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A Study OnCorporate Finance

December 04, 2010

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Report on

Financial Analysis on JSPL

Submitted By

Submitted to:

Mr. Ashish GargLBSIM

 New Delhi

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Copyright © LBSIM 2010 All Rights Reserved. No part of this document may bereproduced without written consent from the author(s).

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Lal Bahadur Shastri Institute of Management

To December 4, 2010Mr. Ashish GargLBSIM

As part of the Corporate Finance course, we are submitting the enclosedreport on Financial Analysis of JSPL.

The purpose of this report is to provide Financial Analysis of JSPL. Thereport provides the financial status. Additionally, the report describes theimportance of reputation management in an organization and how it can beimplemented through effective corporate communication.

We hope this report meets with your expectations.

Thanks

Respectfully,

Group : 7

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Acknowledgement

First and foremost, we would like to thank our supervisor for this project,Prof.Ashish Garg, for his valuable guidance and advice. He inspired usgreatly and his constant encouragement and cooperation helped in the timelycompletion of our project.

Besides, we would like to thank the authorities at LBSIM for providing uswith a good environment and research facilities to complete this project.Finally, we would like to express our heartfelt thanks to our friends andclassmates for their help and wishes for the successful completion of this

 project.

 

Group 7SectionALBSIM

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Table of Contents

Introduction to corporatehistory…………………………………………………………………

Risk, Return And Beta………………………………………………………………..Cost of Capital of JSPL……………………………………………………Leverage…………………………………………………………

Working Capital…………………………………………Important Financial RatiosOf JSPL vs other Steel Companies………………………………………………

Conclusion…………………………………………………………….....

References………………………………………………………………..

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Corporate Profile of JSPL Perseverance, a passion for excellence and a firm commitment towards all stakeholders

and the community at large, has made us a responsible corporate powerhouse.

With an annual turnover of over US $2.3 billion (Rs. 11,000 crore), JindalSteel & Power Limited is a part of about US $ 12 billion diversified O. P.Jindal Group. It is a leading player in Steel, Power, Mining, Coal to Liquid,Oil & Gas and Infrastructure, consistently tapping new opportunities byincreasing production capacity, diversifying investments, and leveraging itscore capabilities to venture into new businesses. JSPL’s investmentcommitments in steel, power, oil & gas and mining have touched more thanUS $ 30 billion today. In the recent past, JSPL has expanded its steel, power and mining businesses to various parts of the world particularly in Asia,

Africa, South America and Australia.

The company, today, is the largest private sector investor in the state of Chhattisgarh with an investment commitment of over US$ 6 billion (Rs.30,000 crore).Mr. Naveen Jindal, the youngest son of the legendry late Shri.O P Jindal, spearheads Jindal Steel & Power Limited and its groupcompanies Jindal Power Ltd, Jindal Steel Bolivia, Jindal Petroleum Ltd. andJindal Cement with a belief in the concept of self-sufficiency. The company

 produces economical and efficient steel and power through backwardintegration from its own captive coal and iron-ore mines. An enterprisingspirit and ability to discern future trends have been the driving force behindthe company's remarkable growth. And the recognition it has received onlyfurther lends credence to this. Jindal Steel & Power Limited has recently

 been rated as the second highest value creator in the world by BostonConsulting Group.

The company has also been rated as one of the Best Blue Chip companies by Dalal Street Journal; One of the Fab 50 Companies by Forbes Asia aswell as the Highest Wealth Creator by the Dalal Street Journal. It has also

won several awards for its efficient operations and commitment toenvironment & safety.

The company has scaled new heights with the combined force of innovation,adaptation of new technology and the collective skills of its 15,000 strong,committed workforce.

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Jindal Steel and Power is a part of the Jindal Group, founded by O. P.Jindal (1930–2005). In 1969, he started Pipe Unit Jindal India Limited , oneof the earlier incarnations of his business empire. After Jindal's death in2005, much of his assets were transferred to his wife, Savitri Jindal. JindalGroup's management was then split among his four sons with Naveen Jindal as the Managing Director of Jindal Steel and Power Limited. His elder 

 brother, Sajjan Jindal, is currently the head of ASSOCHAM, an influential body of the chambers of commerce, and the head of JSW Group, part of O.P.Jindal Group.

Savitri Jindal, the widow of O. P. Jindal, is ranked as the 19th richest Indian person according to Forbes

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Risk, Return And Beta

Risk 

Risk concerns the deviation of one or more results of one or more future

events from their expected value. Technically, the value of those results may be positive or negative. However, general usage tends to focus only on potential harm that may arise from a future event, which may accrue either from incurring a cost ("downside risk ") or by failing to attain some benefit ("upside risk ").

Risk = Standard Deviation = √1/N ∑(x-µ)(x-µ)= 1.8%

Return

In finance, rate of return (ROR ), also known as return on investment(ROI), rate of profit or sometimes just return, is the ratio of money gainedor lost (whether realized or unrealized) on an investment relative to theamount of money invested. The amount of money gained or lost may bereferred to as interest,  profit/loss, gain/loss, or net income/loss. The moneyinvested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage rather than afraction.

Return = closing price of today – closing price of previous dayClosing price of previous day

After calculating daily average we multiply it with 240 to annualiserate of return

Average return on security = 16.942%

Beta

 In  finance, the beta (β) of a stock  or  portfolio is a number describing the

relation of its returns with that of the financial market as a whole.

An asset with a beta of 0 means that its price is not at all correlated with themarket. A positive beta means that the asset generally follows the market. Anegative beta shows that the asset inversely follows the market; the assetgenerally decreases in value if the market goes up and vice versa.

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The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot bemitigated by the diversification provided by the portfolio of many riskyassets, because it is correlated with the return of the other assets that are inthe portfolio. Beta can be estimated for individual companies usingregression analysis against a stock market index.

β = covariance(Rj,Rm)/ variance(Rm)

= 0.000142 / 0.000122

= 1.16

Value of β>1 shows that the stock is more sensitive towards marketmovement. This is clearly shown in the above chart.

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Cost Of Capital

The cost of capital is the cost of a company's funds (both debt and equity),or, from an investor's point of view "the expected return on a portfolio of allthe company's existing securities".[1] It is used to evaluate new projects of acompany as it is the minimum return that investors expect for providingcapital to the company, thus setting a benchmark that a new project has tomeet

Cost of debt

The cost of debt is computed by taking the rate on a risk free bond whoseduration matches the term structure of the corporate debt, then adding adefault premium. This default premium will rise as the amount of debtincreases (since, ceteris paribus,"all other things being equal", the risk risesas the amount of debt rises). Since in most cases debt expense is a deductibleexpense, the cost of debt is computed as an after tax cost to make itcomparable with the cost of equity (earnings are after-tax as well). Thus, for 

 profitable firms, debt is discounted by the tax rate.

The formula can be written as

 (Rf + credit risk rate)(1-T)

T is the corporate tax rate and Rf is the risk free rate.

K d = Interest(1-Tax Rate)/Debt

=192.47(1-0.339)/8383.26= 0.01517 or 1.52 %

Cost of Equity

The cost of equity is more challenging to calculate as equity does not pay aset return to its investors. Similar to the cost of debt, the cost of equity is

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 broadly defined as the risk-weighted projected return required by investors,where the return is largely unknown. The cost of equity is therefore inferred 

 by comparing the investment to other investments (comparable) with similar risk profiles to determine the "market" cost of equity.

Once cost of debt and cost of equity have been determined, their blend, theweighted-average cost of capital (WACC), can be calculated. This WACCcan then be used as a discount rate for a project's projected cashflows.

CAPM:-

The general idea behind CAPM is that investors need to be compensated intwo ways: time value of money and risk. The time value of money isrepresented by the risk-free (rf) rate in the formula and compensates theinvestors for placing money in any investment over a period of time. Theother half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This iscalculated by taking a risk measure (beta) that compares the returns of theasset to the market over a period of time and to the market premium (Rm-rf)

= 31.217

CONSTANT DIVIDEND GROWTH MODEL:-

A stock valuation model that deals with dividends and their growth,discounted to today. D1 is the return of the current year. D0 is the return on

 previous year.

K e = (D1/Po) +g

= (Do(1+g)/Po) +g

K e = 20.8%

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Weighted Average Cost Of Capital

The Weighted Average Cost of Capital (WACC) is used in finance tomeasure a firm's cost of capital.

The total capital for a firm is the value of its equity (for a firm withoutoutstanding warrants and options, this is the same as the company's marketcapitalization) plus the cost of its debt (the cost of debt should be continuallyupdated as the cost of debt changes as a result of interest rate changes).

 Notice that the "equity" in the debt to equity ratio is the market value of allequity, not the shareholders' equity on the balance sheet.To calculate thefirm’s weighted cost of capital, we must first calculate the costs of theindividual financing sources: Cost of Debt Cost of Preference Capital Cost of Equity Capital.

WACC = wd * K d + we * k e

WACC = 0.5536*1.52 + 0.4464*31.217

= 14.776%

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LEVERAGE

Operating Leverage

The operating leverage is a measure of how revenue growth translates intogrowth in operating income. It is a measure of leverage, and of how risky(volatile) a company's operating income is.

Summarizes the effect a particular amount of operating leverage has on acompany's earnings before interest and taxes

EBIT (PBIT) = PBDIT - DepreciationOperating leverage= (% change in EBIT) / (% change in sales)

2008 2009 2010

DOL 1.29 1.23 1.15

Degree of Financial Leverage

Financial leverage tries to estimate the percentage change in net income for a one percent change in operating income

 The product of the two is called Total leverage, and

estimates the percentage change in net income for a one

percent change in revenue

DFL = EBIT/(EBIT-Interest)

2008 2009 2010

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DFL 1.1 1.07 1.08

Degree of Total Leverage (DTL)

A leverage ratio that summarizes the combined

effect the degree of operating leverage (DOL), and the

degree of financial leverage has on earnings per share (EPS),

given a particular change in sales.

DTL = DOL * DFL

= 1.15 * 1.08

= 1.242

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Working Capital

A measure of both a company's efficiency and its short-term financial health.The working capital ratio is calculated as:

If a company's current assets do not exceed its current liabilities, then it mayrun into trouble paying back creditors in the short term. The worst-casescenario is bankruptcy. A declining working capital ratio over a longer time

 period could also be a red flag that warrants further analysis. For example, itcould be that the company's sales volumes are decreasing and, as a result, itsaccounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlyingoperational efficiency. Money that is tied up in inventory or money thatcustomers still owe to the company cannot be used to pay off any of the

company's obligations. So, if a company is not operating in the most efficientmanner (slow collection), it will show up as an increase in the workingcapital. This can be seen by comparing the working capital from one periodto another; slow collection may signal an underlying problem in thecompany's operations.

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Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently isunable to meet its short-term liabilities with its current assets (cash, accountsreceivable and inventory).

CALCULATION OF DIFFERENT RATIOS FOR THE YEAR

ENDING 31/12/2010

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Conclusion

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