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I am very much grateful to Dr.K.K.Roy, the HOD, IISWBM, whose guidance &
valuable advises acted as limelight to accomplish the project.
I am really grateful to Mr. Rajesh Dasgupta the Senior Manager, Raw Materials
Division, Koltaka, Steel Authority of India Ltd without whose guidance & help I
would have learnt nothing during SIP. A major part of my learning was just
because him. He helped us to visualize the broader picture and helped us to
identify the aspects on which we started to work on.
AYAN SARKAR
IISWBM, KOLKATA
1
Executive Summary:
The process involves a rigorous study of company’s financials which leave the
rest on individual assessment. Ratios from all different categories (leverage,
activity, performance, profitability) were chosen. Besides them a thorough study
on internet has also been conducted to gauge the other market driven factors and
perception of the broader market on our target company. The peers are chosen on
basis of there size, scale of operation and also performance which are compatible
to the target company. The are few imminent macroeconomic factors which have
common effects on all these peer companies in the form of hike in price of raw
materials, slowdown in demand etc .We have tried to figure out their
intensiveness and sustainability on these company’s financials in the long run .
We also have some fertile discussions with our project head which have made us
to know the areas of concern for them. Our effort was to churn out some
productive ideas which could have resolved the matter. The overall study involved
frequent use of MS-EXCEL, data collection and analysis to come up with some
observations and remedies at the end which have a strong correlation with our
objective of study. We have also done documentation of our work all of which
have been assessed by our project guide and other dignitaries and been awarded
with precious compliments and suggestions.
2
Industry Profile:
1) Contribution to GDP/ India’s industrial output:
India occupied the eighth position in terms of global crude steel output. India’s per
capita steel consumption is low at 30 kg, compared to global standards for
developed countries pegged at 400 to 500 kg.
The steel industry is in the growth phase. Indian steelmakers plan to increase
annual steel production capacity to 81.4 million tonnes by FY10, larger than the
domestic consumption forecast of 65 million.
Continuously improving macro-economic factors, a younger demographic profile,
urbanization, government focus on infrastructure, increasing demand for
automobiles and houses are likely to push up demand for steel.
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FACTORS CONTRIBUTING:
Rise of private sector
Private sector versus public sector
Gradual industry consolidation
Huge investment in infrastructure
Booming industrial production
2) Present scenario / important players in the sector :
The leading firms of the industry, namely Steel Authority of India (SAIL), Tata
Steel, ESSAR Steel and JSW Steel. All the other significant names in this industry
includes:
Indian Iron and Steel Company (IISCO), Jindal Iron and Steel Company
(JISCO), Jindal Vijayanagar Steel Limited (JVSL), ISPAT, Bhushan
Steels & Strips, Uttam Galva, Mukand, ISMT
Company Profile :
Products of the company:
Product Wise
Semis Blooms, Billets & Slabs
Structures
Long Products Crane Rails
Bars, Rods & Wire Rods
HR Coils, Sheets &
Plates
CR Coils & Sheets
Flat Products
GC Sheets\ GP Sheets and Coils
Tinplates
Electrical Steel
Tubular Products Pipes
Rails
Railway Products
Wheels, Axles, Wheel Sets
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Plant Wise
Bhilai Steel Plant Blooms, Billets & SlabsBeams
Channels, Angles
Crane Rails
Plates
Rails
Pig Iron, Chemicals & Fertilisers
Bokaro Steel Plant HR Coils & Sheets
Plates
CR Coils & Sheets
GP Sheets & Coils/ GC Sheets
Pig Iron, Chemicals & Fertilisers
Durgapur Steel Plant Blooms, Billets & Slabs
Joists, Channels, Angles
Bars, Rods & Rebars
Skelp
Wheels, Axles, Wheel Sets
Pig Iron, Chemicals & Fertilisers
Rourkela Steel Plant HR Coils
Plates
CR Coils & Sheets
GP Sheets/ GC Sheets
Tinplates
Electrical Steel
Pipes
Pig Iron, Chemicals & Fertilisers
Salem Steel Plant Stainless Steel
Collaborations:
• SAIL & MOIL Ferro Alloys Pvt. Ltd and S&T Mining Co. Pvt. Limited
• Joint Venture Agreement with Govt. of Kerala to acquire equity stake in steel
complex ltd
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• MoU signed with Shipping Corporation of India for incorporation of a JV for
carrying out transportation of imported coking coal & dry bulk shipping trade.
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Name and designations of higher officials pursuing currently:
5. Shri A K Goswami
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8
Problem Statement:
9
Research Problem:
The Balance Sheet and the Statement of Income are essential, but they are only
the starting point for successful financial management. Ratio Analysis of
Financial Statements requires some ancillary information to analyze the success,
failure or progress of any business .
Ratio Analysis enables the business owner/manager to spot trends in a business
and to compare its performance and condition with the average performance of
similar businesses in the same industry. To do this one should compare ratio with
the other businesses similar in nature and compare own ratios for several
successive years, watching especially for any unfavourable trends that might have
started. Ratio analysis may provide the all-important early warning indications
that allow you to solve the business problems before the business succumbs to
adverse situations.
Review of literature:
Steel
The 4000 years Indian steel industry is on the upswing. During April-December
2004-05, the production of the finished steed recorded a growth of 4 per cent and
reached 28.3 million tonnes. In the world scenario, Indian steel industry ranks
10th. It represents approximately Rs. 9,000 crore of capital and provides direct
employment to more than 0.5 million people. Major Players: Steel Authority of
India (SAIL), Bhilai Steel Plant, Durgapur Steel Plant, Rourkela Steel Plant,
Bokaro Steel Plant.
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Ratios simply mean one number expressed in terms of another. A ratio is a
statistical yardstick by means of which relationship between two or various
figures can be compared or measured.
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Limitations of Ratios Analysis:
The ratios analysis is one of the most powerful tools of financial management.
Though ratios are simple to calculate and easy to understand, they suffer from
serious limitations.
3. Ratios alone are not adequate: Ratios are only indicators; they cannot be
taken as final regarding good or bad financial position of the business. Other
things have also to be seen.
4. Problems of price level changes: A change in price level can affect the
validity of ratios calculated for different time periods. In such a case the ratio
analysis may not clearly indicate the trend in solvency and profitability of the
company. The financial statements, therefore, be adjusted keeping in view the
price level changes if a meaningful comparison is to be made through accounting
ratios.
5. Lack of adequate standard: No fixed standard can be laid down for ideal
ratios. There are no well accepted standards or rule of thumb for all ratios which
can be accepted as norm. It renders interpretation of the ratios difficult.
6. Limited use of single ratios: A single ratio, usually, does not convey much of
a sense. To make a better interpretation, a number of ratios have to be calculated
which is likely to confuse the analyst than help him in making any good decision.
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7. Personal bias: Ratios are crucial for financial analysis and not an end in itself.
Ratios need to be assessed and different people may interpret the same ratio in
different way.
8. Incomparable: Not only industries differ in their nature, but also the firms of
the similar business widely differ in their size and accounting procedures etc. It
makes comparison of ratios difficult and misleading.
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Classification of Accounting Ratios:
14
Other relevant articles:
Profitability ratios:
Liquidity ratios:
• Current ratio
• Liquid /Acid test / Quick ratio
Activity ratios:
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LIQUIDITY RATIO:
1. Current Ratio: This ratio indicates the firm’s ability to meet its current
liabilities. This ratio is of very high importance of the suppliers of short term
funds like the banker and trade creditors. The concept behind this ratio is to
ascertain whether a company's short-term assets (cash, cash equivalents,
marketable securities, receivables and inventory) are readily available to pay
off its short-term liabilities (notes payable, current portion of term debt,
payables, accrued expenses and taxes). In theory, the higher value of current
ratio is always preferred. It is also true a significant rise of current ratio can
also indicate existence of idle cash.
Both the years the Current Ratio are good and also in 2009 it have gone up a little.
It means the company has more current assets to pay off the short term liabilities.
To know the exact amounts which exist as cash, inventories, recoverable loans
and advances we need further analysis.
2. Quick Ratio: It is a liquidity indicator that further refines the current ratio by
measuring the amount of the most liquid current assets there are to cover
current liabilities. The quick ratio is more conservative than the current ratio
because it excludes inventory which is more difficult to turn into cash.
Therefore, a higher ratio means a more liquid current position.
Current
YearAsset – Invento Current Assets less Current Ratio
invent invento inIInvent Inventories(Crs) Liabilities(Crs)
liinveninventories(Crs)
2007-08 26318- 6857 13199 1.47
2008-09 34511 - 10121 17122 1.42
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The company shows a downward trend in the quick ratio. It is mainly because of
slow demand for steel during 2nd quarter. The inventory has increased by nearly
47%. Then also the ratio is well above the range of 0.75 -1 which expresses the
liquidity of its current assets. More important is there is increase in cash and bank
balances by 32% from 13759(Rs in crores) to 18228(Rs in crores).So the company
is able to partly fund the expansion plans which are going to be undertaken soon.
LEVERAGE RATIO:
3. Debt Equity Ratio: Indicates what proportion of equity and debt that the
company is using to finance its assets. The higher the amount of total
borrowings, the riskier the company becomes.
4. Total Debt Ratio: The debt ratio compares a company's total debt to its total
assets, which is used to gain a general idea as to the amount of leverage being
used by a company. A low percentage means that the company is less
dependent on leverage. The lower the percentage, the less leverage a company
is using and the stronger its equity position. The higher the ratio, the more risk
that company is considered.
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Year Debt(Crs) Total Assets(Crs) Ratio
2007-08 3045 27677 0.11
2008-09 7539 36855 0.20
Total debt ratio increased in 2009 because of the in the increment in borrowings
by 33%, which indicates that the company has leveraged it a bit. .
For SAIL though EBIT figure has decreased due to reduced profitability, it still
shows higher value. There has been slight increase in interest expense due to
expenditure during construction. The higher value of this ratio indicates that the
company is capable of clearing off the interest charges and can opt for future debt
due to its less risky profile.
PROFITABILITY RATIO:
6. Operating Profit Margin: It is the measurement of the margin left over after
paying all variable cost of production like raw material, wages etc.A healthy
operating profit margin is required to pay the interest and debt expenses. It is like
how much a company makes on each rupee of sales. Higher operating margin is
always anticipated. Comparison can also be done between peer companies on this
basis.
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We can see there is a decrease with respect to previous year. The net sales figure
has increased by 9%. But due to global meltdown there has been a shrinkage in
demand for steel (especially in the second quarter) and the sales volume of steel
has also come down to 11.32 million tonnes with respect to 12.3 million tonnes in
the last year. Also there has been fall in steel price and rise in price of some input
ingredients like indigenous and imported coal etc. There is also a rise in provision
Year Operating Net Sales(Crs) Ratio (%)
Profit(Crs)
2008-07 11267 39510 28.51
2008-09 8941 43150 20.72
for wage revision.
7. P
The PBT has decreased in 2009. The tax in 2009 and 2008 are 3229 and 3932
respectively. So there is less difference in tax amount and more difference in PBT.
We can say due to shrinkage in demand for steel in international market the sales
revenue has not increased to the anticipated level where there is increase in
expenditure. So this has factored in the decrease of PBT.
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8. Net Profit Margin: Profit margin is an indicator of a company’s ability to
control costs. It takes into account the fixed costs involved in production minus
the overheads.
TThe profit has gone down by 22% in 2009. It was better in 2008. Higher profit is
the main aim of any company.
9. Return on capital Employed: It shows the profit of the company to its total
capital employed. Higher the profit, better it is. He the capital employed consists
of total share capital, reserve and long term debts. Here the profit before interest
and taxation has been considered to remove biasness due to taxation and different
debt leveraging policies of different companies.
We can see it has significantly decreased from previous year. There are several
tentative reasons like decrease in profitability, increase in net worth and
borrowings .We can go for further investigation.
ROCE = EBIT
Capital Employed
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By using this technique we can break it down into two segments.
(a) Return from this portion is 22 %. The EBIT margin has dropped by 18 % from
11658 crores of last year to 9531 crores of present year.
(b) Return from this portion is 125% .That means the company has utilised its
employed capital 1.25 times to generate sales which is good.
10. Earnings per share (Rs): T he portion of a company's profit allocated to each
outstanding share of common stock. Earnings per share serve as an indicator of a
company's profitability. It is calculated by dividing net income less dividend on
preferred stock with average number of out standing shares. When calculating, it
is more accurate to use a weighted average number of shares outstanding over the
reporting term, because the number of shares outstanding can change over time.
However, data sources sometimes simplify the calculation by using the number of
shares outstanding at the end of the period. Diluted EPS expands on basic EPS by
including the shares of convertibles or warrants outstanding.
The EPS has decreased a bit that is because of decreased net profit. So the profits
for each share are less as compared to the previous year.
11. Dividend per share (Rs.): If the profits are less then the dividend will be
also less. A company can give dividend from its reserves and surplus also.
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2007-08 1528 413 3.70
2008-09 1074 413 2.60
SAIL should increase its profits so that the dividend also increase, otherwise
investors will not invest in the company if dividend are less. In 2008 the dividend
was quite higher than in 2009
ACTIVITY RATIO:
12. Inventory Turnover: It is calculated by dividing the net sales by the average
inventory at cost for a time period. This ratio indicates the number of times
the stock has been turned over during the period and evaluates the efficiency
with which a firm is able to manage its inventory. This ratio indicates whether
investment in stock is within proper limit or not. A low turnover rate may
indicate overstocking in the product line or deficiencies in marketing
effort.Somtimes lower turnover ratio is maintained in anticipation of rapidly
rising prices or shortages.
The inventory figure for the year 2006-07 and 2007-08 was 6651(Rs in crores)
and 6857 (Rs in crores ) where it has become 10121(Rs in crores) for the year
2008-09.So there is an increase of 48% than the previous year. But the net sale
has only increased by 7% than the previous year. So it is not because of the high
demand in the market that the inventory has been piled up. It is due the shortfall
in demand for saleable steel in the global market during the 2 nd quarter. There
can be deficiencies in the product line or in marketing effort. However, in some
instances a low turnover rate may be appropriate such as where overstocking in
inventory levels occur in anticipation of rapidly rising prices or shortages.
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13. Number of days of inventory: Ratio measuring the average number of days an
item is held in the inventory. It has a normal range of 50-55 days for metal
industry. A very high value indicates company is failing to sell out its
inventory in a quick manner. It may also be possible by sensing rise of
demand and product price in near future they are preferring to raise inventory
level.
In 2009, the number of days has increased quite a bit .As we all know due to the
shortfall of demand in 2nd quarter it has happed in this way.
14. Debtors Turnover: It has basically two components: annual gross sales and
receivables from sundry debtors. For receivables we take consecutive two years
average in this case. The trade debtors for the purpose of this ratio include the
amount of Trade Debtors & Bills receivables. It should be noted that provision
for bad and doubtful debts should not be deducted since this may give an
impression that some amount of receivables has been collected.
Accounts receivable turnover ratio or debtors’ turnover ratio indicates the number
of times the debtors are turned over a year. The higher the value of debtors’
turnover the more efficient is the management of debtors or more liquid the
debtors are. Similarly, low debtors turnover ratio implies inefficient management
of debtors or less liquid debtors. It is the reliable measure of the time of cash flow
for credit sales. The debtors’ turnover ratio has decreased a bit from 2008 to 2009.
In general the company still holds a high value so that reflects an efficient
collection policy.
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15. Average Collection period: The average collection period ratio represents
the average number of days for which a firm has to wait before its debtors are
converted into cash. This ratio measures the quality of debtors. A short collection
period implies prompt payment by debtors. It reduces the chances of bad debts.
Similarly, a longer collection period implies too liberal and inefficient credit
collection performance. It is difficult to provide a standard collection period of
debtors. Sometimes firms extend the collection period or relax their credit policy
to increase the volume of of sales.
SAIL has increased its collection period a bit in 2009. Still these figures reflect
that SAIL has a very effective debt collection mechanism as far collection period
of metal industry is concerned.
Comparison of SAIL with Tata Steel and JSW Steel for the year 2008-09:
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7 Net Profit Margin (%) 12.7 19.4 3
8 Return On Capital 27.5 14.5 12
Employed (%)
9 EPS(Rs) 14.95 61.78 22.7
10 Dividend Payout Ratio 17 4 0.3
(%)
11 Debtors Turnover 15.04 43 39.3
12 Average Collection 24 9.28 8.4
Period(days)
13 Inventory Turnover 5.08 7.9 7.78
14 No. Of Days Of 72 46 47
Inventory(days)
15 Fixed Assets Turnover 3.5 2.2 1.06
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1. Current ratio: It is the ratio of current assets to current liabilities and
provisions. We can see for SAIL the current ratio for the year 2008-09 is 2.015
which is quite good with comparison to the normal range of 1.5-2.That means the
company has adequate current assets to pay off the short time liabilities .For the
peer companies TATA Steel has a current ratio of 1.15 which is lower than the
normal. In case of JSW Steel it has a much lower value of 0.61. That means
company has less current assets to pay off its short term liabilities .Now we need
to see the extent of liquidity among the current assets of these companies .It can
by done by the method of quick ratio which is done later.
For SAIL its value for this year is 2.105. It is evident from the schedule that the
inventory has gone up by 48%. The company also holds a good bank balance
(term deposits), other current assets (interest receivable) to pay off its current
liabilities. The rise in current liabilities has occurred due to rise in provisions for
wage revision, taxation and money payable for capital works on credit.
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Current assets (Rs in Crores ) 10037 6067 65
Inventories 3480 2605 34
Cash and Bank Balance 1591 465 242
Sundry Debtors 636 543 17
Accrued Interest - 0.2
Loans and Advances 4330(excl 2453(excl 77
uding 248 uding
as 30896 as
advance advance
against against
equity) equity)
Current liabilities and Provisions (Rs in 8974 6769 32
Crores )
For TATA Steel the ratio is 1.15. This is quite a marginal one. Here due to
shortfall of demand inventory level has also picked up a bit by34%. Due to rising
advances against equity (248 Cr in this year) through TATA STEEL Global
Holdings Pvt Ltd which also occurred in previous year company has a shortfall in
cash.
There is an increase in cash and cash equivalents due to term deposits at banks.
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For JSW Steel the ratio is very low at 0.61.That indicates the company does not
own adequate current assets to pay off current liabilities .There is only a rise of
50% in current assets where the current liabilities has increased by 84% (mainly
because of rise in trade acceptances payable).Now we also need to see to which
extent these current assets are liquid in the Quick Ratio segment.
For SAIL the value of quick ratio is 1.42. This is quite good. As we all know due
to shortfall in demand for steel in global market especially in the 2nd quarter the
blocked inventory has increased by 48% there are also enough cash and cash
equivalents(bank term deposits, accrued interest) to pay off the current liabilities.
For TATA STEEL the value is 0.73 which indicates the company does not have
one unit of liquid asset (excluding inventory) to pay off each unit current
liabilities. Here the inventory level has gone up by 34% where the cash and bank
balances have gone up by 242 %( due to term deposits with the bank). Still the
current cash and bank balance is at 1591 crores which needs to be enhanced.
For JSW STEEL the value is 0.34 which is very low. The inventory level has gone
up by 48%. This blocking up is quite understandable with reference to the
shortfall of global demand for steel. It may also be possible the company is piling
up the stock in anticipation of booming market in near future. As of now the
company is mostly concentrating on enhancing operations which has increased
trade acceptances payable (as Current Liability) which has adversely affected the
ratio.
3. Debt Equity ratio: Indicates what proportion of equity and debt that the
company is using to finance its assets.
For SAIL its value is 0.27. The total debt (secured and unsecured loans) consisting
of non convertible bonds, term loans, borrowing from Govt of India, Steel
Development Fund has increased by 148% from 3045 crores of last year to 7539
crores of this year. Then also we can say the company is lightly leveraged
company and the company can opt for more future debts for accomplishing its
future expansion projects.
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For TATA STEEL this ratio is 0.89 for in this current year. The total debt in
forms of tem loans from banks, privately placed non convertible preference
shares, loans from Govt of India, Steel Development Fund has increased by 50%
from 18022 crores to 26946 crores .As the ratio reaching near 1 it means
company is exposing itself to more financial risk . Interest payables are also going
to rise for obvious reasons. It is understandable that due to huge investment
mainly in Corus though Tata Global Holdings Pte Ltd the debt has increased.
More profitability is required from its operations to normalise the situation. Term
loans of 2000 crores and 2150 crores of non convertible debentures can also be
used during the year. So the company needs to be careful towards its repayment
schedule.
For JSW STEEL is quite high at 1.42. That means the company has more debt
than its shareholders worth. The total debt in forms of foreign currency
convertible bonds ,debentures, term loans ,long term advances etc has risen by
50% from 7547 crores of last year to 11273 crores of present year . This happened
because the company is considering rapid expansion plans of mines,
improvisation of plant equipments to enhance its capability of steel productions.
But this rising debt also implies huge repayment schedule. So the company needs
to strengthen its profitability.
4. Interest and Financial charges coverage ratio: this ratio is calculated by dividing
the earnings before interest and taxation by the interest and finance charges. It
indicates what portion of debt interest is covered by a company's cash flow
situation. Ratio bellow 1 means that the company has become unable to generate
enough cash to pay off its interest expenses. This ratio is very important because
this ratio denotes the credibility of the company towards the lenders.
For SAIL it is quite high at 29.6. That means its earnings are 29.6 times of its
payable interest charges which is quite good. though its earnings has gone down
by18% from11720 crores to 9657 crores it still bears quite a less long term debt
which enables it to opt fore more in near future.
For TATA STEEL the value of the ratio in the current year is 7.349. though the
earnings has gone up by 16 % from 7564 crores to 8805 crores, the interest
charges has also gone up by 60 % from 929 crores to 1489 crores. The company
still maintains a ratio which enables it to opt for further long term debts of 2000cr
as term loans and 2150 as non convertible debentures which will bring down the
ratio near 5 by considering the current years EBIT.
For JSW STEEL the value of the ratio in the current year is 2.8 which is on the
lower side. Though the earnings has gone down by 16 % from 2873 crore to
2304crores, the interest charges has also gone up by 70 % from 424 crores to 836
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crores. So this is an alarming situation. As the company still thinks of going
forward with some expansion projects it must increase its profitability to meet the
repayment schedule and try to mitigate its growing risky profile.
5.Operating profit margin: : It is the measurement of the margin left over after
paying all variable cost of production like raw material, wages etc.A healthy
operating profit margin is required to pay the interest and debt expenses. It is like
how much a company makes on each rupee of sales. Higher operating margin is
always anticipated. Comparison can also be done between peer companies on this
basis.
For SAIL the value is at 20.72% with decrease in operating profit margin by 21
% from 11267 crores of last year to 8941 crores of present year. The net sales has
also risen by only 9% due to shortfall of demand for steel in the global market.
The rise in cost of goods has occurred mainly because of the rise in price of
indigenous and imported coal whose consumption of 13.8 million tonnes(nearly
same with the previous years consumption) has become costlier by 70% from
8243 crores to 14088 crores of this year.
For TATA STEEL the value is at 37.7% with increase in operating profit margin
by 11 % from 8245 crores of last year to 9176 crores of present year. The net sales
has also risen by 27% from 19691 crores to 24316 crores .So this company shows
a relatively higher profit margin. It has also faced situations like rise in price of
coking coal, power purchase from outside (due to shutdown at Jamshedpur) etc
which has factored in the rise of expenditure.
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For JSW STEEL the value is at 20.4%with decrease in operating profit margin
by 15 % from 3356 crores of last year to 2861 crores of present year. The net sales
has risen by 23% from 11420 crores to 14001 crores .So this shortfall in
operating profit has mainly occurred because of rise in price of raw materials (iron
ore, coal etc) .The consumption cost of raw materials has risen by 48% from 5694
crores to 8450 crores.
6. PBT to net sales: It is the ratio of profit before taxation ( excluding exceptional
items ) to net sales during the year. This measure combines all of the company's
profits before tax, including operating, non-operating, continuing operations and
non-continuing operations. PBT exists because tax expense is constantly changing
and taking it out helps to give an investor a good idea of changes in a company's
profits or earnings from year to year.
For SAIL the margin is 22%. The the PBT margin has gone down by 19 % at
9278 crores of this year than 11407 crores of last year though there is an increase
in net sales of 9 % 0ver the previous year. Downfall in demand as also in the price
of saleable steel, rising raw materials cost have triggered the problem. Slight rise
in income from other than operations has also been observed.
For TATA STEEL the margin is 30 %.The PBT has gone up by 10 % while
reaching 7316 crores in this year than 6635 crores of last year . There is an
increase in net sales of 27 % from 19691 crores to 24316 crores. This indicates
this is the only company which has been able to increase its profitability.
For JSW STEEL the margin is 10.5%.The PBT has gone down by 38 % at 1468
crores of this year than 2379 crores of last year. There is an increase in net sales of
23% from 11420 crores to 14001crores. If we compare the operating profit margin
with this PBT to net sales margin we will
be able to see that downfall in PBT margin is largely because of rising interest
and finance charges (69 % more than the previous year).
7. Net Profit Margin: This ratio of profitability calculated as net income divided
by revenues, or net profits divided by gross sales. It measures how much out of
every rupee of sales a company actually keeps in earnings. Profit margin is very
useful when comparing companies in similar industry. A higher profit margin
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indicates a more profitable company that has better control over its costs
compared to its competitors. Profit margin is displayed as a percentage; for
example a 20% profit margin means company has net income of 0.20 rupee on
each rupee of sales. Looking at the earnings of a company often doesn't tell the
entire story. Increased earnings are good, but an increase does not mean that the
profit margin of a company is improving. For instance, if a company has costs that
have increased at a greater rate than sales, it leads to a lower profit margin. This is
an indication that costs need to be under better control.
For SAIL the margin is at 12.7%. If we look at current year’s net profit then it has
decreased by 18% at 6175 crores of this year to 7537 crores of last year. There is
also marginal increase increase in gross sales of 7% from 45555 crores of last
years to 48681 crores of this year. Price rise of coal, more provision for wage
revision etc are some of reasons which have intrigued in the rise of expenditure.
For TATA STEEL the margin is at 19.4%. If we look at current year’s net profit
then it has increased by 11% at 5202crores of this year to 4687 crores of last year.
There is also increase in gross sales of 21% from 22190 crores of last years to
26844 crores of this year. So this indicates the company has truly converted its
rise in sales to rise in net profit which is good .
For JSW steel the margin is at 3%. It is quite low. If we look at current year’s net
profit then it has decreased by 73 % at 459 crores of this year from 1728 crores of
last year. There is also marginal increase in gross sales of 20% from 12629
crores of last years to 15179 crores of this year. Apart from increasing expenditure
for raw materials, interest and finance charges a foreign exchange loss of 790
crores (considered as exceptional item) has largely affected the net profit margin.
8. Return on capital employed: It shows the profit of the company to its total
capital employed. Higher the profit, better it is. He the capital employed consists
of total share capital, reserve and long term debts. Here the profit before interest
and taxation has been considered to remove biasness evolved from taxation and
different debt leveraging policies of different companies.
Now we can split it into two parts. One for calculating the return from operations
(EBIT/Net Sales). The other for calculating Net Sales to Capital employed ratio
which indicates how much sales is generated from the employed capital. Same has
been done for all three.
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Capital Employed
For SAIL :
We can see it has significantly decreased from previous year. This year the return
percentage is at 27.5 % where in the previous year it was at 45% .
(a) Return from this portion is 22 %. The EBIT margin has dropped by 18 % from
11658 crores of last year to 9531 crores of present year.
(b) Return from this portion is 125% .That means the company has utilised its
employed capital 1.25 times to generate sales which is good.
For TATA STEEL we can see it has decreased a bit from previous year. This
year the return percentage is at 14.5 % where in the previous year it was at 15.9 %
Now we need to look at the parts.
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(a)Return from this portion is 35 % this year . The important thing is that with
comparison to its peers it has been able to increase its EBIT margin. The EBIT
margin has increased by 14 % from 7422 crores of last year to 8469 crores of
present year.
(b) Return from this portion is 42% .That means the company has utilised its
employed capital 0.42 times to generate sales which is not good. It indicates that
company’s huge debt margin of 26946 crores has mostly been utilised for capital
expenditure and acquisition purpose.
For JSW STEEL : WE can see it has decreased from previous year. This year the
return percentage is at 12 % where in the previous year it was at 18.5 % . Now we
need to look at the parts.
(a)Return from this portion is 16 % this year . The EBIT margin has dropped by
20 % from 2819 crores of last year to 2265 crores of present year. So rise in price
of raw materials like coal and iron ore has become a problem.
(b)Return from this portion is 73% .That means the company has utilised its
employed capital 0.73 times to generate sales. As among all the peers it offers
minimum return so company should enhance its profitability.
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could do so with less equity (investment) - that company would be more efficient
at using its capital to generate income and, all other things being equal would be a
"better" company. Investors also need to be aware of earnings manipulation that
will affect the quality of the earnings number. It is important not to rely on any
one financial measure, but to use it in conjunction with statement analysis and
other measures.
During this year SAIL has a EPS of 14.95 .TATA STEEL has higher EPS at
61.78(diluted) .JSW Steel has diluted EPS at 22.7 .So it is evident that due to
decreased profitability SAIL has recorded less earnings per share.
For SAIL this ratio is at 17%. TATA Steel though recorded a higher EPS margin
it has a ratio of 4 % with 2.4 rupees dividend per share. JSW Steel has ratio of
0.3% with 0.08 rupees of dividend per share. So it seems that other than SAIL
other two peer companies have preferred to retain their capital for growth purpose.
11. Debtors turnover: This ratio calculates the number of times in an operating
cycle (normally one year) the company collects its receivable balance. It is
calculated by dividing gross sales by the average receivables. Average
receivables are usually the balance of receivables at the beginning of the year plus
the balance of receivables at the end of the year divided by two. If the company is
cyclical, an average calculated on a reasonable basis for the company's operations
should be used such as monthly or quarterly. It should be noted that provision for
bad and doubtful debts should not be deducted since this may give an impression
that some amount of receivables has been collected. Accounts receivable turnover
ratio or debtors turnover ratio indicates the number of times the debtors are turned
over a year. The higher the value of debtors turnover the more efficient is the
management of debtors.
For SAIL the value during this year is 15.04. Though there is 7 % increased in
gross sales company has maintained a high turnover ratio. For TATA STEEL this
has a value of 43 during this year with average sundry debtors of 620 crores and
gross sales of 26844 crores. For JSW STEEL the ratio is 39.3 with gross sales at
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15179 crores and average sundry debtors of 386 crores. So the other two
companies have much higher turnover ratio than SAIL.
12. Average Collection Period: The average collection period (also known as
day's sales outstanding) is calculated by dividing the number of days in a year by
receivables turnover. It calculates the number of days it will take to collect the
average receivables balance. It is often used to evaluate the effectiveness of a
company's credit and collection policies. A rule of thumb is the average collection
period should not be significantly greater than a company's credit term period. So
it should be within a reasonable period. It has also been seen that sometimes
companies extend their credit term to allow more credit sales.
For SAIL the average collection period is nearly of 24 days. For JSW STEEL it is
of 9.28 days and for TATA STEEL it is of 8.48 days .Both these companies are
dwindling with rising debt in their balance sheet so this shorter average collection
period and lesser sundry debtors will help them to build the credibility.
13. Inventory Turnover Ratio: It is calculated by dividing the net sales by the
average inventory at cost for a time period. This ratio indicates the number of
times the stock has been turned over during the period and evaluates the
efficiency with which a firm is able to manage its inventory. This ratio indicates
whether investment in stock is within proper limit or not. A low turnover rate may
indicate overstocking in the product line or deficiencies in marketing effort.
Sometimes lower turnover ratio is maintained in anticipation of rapidly rising
prices of raw materials or shortages of spares.
For SAIL this ratio is 5.08. The inventory figure for the year 2006-07 and 2007-08
was 6651(Rs in crores) and 6857 (Rs in crores ) where it has become 10121(Rs in
crores) for the year 2008-09.So there is an increase of 48% than the previous
year. But the net sales has only increased by 7% than the previous year. So it is
not because of the high demand in the market that the inventory has been gathered
up. It has the shortfall of demand in global market which has caused this blocking
up. For TATA STEEL this Ratio is at 7.9 which indicate quite high value with
average inventory of 3043 crores and net sales of 24316 crores. JSW STEEL has a
value of 7.78 with average inventory of 1800 crores and net sales of 14001
crores . It has also quite a high value.
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14. Number of days of inventory: Ratio measuring the average number of days
an item is held in the inventory. It is calculated by dividing number of days in a
year by average inventory figure. It has a normal range of 50-55 days for metal
industry. A very high value indicates company is failing to sell out its inventory in
a quick manner. It may also be possible by sensing rise of demand and product
price in near future they are preferring to raise inventory level.
For SAIL this value is of 72 days. Tata STEEL has a value of 46 days and JSW
STEEL has a value of 47 days. So other than SAIL the other to companies have
quite a low inventory period. We must also understand SAIL has a larger scale of
operation which generates nearly double amount of net sales than its peers. So at
this time of global meltdown demand is supposed to be affected adversely which
will factor in rise of inventory. So SAIL should also try to bring down the number
of days in inventory.
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15. Fixed asset turnover ratio: This financial ratio of net sales to fixed assets.
The fixed-asset turnover ratio measures a company's ability to generate net sales
from fixed-asset investments - specifically property, plant and equipment (PP&E)
- net of depreciation. A higher fixed-asset turnover ratio shows that the company
has been more effective in using the investment in fixed assets to generate
revenues.
For SAIL it has a net sales of 43150 crores and net fixed asset of 12269 crores .So
the value of the ratio is at 3.5 .For TATA STEEL the ratio is 2.21(With net sales
of 24316 crores and net fixed assets of 10995 crores) .JSW STEEL has a ratio of
1.06(With net sales of 14001 crores and net fixed assets of 13086 crores). So it is
evident from it that SAIL is turning its fixed assets into sales in the most effective
way.
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CONCLUSION:
The analysis figures out that Steel Authority of India Ltd is based on strong
fundaments. The satisfactory leverage and liquidity ratios eradicate the fear of any
immediate breakdown. The intriguing factors which resulted in inadequate
realisation of sales growth and profit margin are largely macro issues like
shrinkage of demand of saleable steel in global market, inflation in price of raw
materials etc. Due to its existence for so many years company has coped up with
the situation and with its inherent strengths like ownership of mines, strong R& D,
seasoned workforce the company has strong upsides. Issues like higher turnover
ratios (both for debtors and inventory) evoke a bit of scepticism regarding the
strictness of company’s policies. It is also obvious that with great aspirations and
strong financials company will strive for expansion to cash in the opportunities.
We should also keep it in mind ratio analysis is an effective tool to judge the
status of company, to forecast its upcoming performance but future does not
necessarily corroborate them. The other factors like corporate governance,
environmental analyses etc. are also important.
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RECOMMENDATIONS AND LIMITATIONS
Recommendations:
Limitations:
The ratio analysis is one of the most powerful tools of financial management. Though
ratios are simple to calculate and easy to understand, they suffer from serious limitations.
1. Limitations of financial statements: Ratios are based only on the information which
has been recorded in the financial statements. Financial statements themselves are
subject to several limitations. Thus ratios derived, there from, are also subject to those
limitations. For example, non-financial changes though important for the business are
not relevant by the financial statements. Financial statements are affected to a very
great extent by accounting conventions and concepts. Personal judgment plays a great
part in determining the figures for financial statements.
2. Comparative study required: Ratios are useful in judging the efficiency of the
business only when they are compared with past results of the business. However,
such a comparison only provide glimpse of the past performance and forecasts for
future may not prove correct since several other factors like market conditions,
management policies, etc. may affect the future operations.
3. Ratios alone are not adequate: Ratios are only indicators; they cannot be taken as
final regarding good or bad financial position of the business. Other things have also
to be seen.
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4. Problems of price level changes: A change in price level can affect the validity of
ratios calculated for different time periods. In such a case the ratio analysis may not
clearly indicate the trend in solvency and profitability of the company. The financial
statements, therefore, be adjusted keeping in view the price level changes if a meaningful
comparison is to be made through accounting ratios.
5. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There
are no well accepted standards or rule of thumb for all ratios which can be accepted as
norm. It renders interpretation of the ratios difficult.
6. Limited use of single ratios: A single ratio, usually, does not convey much of a sense.
To make a better interpretation, a number of ratios have to be calculated which is likely to
confuse the analyst than help him in making any good decision.
7. Personal bias: Ratios are only means of financial analysis and not an end in itself.
Ratios have to be interpreted and different people may interpret the same ratio in different
way.
8. Incomparable: Not only industries differ in their nature, but also the firms of the similar
business widely differ in their size and accounting procedures etc. It makes comparison
of ratios difficult and misleading.
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BIBLIOGRAPHY:
1. www.wikipedia.org
2. www.moneycontrol.com
3. www.sail.co.in
4. www.money.rediff.com
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