Financial Analysis of Steel

Industry in India
IIM Lucknow, IPMX
06 Jul 2015

MANAC Project
Submitted to Prof Prakash Singh
Submitted By:
Deepak Parthasarathi
Siddharth Jain
Sundar Viswanathan
Veeral Kamalia
Vengada Ramanan
Visharad Pandey

IPMX08016
IPMX08048
IPMX08052
IPMX08057
IPMX08058
IPMX08061

Steel Industry in India

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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Steel Industry in India

EPS..................................................................................................................................................... 23
Return On Capital Employed(%).................................................................................................... 24
Cash Flow Indicator Ratios ................................................................................................................. 25
Dividend Payout Ratio ..................................................................................................................... 25
Du Pont Analysis .............................................................................................................................. 26

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Steel Industry in India

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 highend, 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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Steel Industry in India

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 202526 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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Steel Industry in India

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 201516. 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 postoperating 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-inprogress 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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Steel Industry in India

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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Steel Industry in India

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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Steel Industry in India

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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Steel Industry in India

Impact of IFRS
Particular
Standard

Indian GAAP
AS-9 Revenue Recognition

On transition to IFRS
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
Allocated on a systematic basis to
envisaged
under
the
each accounting period over the
companies
act,
the
useful life of the asset.
depreciation is computed by
applying a higher rate.

Recognized on an accrual
Recognized on an accrual basis
Interest Expense
basis. Practice varies with
using the effective interest method
respect to discounts.
Acquired Intangible
Revaluations are permitted in rare
Revaluations are not permitted
assets
circumstances
Capitalization
of
Permitted as a policy choice. But not
Required
borrowing costs
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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Steel Industry in India

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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Steel Industry in India

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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Steel Industry in India

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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Steel Industry in India

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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Steel Industry in India

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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Steel Industry in India

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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Steel Industry in India

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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Steel Industry in India

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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Steel Industry in India

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

Operating Profit Margin

(%)
Industry
Tata Steel
JSW
SAIL

FY-10
27%
41%
27%
29%

FY-11
23%
43%
21%
21%

FY-12
20%
38%
16%
17%

FY-13
17%
30%
17%
12%

FY-14
19%
32%
16%
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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Steel Industry in India

Profit Before Interest
And Tax Margin (%)
Industry
Tata Steel
JSW
SAIL

FY-10
22%
36%
20%
26%

FY-11
18%
39%
16%
18%

FY-12
15%
35%
10%
13%

FY-13
12%
25%
12%
9%

FY-14
14%
28%
10%
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 (%)
Industry
Tata Steel
JSW
SAIL

FY-10
22%
33%
22%
28%

FY-11
18%
37%
18%
20%

FY-12
14%
32%
12%
14%

FY-13
11%
25%
13%
10%

FY-14
12%
28%
10%
11%

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Steel Industry in India

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 (%)

Industry
Tata Steel
JSW
SAIL

FY-10
11%
18%
11%
17%

FY-11
10%
21%
9%
11%

FY-12
7%
18%
6%
8%

FY-13
5%
14%
6%
5%

FY-14
5%
15%
5%
4%

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Steel Industry in India

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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Steel Industry in India

Return on Capital Employed (%)

Return on capital employed (ROCE) = (EBIT - Other Income)/ (Total Shareholders Equity + noncurrent 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 (%)
Industry
Tata Steel
JSW
SAIL

FY-10
11%
13%
15%
15%

FY-11
9%
14%
12%
11%

FY-12
8%
13%
9%
7%

FY-13
6%
11%
10%
5%

FY-14
6%
12%
8%
3%

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Steel Industry in India

Cash Flow Indicator Ratios

Dividend Payout Ratio
Dividend Payout Ratio
Industry
Tata Steel
JSW
SAIL

FY-10
15%
16%
9%
20%

FY-11
17%
18%
14%
21%

FY-12
17%
19%
9%
22%

FY-13
20%
15%
11%
36%

FY-14
24%
15%
14%
45%

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Steel Industry in India

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
Industry
Tata Steel
JSW
SAIL

FY-10
7%
7%
10%
14%

FY-11
5%
8%
7%
8%

FY-12
4%
7%
6%
6%

FY-13
3%
6%
5%
3%

FY-14
2%
7%
4%
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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Steel Industry in India

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.

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