fsa report final

8/8/2019 FSA Report Final

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Financial Accounting Financial Statement Analysis JSW vs. ISPAT

credits . This amount has been treated as miscellaneous income during

our analysis since there is no indication of how sustainable this income will

be in the future.

The annual report of 2007 talks about launching a Clean Development

Mechanism (CDM) Project , the details of which is reproduced verbatim

below:

As a part of Clean Development Mechanism (CDM) initiatives, your

Company has developed a

100 MW Captive Power Plant using waste gases as a Clean Development

Mechanism (CDM) Project,

which was commissioned in April, 2005. This project has been registered

by CDM Executive Board

of UNFCCC on 12th January, 2007. As per the registered project design

document, the company is

eligible for a total 7673254 Certified Emission Reductions (CERs) from

April 2005 to March 2015.

The CERs will be issued after examination by the CDM Executive Board.

Apart from this there were no other significant changes in the accounting

policies.

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FINANCIAL ANALYSIS:

DuPont Analysis:

As per the DuPont analysis, the Return on Investment is broken down into

Profit Margin and Asset Turnover Ratio to understand better the

performance of the company.

RATIOS:

Ratios 2008 2007 2006

Net Profit Margin (PAT/Sales)

13.81

%

13.84

% 12.77%Asset Turnover Ratio (Sales/Average Total

Assets)

0.7484

8

0.7754

94

0.6848

38Return on Investment (PAT/Average Total

Assets)

10.33

%

10.73

% 8.75%

The profit margin increases every year because of increasing PAT every

year except 2008 where there was pressure on margins due to increase in

input costs as raw material costs increased. In 2008, the Company had to

absorb a part of the un-precedented increase in cost of inputs namely; iron

ore, coking coal, coke, ferro alloys and transportation cost squeezing the

margins of the Company.

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Return on investment(ROI)

Net Profit Margin

(PAT / Sales)

Asset Turnover Ratio(Sales/Average Total

Assets)

PAT SALES SALESAVERAGE TOTAL

ASSETS


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Asset turnover ratio increases from 2006 to 2007 due to increase in sales

but in 2008 it falls because fixed assets rose due to commissioning of 1.3

MTPA capacity expansion project.

In 2007, PAT increases for 49.49%, so ROI increases .In 2008, ROI falls as

the average total assets increases as mentioned earlier but increase in

PAT is not proportional.

Ratios 2008 2007 2006Return on Equity (PAT/Avg Shareholder's

funds)

27.63

%

29.06

%

27.47

%

The ROE jumped in 2007 because PAT increased by almost 49.5% but in

2008 it comes down to 27.63% due to increase in shareholders funds.

Shareholders funds increased in 2008 due to increase in general reserves

due to amalgamation of SISCOL and owing to high profits last year.

Ratios 2008 2007 2006Current ratio

(Current Assets/Current Liabilities)

0.7762

7

0.9582

83

0.9818

08Quick ratio

( (Current Assets-Inventory)/Current

Liabilities)

0.4121

08

0.5710

36

0.6518

73

2005-06 2006-07 2007-08

Current Ratio 0.77627 0.95828 0.9818

Quick Ratio 0.4121 0.571 0.6519

0

0.2

0.4

0.6

0.81

1.2

Liquidity Ratios

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The current ratio keeps decreasing YoY as the current liabilities increase

due to increase in sundry creditors and acceptances. This indicates that

JSW is financing its long term assets with current liabilities. In order to get

a better idea of the liquidity condition, we studied the quick ratio. The

quick ratio also falls but is much lesser than the current ratio. This shows

that a large portion of the current assets consist of the inventory and

hence are not readily liquid. The quick ratio is only 0.41 in 2008 indicating

that inventory forms a dominant part of the current assets of the company

(over 46% in 2008) and hence, the liquidity is even lesser than what the

current ratio indicates. The bulk of current liabilities are comprised of

creditors and short term borrowings. JSW needs to take a hard look at its

liquidity position.

Ratios 2008 2007 2006Debt Turnover ratio ( Sales/Average

receivables)

42.975

88

39.368

99

27.294

18Inventory Turnover ratio (sales/Avg

inventory)

7.7808

64

7.3649

97

6.5812

65

The debt turnover ratio rises sharply from 2006 to 2007 because JSW

implemented new terms of trades oriented towards reducing the debt

collection cycle. Domestic customers were generally dispatched finished

products only on receiving funds and international customers were

serviced through export agents against sight L/cs, minimising receivables

risk. This helped in reducing the debt turnover ratio from 13 in 2006 to 9

days in 2007 as shown below.

Ratios 2008 2007 2006

Debt Collection Period

8.4931

36

9.2712

57

13.372

82

Inventory Holding Period

46.909

96

49.558

75

55.460

47

Operating Cycle

55.403

09 58.83

68.833

28

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Even though the inventory rises from 2006 to 2008, the inventory turnover

ratio increases and the inventory holding period decreases because JSW

implemented better inventory management systems. Because of

reduction in inventory holding periods and improved debt collection

mechanisms, the operating cycle reduces from 68 to 55 days. This means

that the companys funds were stuck up in receivables and inventory for a

shorter period which resulted in saving in interest, storage and other

expenses.

Ratios 2008 2007 2006Debt Equity Ratio

((Secured + Unsecured)/Shareholders

fund) 1.021 0.815 1.086Liabilities Equity Ratio

((Debt + Liabilities)/Shareholders funds) 1.909 1.515 2.128

Both the debt equity ratio and the liabilities equity ratio follow similar

trends. There is a fall from 2006 to 2007 followed by a rise in 2008. The

fall in 2007 is due to a rise in the Shareholders funds which is due to the

increased PAT, both of the current year as well as from the previous year

coming through the reserves and surplus. However, both the ratios fall

again in 2008 as the company raised money through term loans and

foreign currency loans (Foreign Currency Convertible Bonds of worth Rs.

1,295.83 crore ) in order to fund its capital expansion.

RatiInterest Coverage r

expe

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1.021

0.815

1.086

0

0.2

0.4

0.6

0.8

1

1.2

2005-06 2006-07 2007-08

Debt-Equity Ratio

Debt-Equity Ratio


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The interest coverage ratio has improved steadily with rising EBIT from2006 to 2008.

EXCEPTIONAL ITEM:

We observed that in the year 2006, the sales of JSW dropped. In order to

cover up the fall in sales, JSW sold 44,99,400 equity shares of Rs. 10 each

of JSW Energy Ltd. (JSWEL) to

Samarth Holdings Pvt. Ltd., an associate company for a consideration of

Rs. 513.70 crores based on an independent valuers report. The profit on

sale of these shares amounting to Rs. 369.20 crores is included in Other

income. This has been classified as Exceptional Income in our analysis

and the other ratios were calculated.

COMPARISON WITH ISPAT:

Comparing the ratios of JSW with ISPAT:

JSW and ISPAT are both steel companies which have sales in the similar

range. However we see that ISPAT is not financially very sound. A look at

the debt equity ratio of ISPAT shows that it is highly leveraged and has lot

of debt on its books. This would make it very risk prone since with therising input costs the profitability will be affected. IPSAT though has its

liquidity current ratios comparable to that of JSW, with JSW being slightly

better off in many years. The return on investment for ISPAT is dismal

since a large chunk of the profits goes towards interest payments. The

sales of both the companies follow a trend in which there is a dip in 2006,

which can be attributed to the steel industry being affected.

On the whole ISPAT does not seem to be an attractive option for an

investor, though it is managing to clock good sales revenue.

JSW ISPATLiquidity Ratios 2008 2007 2006 2008 2007 2006Current ratio (Current Assets/Current

Liabilities)0.78 0.96 0.98 0.69 0.81 0.84

Quick ratio 0.41 0.57 0.65 0.34 0.50 0.51

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((Current Assets-Inventory)/CurrentLiabilities)Earnings Per Share 95.26 80.86 55.57 -0.36 -0.81 -7.93Return on Investment (PAT/Average 10.33 10.73 8.75% 0.29 - -PAT/Sales 13.81 13.84 12.77 0.42 - 16.39Asset Turnover Ratio (Sales/Average

Total Assets)0.75 0.78 0.68 0.69 0.61 0.46

Debt to Equity Ratio 0.98 0.75 0.94 10.66 13.17 12.69Fixed Asset Turnover ratio ( Sales/AvgNet asset)

1.31 1.27 1.07 1.00 0.87 0.69

Debt Turnover ratio ( Sales/Averagereceivables)

42.98 39.37 27.29 13.53 12.08 5.96

Inventory Turnover ratio (sales/Avginventory)

7.78 7.36 6.58 6.39 6.47 6.53

CONCLUSIONS:

The financial analysis provides a lot of useful information. The financial

data available from the annual report is available as raw data which can

be converted into meaningful information through structured analysis

which reveals different patterns in the data. For example, techniques like

common sizing helps in comparing the financial information across

companies in the same sector in order to compare the allocation of

resources and the sources of revenue which in turn helps in monitoring the

health of company with reference to its competitors. For example, a

company whose income is basically due to non-operating income may not

have a sustainable profit.

Sometimes financial statements themselves give a lot of information. For

example a simple analysis of cash flow shows that JSW is on an expansion

mode where in YOY the outflow of investment activity is increasing and

shows that is on an expansion mode.

Also, financial analysis of financial statements across years helps in finding

the hidden truths and facts concealed willingly or unwillingly by the

company in its annual report.

Different stakeholders use the analysis to find information of importance

to them. For example, As investors would be interested in the profitability

ratios of the company like Return on Investment (ROI), Return on Equity

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(ROE), Profit Margin, Asset Turnover Ratio and EPS. These ratios measure

the degree of operating success of the company and hence will give the

information whether we would be able to get a reasonable return in the

form of capital gain and dividends. They would also look at the solvency

ratios like Debt-Equity Ratio and Liability equity ratio to get information

about the risk status of the company as debt is considered more riskier

than equity.

The financial analysis of the company reveals the following strengths and

weaknesses in the operations of the company:

Strong Areas:

1. The debt turnover ratio rises sharply from 2006 to 2007 because

JSW implemented new terms of trades oriented towards reducing the

debt collection cycle. Domestic customers were generally dispatched

finished products only on receiving funds and international

customers were serviced through export agents .This helped in

reducing the debt turnover ratio from 13 in 2006 to 9 days in 2007

as shown below.

2. They also have got into selling of Carbon credits. In 2008, they sold

Rs 111.11 worth od carbon credits. This is a promising avenue in

future also.

3. They have implemented better inventory management system

which has reduced the collection period steadily over the 3 years.

4. They have been increasing expanding their capacity over the past

three years.

Weak Areas:

The current ratio keeps decreasing YoY as the current liabilities increase

due to increase in sundry creditors and acceptances. This indicates that

JSW is financing its long term assets with current liabilities. Also, the quick

ratio also falls but is much lesser than the current ratio. This shows that a

large portion of the current assets consist of the inventory and hence are

not readily liquid. The quick ratio is only 0.41 in 2008 indicating that

inventory forms a dominant part of the current assets of the company.

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Deferred Tax Liability 1,251.84 1,012.66 742.07 305.49

Total Sources of Funds20,577.9

912,870.6

011,210.

428,549.

16APPLICATION OF FUNDS :

FIXED ASSETS

Gross Block 13,952.32 10,512.768,368.4

37,520.3

0

Less : Accumulated Depreciation 2,996.83 2,323.661,850.4

51,443.9

1

Net Block 10,955.49 8,189.106,517.9

86,076.3

9

Net Fixed Assets10,955.4

9 8,189.106,517.9

86,076.

39

CURRENT ASSETSInventories 1,549.16 1,011.35 924.23 743.41Sundry Debtors 337.39 245.16 229.19 266.6Cash and Bank 339.22 337.8 98.87 122.49Loans and Advances 842.15 549.28 979.42 761.5Other Current Assets 18.62 342.04 513.7 0Short Term Investments 215.75 17.06 4.88 4.88

Total Current Assets 3,302.29 2,502.692,750.2

91,898.

88 OTHER ASSETS

Capital Work in Progress 5,612.43 2,002.931,861.9

5 349.30Long Term Investments 707.78 175.88 80.2 224.69

Total Other Assets 6,320.21 2,178.811,942.1

5 573.99

Total Application of Funds

20,577.9

9

12,870.6

0

11,210.

42

8,549.

26

Useful Ratios

Useful Calculations 2008 2007 2006

Average Net Assets 9572.295 7353.546297.1

85

Average Debtors (Receivables) 291.275 237.175247.89

5

Average Total Assets 16724.312040.5

19879.8

4

Average Inventory 1280.255 967.79 833.82Average Shareholder Funds 6254.235 4446.65 3146.6

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1

Profitability Ratios 2008 2007 2006Profit Margin /Return on Sales ( PAT/Sale) 13.81% 13.84% 12.77%

Asset Turnover Ratio (Sales/Average TotalAssets) 0.748 0.775 0.685Return on Investment (PAT/Average TotalAssets) 10.33% 10.73% 8.75%Return on Equity (PAT/Avg Shareholder'sfunds) 27.63% 29.06% 27.47%Basic EPS 95.26 80.86 55.57Diluted EPS 94.18 79.62 55.57

Liquidity Ratios 2008 2007 2006Current ratio (Current Assets/CurrentLiabilities) 0.776 0.958 0.982Quick ratio ( (Current Assets-Inventory)/CurrentLiabilities) 0.412 0.571 0.652 Fixed Asset Turnover ratio ( Sales/Average Netasset) 1.308 1.270 1.074Debt Turnover ratio ( Sales/Averagereceivables) 42.976 39.369 27.294Inventory Turnover ratio (sales/Avg inventory) 7.781 7.365 6.581

Debt Collection Period 8.493 9.271 13.373Inventory Holding Period 46.910 49.559 55.460Operating Cycle 55.403 58.830 68.833

Solvency Ratios 2008 2007 2006Debt Equity Ratio( (Secured + Unsecured) / Shareholdersfunds ) 0.984 0.746 0.940Liabilities Equity Ratio( (Debt + Liabilities) / Shareholders funds ) 1.909 1.515 2.128Interest Coverage ratios(PBIT/Interest expense) 6.640 5.793 3.586

Cash Flow Statement - JSW

CASH FLOW STATEMENT for year ended 31 MarchParticulars 2008 2007 2006 2005

Cash and Cash Equivalents at Beginningof the year 265.55 49.08 43.23 45.69

Net Cash from Operating Activities3,552.7

02,822.2

61,574.9

61,998.4

0

Net Cash Used in Investing Activities

-5,636.3

6

-2,244.5

5

-1,304.1

1 -409.52

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Net Cash Used in Financing Activities2,124.9

3 -384.39 -265

-1,594.5

9Net Inc/(Dec) in Cash and CashEquivalent 41.27 193.32 5.85 -5.71Cash and Cash Equivalents at End of theyear 306.82 242.40 49.08 39.98Op. Profit before Working CapitalChanges

3,338.84

2,793.69

1,669.28

1218.97

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TREND ANALYSIS

Profit & Loss Statements of JSW 2008 2007 2006 2005 2008 2007 2006

Sales Turnover12,517.

809337.3

46766.0

9 7035.9 34.06% 38.00% -3.83%Total OperatingExpenses

9961.49

7127.77

5487.59

5109.07 39.76% 29.89% 7.41%

Operation Profit2,556.3

12,209.5

71,278.5

01,926.8

3 15.69% 72.83% -33.65%Add: Non operating

income 368.25 105.15 382.96 18.98250.21

%-

72.54%1917.70

%Profit before interestand tax

2,924.56

2,314.72

1,661.46

1,945.81 26.35% 39.32% -14.61%

Less: InterestCharges 440.44 399.54 360.32 469.87 10.24% 10.88% -23.31%

Profit Before Tax2,484.1

21,915.1

81,301.1

41,475.9

4 29.71% 47.19% -11.84%Less: Income Tax 755.93 623.18 436.85 602.5 21.30% 42.65% -27.49%Exceptional item 0 0 0 -3.33

Profit After Tax1,728.

191,292.

00 864.29 870.11 33.76% 49.49% -0.67%

Balance Sheet

Year (Rs in Crs) Mar-08 Mar-07 Mar-06Mar-

05 2008 2007 2006 SOURCES OF FUNDS : Share Capital 248.08 246.77 218.03 190.1 0.53% 13.18% 14.69%

Reserves Total7,140.2

44,873.3

83,555.1

22,329.9

7 46.52% 37.08% 52.58%Total ShareholdersFunds

7,388.32

5,120.15

3,773.15

2,520.07 44.30% 35.70% 49.72%

Total CurrentLiabilities

4,254.05

2,611.64

2,801.25

1,859.39 62.89% -6.77% 50.65%

Total Long TemLiabilities

7,683.78

4,126.15

3,893.95

3,864.21 86.22% 5.96% 0.77%

Deferred TaxLiability

1,251.84

1,012.66 742.07 305.49 23.62% 36.46% 142.91%

Total Sources of Funds

20,577.99

12,870.60

11,210.42

8,549.16 59.88% 14.81% 31.13%

APPLICATION OF FUNDS : FIXED ASSETS

Gross Block13,952.

3210,512.

768,368.4

37,520.3

0 32.72% 25.62% 11.28%Less : AccumulatedDepreciation

2,996.83

2,323.66

1,850.45

1,443.91 28.97% 25.57% 28.16%

Net Block10,955.

498,189.1

06,517.9

86,076.3

9 33.78% 25.64% 7.27%Net Fixed Assets 10,955 8,189. 6,517. 6,076. 33.78% 25.64% 7.27%

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.49 10 98 39 CURRENT ASSETS

Inventories1,549.1

61,011.3

5 924.23 743.41 53.18% 9.43% 24.32%Sundry Debtors 337.39 245.16 229.19 266.6 37.62% 6.97% -14.03%

Cash and Bank 339.22 337.8 98.87 122.49 0.42%241.66

% -19.28%

Loans and Advances 842.15 549.28 979.42 761.5 53.32%-

43.92% 28.62%

Other Current Assets 18.62 342.04 513.7 0-

94.56%-

33.42%

Short Term Investments 215.75 17.06 4.88 4.881164.6

5%249.59

% 0.00%

Total Current Assets3,302.

292,502.

692,750.

291,898.

88 31.95% -9.00% 44.84%

OTHER ASSETS Capital Work inProgress

5,612.43

2,002.93

1,861.95 349.30

180.21% 7.57% 433.05%

Long Term Investments 707.78 175.88 80.2 224.69302.42

%119.30

% -64.31%

Total Other Assets6,320.

212,178.

811,942.

15 573.99190.08

% 12.19% 238.36% Total Application of Funds

20,577.99

12,870.60

11,210.42

8,549.26 59.88% 14.81% 31.13%

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