699.24
Unsecured loans 200.24 284.99 466.43 20.03 132.99
Total 8,312.49 8,974.73 10,017.17 9,982.41 8,303.53
Uses of funds
Fixed assets
Gross block 13,557.39 13,167.93 13,067.37 11,455.71 8,016.31
Less : revaluation reserve 1,070.44 1,151.92 1,240.00 328.49 356.44
Less : accumulated depreciation 4,669.58 3,961.92 3,244.04 2,554.27 1,846.48
Net block 7,817.37 8,054.09 8,583.33 8,572.95 5,813.39
Capital work-in-progress 102.71 108.25 54.68 615.84 933.34Investments 232.89 118.04 113.59 113.32 53.43
Net current assets
Current assets, loans & advances 3,903.49 3,498.40 3,431.32 2,924.55 2,796.14
Less : current liabilities & provisions 3,743.97 2,804.05 2,165.75 2,244.25 1,292.77
Total net current assets 159.52 694.35 1,265.57 680.30 1,503.37
Miscellaneous expenses not written - - - - -
Total 8,312.49 8,974.73 10,017.17 9,982.41 8,303.53
Notes:
Book value of unquoted investments 232.89 118.04 113.59 113.32 55.33Market value of quoted investments - - - - -
Contingent liabilities 717.08 639.31 598.41 893.07 1,986.98
Number of equity shares outstanding
(Lacs)
12224.42 12224.42 12224.42 12224.42 6925.90
8/8/2019 Investment Opportunities in Indian Steel Sector
64/72
%#
Various Ratios of ISPAT Industries Limited
Ratios/Years 2008-09 2007-08 2006-07 2005-06 2004-05
1 Current ratio 1.04 1.25 1.58 1.30 2.16
2 Gross Profit ratio 13.58% 15.18% 21.23% 7.04% 24.58%
3 Net Profit ratio -8.24% 0.41% -0.12% -15.99% 11.24%
4 Return on Assets -5.7% 0.29% -0.16% -10.73% 7.25%
5 Return on Capital Employed 6.72% 7.31% 10.05% -1.9% 14.06%
6 E. P. S. -5.63 0.28 -0.07 -6.65 10.05
7 D. P. S. -------- --------- --------- ---------- ---------
8 Dividend payout ratio -------- --------- --------- ---------- ---------
9 Working Capital Turnover ratio 51.80 12.04 5.95 7.43 4.04
10 Total Assets Turnover ratio 0.68 0.71 0.62 0.41 0.63
11 Debt-Equity ratio 9.04 11.65 13.88 13.66 4.33
12 Pr. Dividend Coverage ratio -------- --------- --------- --------- ---------
13 Interest Coverage ratio 0.49 0.59 0.92 ---------- 1.81
14 P/E ratio 0.8 112.45 ----- 51.6 3.75
8/8/2019 Investment Opportunities in Indian Steel Sector
65/72
%$
Projected Profit & Loss A/c of ISPAT Industries Limited
13(56 13(56 13(56 13(56" 13(56#
Income
Operating income ?075;-;=-=> 9600;9=-76 :06:9-79 :079?--?6 506:5-96 50=5;-?6 ;06:;-7? ;0?6:-:;
Personnel expenses 5 596-66 599-96 595-5> 5;9-=;
Administrative expenses 9=9-?> 9-99
Operating profit 76;-;> >99-9> 97:- 2;-99
Other recurring income ::-9: :9-7? >:-=7 >5-75 =7-; 2906=>->:
Financial expenses 90;66-59 90-
8/8/2019 Investment Opportunities in Indian Steel Sector
66/72
%%
Intrinsic value of the shares of Jindal Steel & Power limited:-
Year EPS D.P.R Expected
Dividend
Cost of
Capital
Dividend/(1+Ke/100)
2010 -11.53 ---- ----- 24% -----
2011 -15.43 ----- ----- 24% -----
2012 -18.06 ------ ----- 24% -----
2013 -28.87 ------ ------ 24% -----
2014 -39.38 ------ ----- 24% -----
Expected share price in 2014 = -39.38*33.72 = -1327.89
Ke = 6%+1.73(12%-6%) = 6%+1.73*6% = 6%+10.33% = 16.33%
Intrinsic value= 0+ (-1327.89)/(1+16.33/100)
= -623.31
8/8/2019 Investment Opportunities in Indian Steel Sector
67/72
%&
Interpretation
1 Current ratio: - The current ratio for 2008-09 is 1.04 which is decreasing from 2004-05 when it was
2.16. So the short term payment ability of the company is not satisfactory.
2 Gross Profit ratio: - Gross profit ratio is also decreasing of the company. In 2004-05 it was 24.58% but
at the end of 2008-09 it was 13.58%, which is not a good figure also. The reason is the increase in
material cost and in wages etc.
3 Net Profit ratio: - The net profit ratio is also not good. In 2008-09, 2006-07 and in2005-06 there is a net
loss. It shows that management is not able to control and reduce the expenses incurred. It is very bad
condition for the company.
4 Return on Assets: - Return on profit is also negative for 2008-09, 2006-07 and in 2006-07, which is not
good also. So the assets are also not utilized efficiently.
5 Return on Capital Employed: - Return on capital is 6.72% in 2008-09. In 2004 -05 it was more than
double, 14.06%. From 2004-05 it has been decreasing constantly. The return is not sufficient.
6 E. P. S.:- As net profit is negative so the earning per share is also negative. Company has hardly profit
available to equity shareholders. This is not suitable for the shareholders.
7 D. P. S.:- No dividend is paid to shareholders because company is also suffering from losses or having
less profit.
8 Dividend payout ratio: - As no dividend is paid in last five years so the dividend payout ratio is also
zero.
8/8/2019 Investment Opportunities in Indian Steel Sector
68/72
%'
9 Working Capital Turnover ratio: - In 2008-09 working capital is good at 51.80. in 2004-05 it was 4.04.
It is constantly increasing for last five years. The reason to be the ratio so higher in 2008-09 is decrease in
working capital
10 Total Assets Turnover ratio: - Total assets turnover ratio is a it stable. It is moving in the range of 0.6
to 0.7%. But the utilization of the assets is not done efficiently. But the consistency is a good sign.
11 Debt-Equity ratio: - Debt Equity ratio of the company is very high and it is increasing for the last
years. So the company is in risky situation, Because company has more fixed interest obligation.
12 Interest Coverage ratio: - Interest coverage ratio is also not good. It is 0.49 in 2008-09. In 2004-05 it
was 1.81. So it is also decreasing and companys interest payment ability is reducing also.
13 Intrinsic value: - The intrinsic value is negative so investors can get away from the shares of this
company.
8/8/2019 Investment Opportunities in Indian Steel Sector
69/72
%
Findings & Conclusion
Steel demand has started increasing after recession. As the recession hit the world the demand also
decreased. The main reason was decline in the growth of automobile and infrastructure sector, Because
steel demand strongly depends upon these two sectors.
The world steel demand has started increasing as well as the production, is expected to grow by 5.3% in
2011.
The income of Indian people has started after recession. In 2008-09 the growth was 3.7%, while in 2009-
10 its growth was 5.3%. It can be a helpful factor in the demand of steel. Population is increasing and by
2025 we will surpass CHINA, which is also important factor in demand improvement. The growth of
housing and infrastructure sector accelerated to 5.1% in 2009-10 from 3.7% in 2008-09. Investment in
infrastructure sector during 11th plan increased to 452.2 billion US$ from 191.1 billion US$ in 10th plan.
That is also an important factor for steel demand. As per my estimation, Indian economy can grow at a
9.5% in 2013-14.
If we see the steel industry of India, the Govt. has put steel in High Priority list. Various exemptions are
done in this sector like-free export and import of iron and steel. Govt. has also aimed to accelerate the
growth of steel industry. Steel industry has a good growth rate and expected to grow around 9%. Though
the growth rate is not stable after recession but it is predicted to go up and to touch 9% (as per govt.
report) .Steel consumption in India has started going up. During recession steel consumption grew by
only 1%in 2008-09, in 2009-10 it increased to 8%. In Indian economy there is no entry barrier in steel
sector, some companys are establishing there plants here like- POSCO steel. This will increase the
competition as well as production of steel.
8/8/2019 Investment Opportunities in Indian Steel Sector
70/72
&
By all this analysis conclusions are following:-
After considering market price of the shares as on 24th August 2010 and the intrinsic value calculated, we
can say that TATA STEEL LIMITED and STEEL AUTHORITY OF INDIA LIMITED, as per my study
are overvalued. Their INTRINSIC value is less than market price, it means they are overvalued in the
market. As per my knowledge their shares can be sold or people can wait for a correction in the market
and can hold their investment till then. Long term investors who have already holding stock in these
companies, I suggest them to hold by seeing good future of the Indian Steel industry.
While by calculating intrinsic value we can say that BHUSHAN STEEL LIMITED and JINDAL STEEL
and POWER LIMITED companies are undervalued. The intrinsic value is more than the market price of
the shares of these companies. So investor can buy shares and the long term investor can hold there who
have invested already can hold there shares and can make an addition to their investment. As per my
study these company have good future growth opportunity.
As per my study ISPAT INDUSTRES LIMITED has a negative intrinsic. So the people can withdraw
their money. And the investors who have already invested in this can sell their stock because the intrinsic
value is negative.
8/8/2019 Investment Opportunities in Indian Steel Sector
71/72
&
References:-
1 http://www.worldsteel.org/- All the world steel data has been got from the
reports and information available on this site.
2 www.indiansteels.com.- All Indian steel related data is recovered from the
reports and information available on this site.
3 www.wikipedia.com
4 www.google.com
5www.moneycontrol.com
6 www.reliancemutualfund.com
7 www.moneycontrol.com- All the financial statement are downloaded from this site.
8 www.money.rediff.com
9 www.indiainfoline.com
10 Financial Management
Author: I. M. Panday
11 Business today
12 The Economic times
8/8/2019 Investment Opportunities in Indian Steel Sector
72/72