steel industry financial analysis

Financial Analysis of Steel

Industry in India IIM Lucknow, IPMX

06 Jul 2015

MANAC Project

Submitted to Prof Prakash Singh Submitted By:

Deepak Parthasarathi IPMX08016

Siddharth Jain IPMX08048

Sundar Viswanathan IPMX08052

Veeral Kamalia IPMX08057

Vengada Ramanan IPMX08058

Visharad Pandey IPMX08061

Steel Industry in India

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Contents

Choice of the industry and players .......................................................................................................... 4

JSW Steel: ............................................................................................................................................... 4

Tata Steel: ............................................................................................................................................... 4

SAIL: ......................................................................................................................................................... 5

Macro-economic factors impacting the steel industry .......................................................................... 5

Characteristics of Steel Industry .............................................................................................................. 6

Business Model: ..................................................................................................................................... 6

Constraints: ............................................................................................................................................. 6

Threat of new entrants: ......................................................................................................................... 6

Threat from substitutes: ......................................................................................................................... 7

Major Accounting Policies Usage and Comparison:........................................................................... 7

Valuation of Inventories ......................................................................................................................... 7

Depreciation ............................................................................................................................................ 8

Recognition of Revenues: ..................................................................................................................... 9

Foreign Currency Transactions .......................................................................................................... 10

Impact of IFRS .......................................................................................................................................... 11

Deviations in Accounting Policies .......................................................................................................... 11

Financial Reports ..................................................................................................................................... 12

Liquidity Ratios And Solvency Ratios................................................................................................ 12

Current Ratios ................................................................................................................................... 12

Debt Equity Ratio ............................................................................................................................. 13

Management Efficiency Ratios ........................................................................................................... 15

Inventory Turnover Ratio ................................................................................................................. 15

Debtors Turnover Ratio ................................................................................................................... 16

Fixed Assets Turnover Ratio (Based on sales) ........................................................................... 18

Profitability Ratios................................................................................................................................. 19

Operating Profit Margin(%) ............................................................................................................. 19

Profit Before Interest And Tax Margin(%) .................................................................................... 20

Gross Profit Margin(%) .................................................................................................................... 21

Net Profit Margin(%) ........................................................................................................................ 22


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EPS..................................................................................................................................................... 23

Return On Capital Employed(%) .................................................................................................... 24

Cash Flow Indicator Ratios ................................................................................................................. 25

Dividend Payout Ratio ..................................................................................................................... 25

Du Pont Analysis .............................................................................................................................. 26


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Choice of the industry and players

India is the fourth largest producer of crude steel and the largest producer of sponge iron in the

world. Indias steel production has grown at CAGR of about 7 percent from FY2008 to FY2013.

With the current Governments make in India initiative, the demand for steel is expected to

increase further.

Steel industry has both private and public sector participation. The top three Companies by

production account for almost 40% of the total steel production in India and the demand for steel

is indirect, meaning it is dependent on the demand of products using steel as an input. While the

global steel market is under pressure, the Indian steel sector has been growing slowly but

steadily. These factors make steel an interesting sector to research. We have selected JSW

Steel, Tata Steel and SAIL to research as they are the three largest Steel producers in India.

JSW Steel:

One of the largest Indian private sector steel producer, Jindal South West Steel or JSW Steel is

the flagship company of the JSW Group. Originally incepted as single steel mill in 1982, JSW

steel is now a US$ 9 billion global conglomerate spread over six locations in India and with a

footprint that extends to the US, South America and Africa.

The company's strategy of always staying on the leading edge of technical advancement has

led to partnerships with global sector leaders such as JFE Steel, Marubeni Itochu Steel, Praxair

and Severfield Rowen Plc. This technological edge has helped JSW's plants rank among the

lowest-cost steel producers in the world. The strong focus on innovation and research and

development (R&D) has led to JSW Steel being recognized worldwide as a purveyor of high-

end, value-added steel. Nearly 40 percent of its products today are high value steels and nearly

one-fifth is exported.

It recently inaugurated India's most modern cold rolling mill; wins the Prime Minister's Trophy for

Excellence in Performance.

Tata Steel:

Leaders in the Indian Steel Sector, Tata Steel was founded in 1907 by Mr. J N Tata. It started

as Asia's first integrated private sector steel company and presently is among the top ten global

steel companies with an annual crude steel capacity of nearly 30 million tonnes per annum

(MTPA). It is now the world's second-most geographically-diversified steel producer with

operations in 26 countries, commercial presence in over 50 countries and a strength of 80,000

employees across five continents.

Tata Steel founded India's first industrial city, Jamshedpur, where it established the country's

first integrated steel plant. The company is focused not only on the execution of the plant

facilities but also on addressing the socio-economic infrastructure needs of an industrial

enterprise of this scale. Presently, it has plans for two new Greenfield steel projects in the Indian


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states of Jharkhand and Chhattisgarh. It recently launched Ferro Manganese and Ferro Chrome

brands.

SAIL:

SAIL is India's largest steel producing company. With a turnover of Rs. 49,350 crore, the

company is among the seven Maharatnas of the country's Central Public Sector Enterprises.

SAIL has five integrated steel plants, three special plants, and one subsidiary in different parts

of the country. It is a fully integrated iron and steel maker, producing both basic and special

steels for domestic construction, engineering, power, railway, automotive and defense industries

and for sale in export markets. It is expected to receive a part of the 12000 crore funding based

on the make in India initiative by the Narendra Modi Government.

Macro-economic factors impacting the steel industry

a. GDP: Over the next 12 years at a GDP growth of 6 6.5%, and a GDP elasticity of

steel demand at 1.1, the likely growth of steel consumption growth rate is estimated at

7.3% per year and the finished steel consumption in 2025-26, on this basis, is estimated

to grow to 155 170 million tonnes by that year.

b. Changing Energy Prices: If natural gas prices remain reasonably priced in a number

of regions such as the USA and the Middle East, blast furnace construction will be

diminished and steel scrap-substitute production will be enhanced.

c. Make in India: The goal of Indian government to increase share of manufacturing to

25% of GDP by 2025 the target if achieved can propel the usage of finished steel from

16 kgs / $ PPP in the year 2012 to 22 25 kgs / $ PPP in the year 2025. This would

mean a growth in steel consumption of 9 -10 percent and the steel consumption in 2025-

26 is likely to be around 230 255 million tonnes.

d. Availability of raw materials and iron ore: The availability of iron ore, coal will be

crucial. India is still dependent on import of such items. Less availability will impact the

production of steel and can impact the prices.

e. Technological advances: Global research on technology is expected to bring in a

technology revolution in the steel industry especially in view of the increasing stringency

in maintaining environmental standards. Technological developments are more likely to

be seen in mining of both iron ore, use of coal and production of iron. The steel industry

will have to cater to the requirement of the technology changes in the end use areas.

Demand for lighter and stronger steel will require technology change in steel making and

rolling. Technology change in product areas will require high investment and not all the

steel producers will be able to respond to it quickly.

f. Steel scrap in China: A rising and sizeable surplus of steel scrap in China will turn the

global metallic balance situation upside-down. Obsolete steel scrap availability will

significantly increase by 2025.


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Characteristics of Steel Industry

Business Model:

Crude steel capacity was 101 MTPA in 2013-14 and India, the 4th largest producer of crude

steel in the world. Capability of producing a variety of grades and also of international quality

standards is a differentiating factor and helps Indian companies compete with the global

players. The country become the 2nd largest producer of crude steel in the world soon, provided

all requirements for creation of fresh capacity are adequately met.

Constraints:

a. Demand-side:

The growth in the steel market is expected to be muted in the short term on account of poor

growth in core consumer sectors such as infrastructure and construction. However, the demand

is expected to rebound in the latter half of 2015 with growth in infrastructure as announced in

the Twelfth Five-year Plan. Growth in the automobile and consumer durable sectors will also

help demand growth in the long term.

Sales of the steel industry are estimated to have grown by seven per cent for the year ended

March 2015. Surge in imports and weak demand led to the mediocre performance by steel

companies. Steel companies faced a hit on both the realizations and volumes front. Steel prices

declined by 6.9 per cent during 2014-15. Sales volumes also fell due to weak demand and rise

in imports. Going forward, sales of the industry are expected to grow by nine per cent in 2015-

16. In 2015-16, industry is expected to perform well owing to rise in demand.

b. Supply-side:

The large steel players and new entrants have announced capacity addition of about 71 MTPA

till 2017. Regulatory hurdles and land acquisition challenges remain the largest supply-side

constraint for the Indian steel market. Procurement of iron ore continued to be a problem for

steel manufacturers in the first half of 2014-15.The domestic prices of iron ore were

considerably higher as compared to international prices during this period. The raw material

costs are likely to rise by 8.2 per cent, a tad faster than sales.

At the net level, profits growth will be restricted to 8.3 per cent in 2015-16. Among post-

operating expenses, financial charges and depreciation are likely to rise by 12.1 per cent and

10.7 per cent, respectively. Owing to this, net profit as a percentage of total income is likely to

remain unchanged at 3.1 per cent.

Threat of new entrants:

Because of entry barrier caused by extensive investment in plants and equipment, cost of

licensing, difficulties in procuring raw materials there is a threat to the existing players, who are

well placed in global business and are well equipped in terms of plant and procurement the

entrants is not a major concern.


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Threat from substitutes:

Substitutes for steel range from aluminum, cement, composites, glass to wood, plastic, etc. A

shift toward other substitutes, whether due to lower costs or government mandates on the basis

of environmental or other reasons, would significantly impact prices and demand for steel

products.

However, higher switching costs, unavailability of safe substitutes in construction and

automobile industry are likely to prevent dominance of substitutes.

Major Accounting Policies Usage and Comparison:

Valuation of Inventories

India: (Accounting Standard 2)

This standard provides some guidance on determining the value of inventories and cost

formulas.

Inventory includes raw materials, WIP and finished goods.

Finished and semi-finished products produced and purchased by the Company are carried

at lower of cost and net realisable value.

Work-in-progress is carried at lower of cost and net realisable value.

Coal, iron ore and other raw materials produced and purchased by the Company are

carried at lower of cost and net realisable value.

Stores and spare parts are carried at cost. Necessary provision is made and expensed in

case of identified obsolete and nonmoving items.

Cost of inventories is generally ascertained on the weighted average basis. Work-in-

progress and finished and semi-finished products are valued on full absorption cost basis.

Cost of goods is the summation of cost of purchase, cost of conversion (costs of material other

than direct materials i.e. direct labour and variable overheads) and other costs. Exclusion from

cost of inventories include abnormal wastage of material and labour.

International: (IAS 2)

IAS 2 requires the use of First-in, First-out (FIFO) principle whereby the items which have been

in stock the longest are considered to be the items that are being used first, ensuring those

items which are held in inventory at the reporting date are valued at the most recent price. As an

alternative, costs of inventories may be assigned by using the weighted average cost formula.


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As stated earlier the value of inventories must be recorded at the lower of cost or net realisable

value. Where net realisable value drops to below the cost of inventory the loss is to be

recognised as an expense in the period in which the drop of value occurs.

Raw materials, stores & spares and finished/semi-finished products (including process scrap)

are valued at lower of cost and net realisable value of the respective plants/units. In case of

identified obsolete/ surplus/ non-moving items, necessary provision is made and charged to

revenue. The net realisable value of semi-finished special products, which have realisable value

at finished stage only, is estimated for the purpose of comparison with cost. Residue products

and other scrap are valued at estimated net

Realizable value.

The basis of determining cost is:

Raw materials - Periodical weighted average cost

Minor raw materials Moving weighted average cost

Stores & Spares Moving weighted average cost

Materials in-transit - At cost

Finished/Semi-finished products Material cost plus appropriate share of labour, related

overheads and duties.

Indian Accounting uses Weighted Average Method whereas IFRS accounting standard uses

Average Method

Depreciation

India (Accounting Standard 6)

Depreciation is provided on straight-line method based on the estimated useful life of the asset

but subject to the minimum rates specified in Schedule XIV to the Companies Act, 1956.

Where the historical cost of a depreciable asset undergoes a change, the depreciation on the

revised unamortised depreciable amount is provided over the residual useful life of the asset.

Classification of plant and machinery into continuous and non-continuous is made on the basis

of technical opinion and depreciation provided accordingly.

Depreciation on addition/deletion during the year is provided on pro-rata basis with reference to

the month of addition/deletion.


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International (IAS 16)

Property, plant and equipment is recorded at cost less accumulated depreciation and

impairment. Cost includes all related costs directly attributable to the acquisition or construction

of the asset. Except for land and assets used in mining activities, property, plant and equipment

is depreciated using the straight-line method over the useful lives of the related assets.

Recognition of Revenues:

India (Accounting Standard 9):

Sales include excise duty and are net of rebates and price concessions. Sales are recognized at

the time of dispatch of materials to the buyers including the cases where delivery documents

are endorsed in favor of the buyers. Where the contract prices are not finalized with government

agencies, sales are accounted for on provisional basis. Marine export sales are recognized on:

i) The issue of bill of lading, or

ii) Negotiation of export bills upon expiry of laycan period, in cases where 'realization of material

value without shipment is provided in the letters of credit of respective contracts, whichever is

earlier. Export incentives under various schemes are recognized as income on certainty of

realization. The iron ore fines not readily useable/saleable included in inventory, are recognized

on disposal.

International (IAS18):

Revenue is measured at the fair value of the consideration received or receivable. Revenue is

reduced for estimated customer returns and other similar allowances. Revenue from the sale of

goods is recognized when the Company has transferred to the buyer the significant risks and

rewards of ownership of the goods, no longer retains control over the goods sold, the amount of

revenue can be measured reliably, it is probable that the economic benefits associated with the

transaction will flow to the Company, and the costs incurred or to be incurred in respect of the

transaction can be measured reliably. Revenue from the sale of iron ore is recognized when the

risk and rewards of ownership are transferred to the buyer. The selling price is contractually

determined on a provisional basis, based on a reliable estimate of the selling price and

adjustments in the price may subsequently occur depending on movements in the reference

price or contractual iron ore prices to the date of the final pricing and final product specifications


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Foreign Currency Transactions

India (Accounting Standard 11)

Monetary assets and liabilities denominated in foreign currency remaining unsettled at the end

of the year are translated at year-end rates.

The exchange differences in translation of monetary assets and liabilities and realised gains and

losses on foreign exchange transactions other than those relating to fixed assets, are

recognised in the Statement of Profit and Loss. In respect of transactions covered by forward

exchange contracts entered into to hedge foreign currency risks, the difference between the

contract rate and spot rate on the date of the transaction is recognised in the Statement of Profit

and Loss over the period of the contract. The Company had opted for accounting the exchange

differences arising on reporting of long term foreign currency monetary items in line with

Companies (Accounting Standards) Amendment Rules, 2009 relating to Accounting, Standard -

11 notified by Government of India on 31st March, 2009 (as amended on 29th December 2011).

Accordingly, exchange differences (including arising out of forward exchange contracts) relating

to long-term monetary items, arising during the year, in so far as they relate to the acquisition of

fixed assets, are adjusted in the carrying amount of such assets

International (IAS 21)

Transactions in currencies other than the functional currency of a subsidiary are recorded at the

rates of exchange prevailing at the date of the transaction. Monetary assets and liabilities in

currencies other than the functional currency are remeasured at the rates of exchange

prevailing on the date of the consolidated statements of financial position and the related

transaction gains and losses are reported within financing costs in the consolidated statements

of operations. Non-monetary items that are carried at cost are translated using the rate of

exchange prevailing at the date of the transaction. Non-monetary items that are carried at fair

value are translated using the exchange rate prevailing when the fair value was determined and

the related transaction gains and losses are reported in the consolidated statements of

comprehensive income


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Impact of IFRS

Particular Indian GAAP On transition to IFRS

Standard AS-9 Revenue Recognition IAS-18 Revenue

Revenue Definition

Revenue is the gross inflow of

cash, receivables or other

consideration arising in the

course of the ordinary activities

from the scheduled services

(such as passenger, excess

baggage ,mail, and cargo),

and from the use by others of

enterprise resources yielding

handling and servicing

revenue, manufacturers credit

and incidental revenue.

Revenue is the gross inflow of

economic benefits during the period

arising in the course of the ordinary

activities of an entity when those

inflows result in increases in equity,

other than increases relating to

contributions from equity participants.

Amounts collected on behalf of third

parties such as sales and service

taxes and value-added taxes are

excluded from revenues.

Depreciation

Similar to IFRS except where

the useful life is shorter as

envisaged under the

companies act, the

depreciation is computed by

applying a higher rate.

Allocated on a systematic basis to

each accounting period over the

useful life of the asset.

Interest Expense

Recognized on an accrual

basis. Practice varies with

respect to discounts.

Recognized on an accrual basis

using the effective interest method

Acquired Intangible

assets Revaluations are not permitted

Revaluations are permitted in rare

circumstances

Capitalization of

borrowing costs Required

Permitted as a policy choice. But not

required.

Deviations in Accounting Policies

For JSW Steel, the auditors drew attention to the fact that No provision was present against the

carrying amount of investments and loan aggregating to Rs. 2,007.46 crores and with respect to

financials guarantees of Rs. 2,752.57 crores relating to JSW Steel (USA) Inc., a subsidiary of

the company due to losses from operations.

In the opinion of the Board of Directors of JSW Steel, based on independent valuation of the

underlying fixed assets, review and assessment of business plan and expected future cash

flows of JSW Steel (USA) Inc., the decline is temporary and hence no provision is required.


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Financial Reports

Liquidity Ratios and Solvency Ratios

Liquidity ratios are intended to provide information about a firms short term solvency. One of

the primary concern of a firm is its ability to pay its bills over the short run without undue stress.

Consequently Liquidity ratios focus on current assets and current liabilities.

Current Ratios

Current Ratio = (Current Assets / Current Liability).

The ratio is mainly used to give an idea of the company's ability to pay back its short-term

liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The

higher the current ratio, the more capable the company is of paying its obligations.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability

to turn its product into cash. Companies that have trouble getting paid on their receivables or

have long inventory turnover can run into liquidity problems because they are unable to alleviate

their obligations.

Current Ratio FY-10 FY-11 FY-12 FY-13 FY-14

Industry

1.7

1.9

1.5

1.5

1.3

Tata Steel

1.4

1.6

1.0

0.9

0.6

JSW

0.7

0.9

1.1

1.1

1.0

SAIL

2.3

2.6

2.0

1.9

1.6

Tata Steel: Current assets decreased in FY 2012 whereas current liability increased at a

relatively sharper rate.

Increase in Debtors is mainly on account of discontinuation of Receivable Purchase (RP)

program during Financial Year 2011-12.

Loans and advances decreased because repayment of loan by Tata Steel Holding

(TSH) as well as reduction in advance against.

Equity due to issuance of shares by TSH during the year.

Sundry Debtors were higher than previous year primarily on account of discontinuation

of the receivable purchase schemes


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JSW:

The trend remained upwards indicating steady performance.

SAIL:

Decline in current ratio for the year 2011-2012... Though the short term advances increased,

there was a net reduction in cash for year 2011-2012. The repayment of borrowings and capital

expenditure led to decrease in cash.

Debt Equity Ratio

Debt Equity Ratio (DER) = (Total Liabilities / Shareholder's Equity)

It is a measure of a company's financial leverage calculated by dividing its total liabilities by

stockholders' equity. It indicates what proportion of equity and debt the company is using to

finance its assets.

If a lot of debt is used to finance increased operations (high debt to equity), the company could

potentially generate more earnings than it would have without this outside financing. If this were

to increase earnings by a greater amount than the debt cost (interest), then the shareholders

benefit as more earnings are being spread among the same amount of shareholders. However,

the cost of this debt financing may outweigh the return that the company generates on the debt

through investment and business activities and become too much for the company to handle.


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Debt Equity Ratio FY-10 FY-11 FY-12 FY-13 FY-14

Industry

1.0

1.0

1.1

1.2

1.3

Tata Steel

0.7

0.7

0.6

0.6

0.5

JSW

1.2

0.7

0.9

0.9

1.1

SAIL

0.5

0.6

0.5

0.7

0.7

Tata Steel:

There is not much variation observed in Debt Equity ratio over the observed periods

JSW Steel

There is a sharp decline for year 2010-2011. Company could meet its entire repayment

schedule in 2010-2011. This led to reduction in debt equity ratio from 1.19 in 2009-2010

to .72 in 2010-2011.

SAIL

With SAIL meeting Capex requirements mainly through internal resources, the

companys market borrowings were reduced. This led to small reduction in Debt Equity

ratio for year 2011-2012.


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Management Efficiency Ratios

There is an overall decrease in the efficiency of all the ratios.

Inventory Turnover Ratio

This Ratio is calculated by taking ratio of Cost of Goods Sold and Average Inventory.

Inventory Turnover = COGS

-------------------------------------

Average Inventory

For Tata Steel, Inventory Turnover ratio has marginally decreased. This is due to the fact

that Net Inventories were increasing YoY at a faster rate than COGS.

For SAIL, in the last two years, Inventory Turnover Ratio has decreased. This is due to

the fact that COGS increased every year except 2012-2013 year whereas Inventory

increased throughout.

For JSW, over the last 5 years, the sales are showing an upward trend resulting in

gradual increase in Inventory Turnover Ratio.

Inventory Turnover

Ratio FY-10 FY-11 FY-12 FY-13 FY-14

Industry

3.7

3.4

3.4

3.1

3.1

Tata Steel

4.2

4.1

4.0

4.3

4.1

JSW

5.3

5.4

5.6

5.5

6.2

SAIL

3.5

3.4

3.2

2.4

2.5


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Debtors Turnover Ratio

Also called Receivables Turnover Ratio, this ratio indicates the relationship between net credit

sales and trade debtors. Basically, we can get the rate at which we generate cash by the

turnover of the debtors.

Debtors Turnover Ratio = Credit Sales

-----------------------------

Average Debtors

The Debtors Turnover Ratio is usually supplemented by Average Collection period. The usage

of two involves:

Calculation of Daily Sales, given by:

Sales per Day = Net Sales (Credit)

-----------------------------------

No. of working days in a year

Average collection period (ACP), given by:

ACP = Days in the year

----------------------------------------------

Debtors Turnover Ratio


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Tata Steel, Debtors Turnover Ratio has increased from 2010 to 2011 because of

decrease in collection period...

SAIL, we observe a decrease because of the increase in collection period - due to the

recession and the credit crunch faced by many customers.

Gathered from: Journal of Business Management, Commerce and Research, Vol-11, No-6, December-2013

For JSW, We observe gradual reduction in the Debtors turnover ratio because the

Account Receivables were increasing YoY indicating much more liberal Collection period

leading to only marginal improvement in Sales.

Debtors Turnover Ratio FY-10 FY-11 FY-12 FY-13 FY-14

Industry

15.6

16.2

16.0

13.2

12.5

Tata Steel

61.5

74.3

55.7

49.8

59.1

JSW

34.5

36.1

32.7

24.7

24.2

SAIL

12.6

12.5

11.5

10.9

10.6


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Fixed Assets Turnover Ratio (Based on sales)

This Ratio indicates the efficiency with which the firm is using its investments in Fixed Assets

such as plants, machinery and Land. The formula for this ratio is:

Fixed Assets Turnover Ratio= Sales (or Cost of Sales)

---------------------------------------------------------

Net Fixed Assets

Tata Steel, Fixed Assets Turnover Ratio has been increasing from 2010 to 2012

signaling more sales per unit of Fixed Assets but the trend is declining in the last two

years.

SAIL, decrease in Asset Turnover Ratio is observed from 2010 to 2014 because they

have accumulated Fixed Assets at a much higher rate (220%) than the rate of increase

in sales (15%).

JSW, Sales have increased 150% from 2010 to 2014 in tandem with the 90% increase in

Fixed Assets leading to marginal increase in Asset Turnover Ratio.


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Fixed Assets Turnover

Ratio (Based on sales) FY-10 FY-11 FY-12 FY-13 FY-14

Industry

1.8

1.8

1.7

1.3

1.3

Tata Steel

2.1

2.5

2.9

2.1

1.7

JSW

1.1

1.2

1.3

1.3

1.4

SAIL

3.0

3.0

2.9

2.6

2.1

Profitability Ratios

The Profitability ratios are on a decline because of the following reasons in the large steel

industry.

Operating Profit Margin (%)

Operating Profit Margin (%) = (Operating Income/Net Sales)*100

This is a measurement of what proportion of a company's revenue is left over after paying for

variable costs of production such as wages, raw materials, etc. A healthy operating margin is

required for a company to be able to pay for its fixed costs, such as interest on debt. Operating


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margin gives analysts an idea of how much a company makes (before interest and taxes) on

each dollar of sales

Operating Profit Margin

(%) FY-10 FY-11 FY-12 FY-13 FY-14

Industry 27% 23% 20% 17% 19%

Tata Steel 41% 43% 38% 30% 32%

JSW 27% 21% 16% 17% 16%

SAIL 29% 21% 17% 12% 13%

Profit Before Interest and Tax Margin (%)

EBIT = Revenue - COGS- Operating Expenses

This is an indicator of a company's profitability, it is calculated as revenue minus expenses,

excluding tax and interest. It is also called EBIT or earnings before interest and taxes. It is also

referred to as "operating earnings", "operating profit" and "operating income".

It is all the profits before taking into account interest payments and income taxes. An important

factor contributing to the widespread use of EBIT is that it nulls the effects of the different capital

structures and tax rates used by different companies. By doing this it creates a common ground

for comparisons.


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Profit Before Interest

And Tax Margin (%) FY-10 FY-11 FY-12 FY-13 FY-14

Industry 22% 18% 15% 12% 14%

Tata Steel 36% 39% 35% 25% 28%

JSW 20% 16% 10% 12% 10%

SAIL 26% 18% 13% 9% 9%

Gross Profit Margin (%)

Gross Profit margin (%) = (Gross Profit/Net Sales)*100

This measurement is used to assess a firm's financial health by revealing the proportion of

money left over from revenues after accounting for the cost of goods sold. Gross profit margin

serves as the source for paying additional expenses and future savings. Without an adequate

gross margin, a company will be unable to pay its operating and other expenses and build for

the future. In general, a company's gross profit margin should be stable. It should not fluctuate

much from one period to another, unless the industry it is in has been undergoing drastic

changes which will affect the costs of goods sold or pricing policies.

Based on the heads under capitaline data, Gross Profit margin has been taken as the money

left over after accounting for all expenses except depreciation and tax

Gross Profit Margin (%) FY-10 FY-11 FY-12 FY-13 FY-14

Industry 22% 18% 14% 11% 12%

Tata Steel 33% 37% 32% 25% 28%

JSW 22% 18% 12% 13% 10%

SAIL 28% 20% 14% 10% 11%


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Net Profit Margin (%)

Net Margin (%) = (Net Profit/Revenue)*100, where Net Profit = Revenue - COGS - Operating

Expenses - Interest and Taxes

This measurement is a ratio of net profits to revenues for a company or business segment -

typically expressed as a percentage that shows how much of each currency unit earned by

the company is translated into profits. Companies that are able to expand their net margins over

time will generally be rewarded with share price growth, as it leads directly to higher levels of

profitability.

Net Profit Margin (%) FY-10 FY-11 FY-12 FY-13 FY-14

Industry 11% 10% 7% 5% 5%

Tata Steel 18% 21% 18% 14% 15%

JSW 11% 9% 6% 6% 5%

SAIL 17% 11% 8% 5% 4%


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EPS

Earnings per share = Net profit available to Equity-holders/Number of ordinary shares

outstanding

This is a measurement of the profit available to the equity shareholders on a per share basis

that is the amount they can get on every share held. It is calculated by dividing the profits

available to the equity shareholders by the number of the outstanding shares. This does not

reveal how much has been paid to the shareholders as dividend nor how much of the earnings

are retained in the business. It only shows how much earnings theoretically belong to the

ordinary shareholders (per share basis)

EPS FY-10 FY-11 FY-12 FY-13 FY-14

Tata Steel

49.8

65.7

62.7

54.9

65.9

JSW

12.3

12.1

12.0

12.2

13.0

SAIL

16.3

11.6

9.0

5.5

4.5


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Return on Capital Employed (%)

Return on capital employed (ROCE) = (EBIT - Other Income)/ (Total Shareholders Equity + non-

current liabilities)

The term capital employed refers to long term funds supplied by the lenders and owners of the

firm. The capital is equal to non-current liabilities + owners equity, alternatively, it is equal to

long term assets plus net working capital. Thus, the capital employed basis provides a test of

profitability related to the sources of long term funds. A comparison of this ratio with similar

companies, with the industry average and over time would provide sufficient insight into how

efficiently the long term funds of the owners and lenders are being used.

Return On Capital

Employed (%) FY-10 FY-11 FY-12 FY-13 FY-14

Industry 11% 9% 8% 6% 6%

Tata Steel 13% 14% 13% 11% 12%

JSW 15% 12% 9% 10% 8%

SAIL 15% 11% 7% 5% 3%


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Cash Flow Indicator Ratios

Dividend Payout Ratio

Dividend Payout Ratio FY-10 FY-11 FY-12 FY-13 FY-14

Industry 15% 17% 17% 20% 24%

Tata Steel 16% 18% 19% 15% 15%

JSW 9% 14% 9% 11% 14%

SAIL 20% 21% 22% 36% 45%


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Du Pont Analysis

ROA = Profit Margin (Net Income/Sales) * Total Asset Turnover (Sales/Total Assets)

ROA for the industry is showing declining trend over the period from 2010 through 2014. While

the asset turnover ratio is fluctuating less, the profit margin is down sloping steeply in the

industry.

Du Pont Analysis FY-10 FY-11 FY-12 FY-13 FY-14

Industry 7% 5% 4% 3% 2%

Tata Steel 7% 8% 7% 6% 7%

JSW 10% 7% 6% 5% 4%

SAIL 14% 8% 6% 3% 3%

JSW and sail follow the same trend and the profit margins deteriorate rapidly and hence

the ROA decreases. The change in profit margin ranges from 6% to 13%. This slump is

mainly due to increase in raw material cost.

During this period the demand increased as the global economy was recovering slowly.

Moreover, there was a structural change in terms of the contract structure of the key raw

materials for the primary steelmakers. Therefore, volatility over steel prices became

inevitable.


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In addition to that increase in demand from china, decrease in supply of raw materials

from India and Australia have added more volatility to the raw materials price. These

factors contributed to the fewer profit margins.

Though Tata steel's profit margin fluctuated little there was not much volatility. Tata steel

was able to procure the raw materials from its mines form various regions like from

Europe, Asia and Australia. Hence there was less volatility. Hence, the ROA was

relatively stable for the Tata steel.

steel industry financial analysis

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